6 Common Causes of Cost Overruns
They leave a lot more than money on the table.
We’ve seen some pretty massive budget overruns in the news lately.
For instance, a leaked 2020 study revealed Exxon-invested projects went $138B over their estimates between 1998 and 2017. Of 110 projects reviewed, 21 accounted for 93% of overspend. One went 6X over the estimated spend. The study pointed to four likely contributors to the huge overrun, including operator mismanagement, poor planning, massive complexity in large-scale development, and over-promised plans to win funding approval.
In light of today’s inflation, supply chain issues, and global demand for heavy industrial products and resources, the stakes are higher than ever. It means facilities are looking to evolve as quickly as demand is rising. The data behind these kinds of overruns is imperative to performing a root cause analysis, identifying opportunities for improvement, and moving forward for more profitable gains.
Time and cost overruns often point to deeper project management issues, largely dependent upon vendor relationship management. Because, according to the white paper, “Agile Procurement Insights by SAP & Oxford Economics,” released in 2021, 58% of the average facility’s workforce dollars are spent internally. That means a massive 42% of the typical project budget hinges on those external vendors. Meanwhile, monitoring vendor performance and contract compliance manually is an impossible ask.
So, lack of control and visibility into overseeing vendor performance and spend is leading to cost overruns that steal a heck of a lot more than cold hard cash. The most common overrun causes can bring facilities and projects down in other detrimental ways, too. Here, we break down the top 6.
- Failing to plan is planning to fail.
The biggest determinant for success at the end of a project is getting it off to the right start in the first place. Even prior to its start, the pre-project planning and negotiation phases are imperative to success. A number of things can go wrong at this early stage. Unfortunately, all too often, they do.
Poor estimations, sadly sometimes in vendor pursuit to win the bid and then copping to the actual cost at the point of no return, can add up big time. Not only do they blow the budget, these surprise invoices become a headache and time drain for those who now have to rectify them.
This early negotiation stage is also vulnerable to issues arising when contract terms are left insufficient or ambiguous.
2. Not closing communication gaps.
Lack of transparency and ineffective flow of information, common when people are working in silos, is an outdated and risky position to take on in today’s competitive world. It’s often described as “being left in the dark” when information is needed but can’t be easily accessed in a timely manner.
The top reasons for productivity loss are associated with a lack of quick, accurate information access. Receiving the wrong information or waiting on information were listed among the top three causes of productivity loss by over a third of workers surveyed, according to a 2018 Deloitte UK study, “The Connected Worker.”
If this is a problem at the start of a project, just imagine the impact as work progresses and activity ramps up. This is when scope creep in the form of new and unplanned work drives up project costs.
At the admin level, these information gaps leave professionals at a loss when it comes to tracking and correcting the project’s progress. And, there’s always the danger issues will trickle into different areas of the project before other managers become aware.
3. Over-estimating human capacity.
This is a hard one to hear, and we hate to say it. But the fact is, there are only so many hours in a day, and only so many fires we can manually put out during those hours. It’s not about technology taking away jobs, it should support people to focus on bigger things by taking on the minutiae of manual tasks.
Leaving labor, equipment, or material costs untracked is extremely risky and daily visibility at the worker level has never been so essential. When human error is eliminated through centralized digitization and intelligent automation within invoicing, accounting, and contract management, brainpower can then be used to strategically plan ahead rather than working reactively.
4. Compromising relationships.
We hear it time and again, strong relationships are built on trust. In order to build that trust, expectations must be clearly defined and communicated. What defines a successful and sustainable vendor relationship? Who is responsible for what?
Lacking a culture of accountability and clarity into who in the organization is responsible for what is a direct threat to developing successful and sustainable vendor relationships, which leads to cost overruns. Poor processes and beliefs can create a disassociation between work outcomes and cost outcomes. How many times have we heard, “If I take care of quality and schedule, then cost takes care of itself.” Consider, when was a vendor last held accountable to Customer Performance Indicators (CPIs) in their Key Performance Indicators (KPIs)?
In a culture of accountability, worker morale is heightened and people take ownership of their performance. Productivity, skill levels, safety, worker retention, and truthful reporting are all improved. But, to create that accountability, transparency is must.
5. Lacking easy to find & useful data.
Data is quickly becoming one of heavy industry’s most valued assets. But, what good is that data if people can’t find it easily, interpret it, and put it to use? What if one line of information is needed on the fly, but can only be found by sorting through stacks of disjointed and paper-based data spread across multiple departments? Best case scenario, it steals time and effort. More likely, it means people are working reactively and at the mercy of vendors since it’s now the company’s word against theirs.
Not using data to predict a cost overrun–or evaluate what’s behind one if it’s already occurred–and then progressively improve upon previous results is a missed opportunity to take back control over projects. Making decisions based on concrete information and an accurate representation of actual onsite activity captured opens the door to systematic cost reduction.
6. Not maxing contract value.
Contracts should safeguard parties on both sides of the table, protecting vendor relationships for the long run by laying out expectations in black and white. But, in order to do so, terms and rates must be clearly detailed and communicated in the first place. And then, the ability to automatically monitor and enforce them is a game changer.
When contract term and rate compliance, including worker trade qualifications, is continually monitored and enforced, managers gain the ability to anticipate necessary changes early, avoid disputes, defend the organization, prove excellent ESG, and plan ahead for constant efficiency gains. Contracts should ensure vendor performance obligations are met, risks are managed, and even better deals can be negotiated next time.
What’s at stake?
In today’s world, transparency is not just an asset, it’s an expectation. Unfortunately, bad news travels fastest.
In the best-case scenario, an overrun is handled internally. In the worst case, it’s a PR nightmare that puts brand trust on the line.
When overruns happen, industry insiders understand there are many factors at play. We also know there are ways to mitigate the risks that open the door to overspending.
We believe in the tried and true adage: “An ounce of prevention is worth a pound of the cure.”
And that it starts with exceptional vendor relationship management. Want to know more? Let’s talk!