Top 5 CRE Project Cost Overruns – And How to Combat Them

Whether it’s a new build or a renovation, commercial real estate development projects are significant and complex financial commitments. It’s not surprising that cost and schedule overruns are fairly standard in construction endeavors.

In fact, according to a report by McKinsey & Company, “Large projects across asset classes typically take 20 percent longer to finish than scheduled and are up to 80 percent over budget.”

Those numbers may seem normal for construction, but can you imagine if you were routinely that far off on estimates for other budgetary items? Having to wait longer and pay nearly double the price for most any other goods or services would usually result in a prompt call to customer service to ask, “What gives?!”

Construction costs are expected to rise, with respondents from a recent survey estimating projects in 2018 and beyond will run over budget either more or “much more often.”

In our experience working with clients in the real estate industry, we see significant cost overruns throughout the construction lifecycle. The most common causes we see are:

  • Ineffective project governance
  • Inexperienced management team
  • Design errors and omissions which lead to scope change and/or rework
  • Poor project controls
  • Inaccurate estimating

Fortunately, there is a way to combat these issues.

We work with clients on post-construction audits to find out where and why cost overruns happened, and to ensure they don’t happen again.

We do a few things that save companies from future headaches, strained vendor relationships, and major financial drains.

First, we thoroughly review project costs along with any available historical data, which leads to much more accurate future cost estimates. In any industry, when it comes to procurement and contracting, considering historical performance analytics allow you to better manage risk and improve outcomes.

We also can review contracts for insight on better contract negotiations. More communication and planning at the beginning stage help all parties better define and understand contract scope, and material and service needs. Not to mention, it can help minimize future pricing disputes, change order miscommunications and overcharging.

Oncoming price increases, recent global tariffs on materials, and ever-present labor shortages mean commercial real estate developers need to be diligent when it comes to planning and risk management. A post-construction audit can significantly lessen the financial and operational risks of your next project. This way, you can keep clients and investors happy, and improve your bottom line no matter the market conditions. A quick call can get you started.

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