Sometimes you read about a massive construction project with an estimated budget that just keeps going up. You might wonder how governments, even state or national ones, can keep dedicating billions more. For your business, ensuring that your projects have sufficient funding to keep going is a matter of survival. Here are a few things you can do if you find yourself in a situation where your project is running over budget or lacks enough funding to finish.
Determine Your Obligations
The first thing that you should do is figure out what your obligations are to the project and to the client. This is where an investment into refining contract language that protects you becomes very important. It applies whether you are working directly with the property owner or as a subcontractor. Carefully review the contract that you have signed, and consider hiring a lawyer to help you review it if necessary. This will help you to know what you are required to do, and which actions could possibly put you in trouble.
Look at Additional Funding Options
The most obvious solution is to look for additional funding options. For a reliable property owner with good credit, it may be as simple as applying for additional financing. In some cases, like a lost grant, it may be much more difficult. The right option depends heavily on the type of project and its scope. But if you can find a way forward with this option, you may be able to avoid a lot of stress and conflict in renegotiating or canceling the contract.
Consider Revising the Project
If it’s not possible to get more money, then you may need to renegotiate the contract to limit the scope of the project. Whether or not you can do this depends on the contract and who is responsible for the funding shortfall. For example, if you are working with a client who was only able to secure partial funding for the project, then your personal responsibilities may be lower. On the other hand, if budget overrun came as a result of a fault in your original estimate, you might be on the hook to cover at least part of it. In any case, attempting a reasonable renegotiation of the project may allow both parties to reach a satisfactory conclusion under the new circ*mstances.
Minimize Additional Investment
The last thing that you want to do is keep investing into a project that is failing fast. How you approach that feeling depends on the contract. If you get to the point where you may need to cut your losses, it’s probably best to consult a lawyer to make sure that this is the wisest course of action. Otherwise, this is an important reason to vet clients and projects for funding or ability to pay. It’s also a vital advantage of regular communication between property owners and contractors, or general contractors and subcontractors. Knowing where you are at on any given day can help you determine where to go next.
Evaluate Solutions for Future Projects
Once you get to the other side of a situation like this, one of the last things that you may want to do is spend a lot of time figuring out how to avoid it. As tempting as it can be to take a break and minimize how much time you have to think about it, it’s better to debrief and make improvements while everything is still fresh. Make notes of miscommunications or errors in calculation that led to the shortfall or overrun. This will help you to implement better practices in the future to cut down on the chances that this will happen again.
Budget overrun in construction is so common it might be part of the job description. But if you want to avoid it cutting into your profits, you’ll work to minimize it in your projects. For more advice on running a successful contracting business, contact CSLS today!
FAQs
The most obvious solution is to look for additional funding options. For a reliable property owner with good credit, it may be as simple as applying for additional financing. In some cases, like a lost grant, it may be much more difficult. The right option depends heavily on the type of project and its scope.
What happens if a project is over budget? ›
This can occur due to poor budgeting, scope creep, unforeseen circ*mstances, design changes, or general mismanagement. Such budget overruns can impact the financial stability of a project, requiring use of contingency or worst case leading to disputes among stakeholders.
What happens if your builder goes over budget? ›
With a Fixed-Price contract, your builder is responsible for most budget overages that are outside of your control (but you're still responsible for change orders and/or upgrades). With a Cost-Plus contract, you are responsible for nearly all budget overages (whether the overage is within your control or not).
What happens if you go over budget on a construction loan? ›
Going over budget during the construction phase is a common challenge. If this occurs, the borrower may need to seek additional financing or modify the project plan. This can involve renegotiating loan terms, increasing the loan amount, or using personal funds to cover the extra costs.
What happens if the cost of the project is higher than the budget? ›
Projects that go over budget indicate lower control and negatively impact managers, leaders and wider organisations reputation. Plus, increased costs will affect profit margins due to additional expenses, productivity due to opportunity cost and financial stability due to decreased liquidity.
How do you handle a situation where a project is exceeding its budget? ›
Communicate openly with stakeholders about the situation and potential solutions. Adjust the project plan to accommodate the budget constraints, seeking approval for any significant changes. Continuous monitoring and proactive management are crucial to keep the project on track financially.
What happens when a construction project runs out of money? ›
The most obvious solution is to look for additional funding options. For a reliable property owner with good credit, it may be as simple as applying for additional financing. In some cases, like a lost grant, it may be much more difficult. The right option depends heavily on the type of project and its scope.
Do construction projects run over budget? ›
On construction projects, going over budget is an all-too-common scenario. This situation is more than a mere miscalculation: It can fundamentally alter the trajectory and outcome of a construction project and the companies involved.
How often do contractors go over budget? ›
Inaccurate Initial Budget Estimates
In fact, a report by KPMG states that approximately 70% of construction projects encounter cost overruns due to inaccurate initial estimates. Some common sources of errors are: Lack of experience or expertise in the type of project or location.
What happens if you go over your budget? ›
Going over budget can disrupt your finances. For instance, it might cause you to pile up more debt. That, in turn, could lead to a lower credit score.
To get back on track with your project budget, start by reviewing your scope and deliverables. Identify any scope creep or unnecessary features that may be inflating costs. Realign your project goals with the budget constraints and prioritize deliverables based on their impact and necessity.
What happens if you go over budget on a project? ›
Going over budget is one of the most common and stressful challenges that project coordinators face. It can jeopardize the quality, scope, and timeline of your project, as well as your reputation and relationship with your stakeholders. However, it doesn't have to mean the end of your project or your career.
What is it called when a project goes over budget? ›
A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs.
What happens if you go over budget? ›
Going over budget can disrupt your finances. For instance, it might cause you to pile up more debt. That, in turn, could lead to a lower credit score.
What happens when the actual results are more than the budget? ›
Favorable budget variances occur when the actual results are better than the amount budgeted. Examples of favorable budget variances include: Reported revenues are more than planned revenues.
What to do if expenses exceed budget? ›
⇒ Share housing & expenses with others. ⇒ Find services that will cut expenses in specific budget categories (e.g., food banks or free food distribution, vouchers for gas or laundry, etc.). ⇒ Arrange your life so you can cut expenses – move closer to work or services, use public transportation, car pool, cut to 1 car.
Sometimes you read about a massive construction project with an estimated budget that just keeps going up. You might wonder how governments, even state or national ones, can keep dedicating billions more. For your business, ensuring that your projects have sufficient funding to keep going is a matter of survival. Here are a few things you can do if you find yourself in a situation where your project is running over budget or lacks enough funding to finish.