By Procore Editorial Staff
Errors in construction budgeting have been around as long as people have been putting up buildings, and as the built environment continues to grow, so does the difficulty of accurately forecasting costs.
In 1914, the Panama Canal came in ahead of schedule and some $23 million under budget; an owner’s daydream. But more often, the error goes the other way. It’s not uncommon for an imaginative architect’s high-flying vision to wow the stakeholders so much so, that all common sense is set aside.
The Scottish parliament building may be the most striking example of a grand scale architectural miscalculation. Holyrood, as the building is known, was projected to cost $58 million in 1997 when it was approved. By 2007 it had come in at $608 million. In that case, poor and hurried planning were to blame. Client tinkering and self-deluding optimism, however, are also common reasons large scale projects run off the budget rails.
There are many reasons for budget overruns in construction. Here are some of the least predictable.
Doomed from the start.
What may at first look like a budget shortfall is often the result of someone making an overly optimistic bid in order to land the job. The phenomenon hasthe dark industry nickname “suicide bidding”, but you can also call it “optimism bias” where it stems from the bidder’s positive outlook.
In the CIOB’s 2010 survey, “Procurement in the ConstructionIndustry,” 82% of respondents reported to believing there are contractors who engage in “suicide bidding” within the industry.
In other words, if the bid sounds a wee bit too good to be true – well, you know the rest.
And speaking of the Panama Canal; in 2014 a large-scale expansion of the iconic waterway was found to be running about $1 billion over the bid figure of $3.12billion. The contractor, Spanish consortium Grupo Unidos por El Canal (GUPC),quickly blamed “flawed geologic studies” done by the semi-government officePanama Canal Authority (PCA), an accusation that was immediately rebuffed by the PCA. A Panamanian government source, meanwhile, said that immediately upon winning the hard-fought bid, GUPC had been openly saying the figure couldn’t possibly be met, a bold confession that didn’t trouble the Panamanian government, who felt they were protected by the bid contract. It also developed that the financially ailing GUPC had internally assured stakeholders that they would be able to raise the pricing in later negotiations with PCA-head Jorge Quijano. Mr. Quijano, in the event, could not be budged.
In the intervening two years, the Dispute Adjudication Board (DAB) has found in favor of GUPC over the Panamanian PCA, as clauses in the original contract placed the burden of maintaining “financial equilibrium” with the Panamanian government; something they have been reluctant to do given the scale of the overruns. Cost overruns are fairly routine in grand scale engineering projects of this kind, and contracts typically codify that understanding in the contract language.
Be wary of the surprisingly low bid. The technical approach to a subcontracted job follows professionally agreed-upon norms in the industry. A bid that comes in substantially lower than the nearest competitive bid for the same job is either deceptive, is genuinely uninformed about what the job elements are, or comes from an unlicensed contractor who is passing along payroll savings to you through a sweetheart bid. Your attempt to leverage promised savings from an attractively low bid may in fact be locking in a contract with an opportunist who will blow out your budget.