As a contractor, one of your primary concerns may be completing a given construction project without having to update the existing budget.
As much as it might not be your fault, budget overruns are common and can be caused by several factors. The most common reason a budget needs to be updated is the failure to identify and create a proper risk management strategy. A good risk management strategy should identify and rank risks affecting the project.
Once these risks have been identified, a mitigation strategy should be created and a reasonable budget set aside for mitigating these risks. Other types of construction risks that can affect the budget are as follows.
Types of constructions risks
Project management risks
A project management risk analysis is a type of analysis that identifies the weaknesses, strengths, and opportunities that can affect a construction project. Failure to deal with project management risks can result in design changes affecting the original budget. Some of the project management risks that you need to be aware of are:
- Technology risks
- Communication risks
- Cost risks
- Design change risks
- Operational risks
To solve project management risks, stakeholders of the project should encourage collaboration from the preconstruction phase. Also, project managers should use technology to help mitigate communication and operational risks.
Communication risks can be mitigated by using advanced communication platforms that allow team members to share and store important information online. When looking for a communication platform, ensure it is mobile-friendly and can send out alerts to teams.
Design risks can be costly because the overruns can bankrupt the contractor and stall the entire project. Design risk is a type of risk in which the built structure fails to meet legal requirements or achieve the goals of the project owners.
Design risks are caused by several factors, the most common being design errors, omissions, failure to peer review the design, and change orders from the owner.
The best way to deal with design risks is using a construction optioneering platform. ALICE Technologies is the first AI-based construction optioneering solution on the market, which helps to reduce construction risk, maximize construction margins, and create ideal work schedules.
Contractors can use this technology for complex construction projects such as airports, office towers, tunnels, and rail projects. It can help contractors reduce project time by 17% when properly used.
How to accurately update a budget based on new drawings
When a construction project is faced with a design risk, in most cases, the contractor and architect must come up with new drawings. The new drawings must meet legal requirements and satisfy the needs of the project owners.
However, a change in building design might cause project delays, budget overruns, and in a worst-case scenario, project abandonment. So how do you update a budget based on new drawings?
1. Involve the right team
When a new drawing is made, you will need to update the old budget to accommodate the latest designs. The new drawings can affect a small part of the building or change the entire structure. Whatever the case, the process of coming up with a new budget is the same.
One main thing you need to ensure is that the budget is as accurate as possible. Some of the team members that will need to be involved are architects, engineers, cost estimators, and contractors.
2. Use historical data to your advantage
If the new drawings are similar to a structure that had been made with almost identical specifications, then it is important to study the budget of the old design. This way, it will enable you to know whether the new estimates created are accurate or not. The estimator should consider inflation’s role in increasing labor costs.
Another advantage of using historical data is that you can identify cost-saving strategies that other contractors have used.
3. Consider inflation
Currently, inflation stands at 8.6%. In the economic world, inflation is the rate at which the price of goods and services increases. When doing your new budgeting, you need to factor in the cost of inflation. If you fail to factor in the price of inflation, you risk suffering from a budget deficit.
If the construction project is estimated to last for three years, then the estimator must use reliable sources to calculate the cost of materials and services during this period.
4. Peer review the budget
Another strategy to ensure your budget is accurate is to have it peer-reviewed by other estimators. This might be costly in the short run but very economical in the long run. This is because the independent estimator might identify cost-saving strategies that will make your project more economical to implement.
Peer reviewing the budget also makes it possible for budgeting errors to be identified, saving the project owner thousands of dollars in costs.
5. Have a budget for monitoring performance
Most contractors make the mistake of only creating an updated budget for the new drawings. However, they forget the project manager will require that money to measure Key Performance Indicators (KPIs). Measuring KPIs is important because the contractor can track the progress of the construction project and other metrics such as safety and work quality.