Cost overruns from estimating errors are an unfortunate fact of life in construction. There are many ways for jobs to go over budget – that is, cost you more than you or your contractor (or sub) estimated. While some of items discussed below are not typically considered “estimating errors,” all can drive up costs beyond the estimate or bid price. That means someone need to come up with additional money at the end of the job. Either the contractor makes less profit or you have to come up with extra cash. Who pays for cost overruns is largely determined by your contract.
If you are working with a contractor who has given a fixed bid, then most cost overruns cut into his profits, although many can still be passed on to you. If you are your own contractor, or working with a time-and-materials or cost-plus contract, then most of the cost overruns will come out of your pocket. Cost overruns are probably the most common cause of disputes in building and remodeling projects.
The main types of estimating errors are:
- Omissions: These are items accidentally left out of the estimate – either soft costs (permits, fees, etc.) or hard construction costs. Omissions may be due to items missing from the plans and specs that were, therefore, not included in the estimate and bid.
- Wrong assumptions: These are items that you assumed were covered under a contractor’s or subcontractor’s bid, but aren’t. Or you may have assumed that a standard septic system would be approved, but a $30,000 mound system is required.
- Inadequate allowances: You may get an estimate from a contractor or subcontractor with a material allowance that’s too low, a very common problem.
- Price changes: Material cost or labor costs may rise between the estimate and the project.
- Novel materials/techniques: Every new material or building technique has a learning curve. Even allowing a little extra time, you may find that it takes a lot longer than planned.
Other reasons that actual costs may exceed estimated costs include: