Let’s face it: cost overruns in the AEC industry are more common than we’d like to admit. Whether it’s underestimating material costs or getting caught off guard by unexpected delays, project managers are all too familiar with the pain of seeing a project budget slip through their fingers. The problem isn’t just the extra money—it’s the time, the stress, and the strain on client relationships.
If you’ve been in the industry long enough, you know that managing a project budget is as much about planning as it is about reacting. But the good news? With the right approach, you can avoid many of the pitfalls that lead to project cost overruns. In this article, we’ll dive into the top reasons why projects go over budget and how you can fix them.
What is Cost Overrun?
Cost overrun, also known as budget overrun, happens when the actual cost of a project exceeds its original project budget. This means the total expenditure to complete a project surpasses what was initially estimated. While cost overruns can happen in any industry, they’re particularly common in construction projects due to the sheer complexity and the involvement of many project teams. In fact,
construction projects nationwide typically exceed their budgets by at least 16%, with many going even higher.
How is Cost Overrun Different For Architects and Engineers?
Cost overruns in AEC projects are a bit of a beast. Unlike other industries, where overruns might be caused by market changes or unexpected expenses, A&E budgets often take a hit due to the specific demands of design, precision, and coordination. Here, overruns don’t just stem from simple delays or price hikes—they’re often a direct result of shifting design requirements, evolving client needs, and the need for specialized materials that don’t always go as planned.
Architects and engineers juggle a lot of moving parts. A project might start with a solid design, but as client expectations evolve or environmental requirements change, budgets can quickly spiral. Every design tweak or added feature has a cost ripple, impacting labor, materials, and project timelines. And because A&E projects often require precision tools, custom materials, and rigorous compliance with codes and standards, the budget needs to stretch for the unexpected.
Another key challenge? Forecasting costs with pinpoint accuracy. Unlike general construction, where standard materials and processes apply, A&E projects rely on tailored solutions, specific finishes, and complex coordination. An underestimate in materials or an overlooked design detail can mean hidden costs that show up mid-project, requiring quick adjustments and often unplanned expenses. Keeping budgets on track here means constant oversight and fine-tuning at every stage.
In short, architecture and engineering cost overruns aren’t just about materials and labor—they’re about adapting to client vision, managing precise requirements, and planning for the unexpected. And in this industry, that balancing act is a full-time job.
Common Signs Your Project Has Cost Overrun
Sometimes, the signs of a cost overrun creep up slowly—other times, they hit you like a freight train. Either way, recognizing the red flags early on can save you a world of hurt (and money). Let’s dive a little deeper into these warning signs:
Project Delays
Delays are often the first indicator that your project is headed for a cost overrun. It’s easy to think of delays as just “a few days behind,” but every extra day means your project is incurring additional costs—whether it’s labor, equipment rentals, or extended timelines for subcontractors. Even worse, those days can add up fast, and before you know it, you’re weeks behind.
A project that drags on for too long also risks missing critical deadlines, which can trigger penalties or lost incentives. The key takeaway? If your project timeline keeps getting pushed back, you’re likely staring down the barrel of an overrun.
Budget Burn
Here’s a scenario you might know too well: your contingency reserves are evaporating faster than you expected. Every project budget comes with a cushion for the unforeseen—things like material cost hikes, overtime, or minor changes. But when that cushion disappears too soon, it’s a clear sign that you’re facing an impending budget overrun.
Once you start dipping into other areas of your budget to cover costs, it’s only a matter of time before the entire project spirals into a full-blown cost overrun. It’s crucial for AEC firms to keep an eye on where your cash flow and money is going, and how fast it’s being used up. If you’re burning through your reserves with no end in sight, it’s time to reassess the situation.
Consistent Discrepancies Between Actual and Planned Expenses
If you’re noticing a steady gap between your actual spending and your projected expenditures, it’s a clear sign that costs are slipping beyond control. When expenses keep deviating from the budgeted plan, it often points to underlying issues that need immediate attention.
Unplanned Increases in Resource Costs
Unexpected price hikes for labor, materials, or equipment can throw off your project budget quickly. Rising costs in these core resources are a telltale sign that the project’s expenses may soon outpace what was originally estimated, potentially leading to further budget strain.
Frequent Adjustments to the Budget
If you find yourself regularly revisiting and adjusting the project budget to accommodate unforeseen expenses, it’s a sure indicator that costs are spiraling. Constant budget tweaks not only highlight unexpected financial strain but also suggest that there may be a lack of foresight or contingency in the original budget plan.
These red flags can be subtle at first, but once they start popping up, it’s essential to address them immediately. The sooner you catch these signs, the sooner you can make adjustments and prevent a small issue from turning into a costly project disaster.
What Causes Cost Overruns? 6 Reasons It Happens in AEC
Now, let’s talk about why AEC firms specifically struggle with cost overruns on projects. Here are six common reasons cost overruns happen in the AEC industry:
- Scope Creep: Scope creep is one of the biggest culprits behind cost overruns, and it can’t be overstated. When project requirements start expanding—whether through added features, material upgrades, or design adjustments—it drives up both labor and material costs. Architects and engineers know that client requests or on-the-fly changes can create runaway costs. The solution? Establish clear project scopes and a robust change order process that accounts for every alteration’s impact. Without these, scope creep will continue to sabotage your project budget.
- Inaccurate Project Estimates: Starting with inaccurate estimates is like building on a shaky foundation. If your initial project estimates don’t fully reflect costs—whether labor, materials, or equipment—you’re setting yourself up for hidden costs and inevitable budget overruns. This often happens when project managers rely on outdated data or overlook critical aspects like labor market shifts or material price increases. The fix? Use accurate cost reports, data from similar projects, and ensure estimates reflect current market conditions to avoid under-budgeting.
- Hidden Costs: Hidden costs are often the silent budget breakers in architecture and engineering projects. These unexpected expenses include small, overlooked details such as last-minute material substitutions, higher utility fees during extended project hours, or extra travel expenses for on-site inspections. They might seem minor individually but can quickly accumulate, leading to significant budget strain. To mitigate hidden costs, work closely with vendors, use transparent and detailed contracts, and keep track of every project phase to catch extra costs before they add up.
- Unforeseen Site Conditions: Every architect and engineer dreads the discovery of unforeseen site conditions once the project begins. Whether it’s uncharted underground utilities, poor soil quality, or unexpected structural issues, these surprises quickly add to project costs. Hidden site conditions are notorious for triggering delays and unexpected costs. While not every issue can be predicted, a thorough site assessment and contingency planning can help prepare for the worst. Investing in detailed site studies upfront saves substantial costs and headaches down the line.
- Inefficient Use of Resources: Poor resource allocation is a silent budget killer. If your team is idling due to late materials or unused equipment because of scheduling conflicts, you’re burning through the budget without moving forward. This inefficiency is especially damaging on large projects where multiple teams need to work in sync. Using project management tools to schedule and allocate resources more efficiently can prevent costly delays and make the most of your manpower and equipment. Smart resource planning is key to keeping unnecessary costs in check.
- Lack of Risk Management: Here’s an often-overlooked but critical cause: lack of risk management. Every project in architecture and engineering comes with risks—be it delays, unforeseen site conditions, or regulatory hurdles. Without a proactive risk management strategy, hidden costs and unplanned expenses are almost guaranteed. Regular risk assessments and a proactive contingency plan can address potential issues before they turn into budget disasters.
- Regulatory Changes and Compliance Costs: Architects, engineers, and construction teams must stay compliant with regulations, whether it’s EPA standards, OSHA protocols, or new building codes. Regulatory changes during a project often lead to unanticipated, expensive adjustments. These compliance costs frequently aren’t included in the original project budget, resulting in unplanned overruns. Staying informed on regulatory trends and building contingency reserves for compliance expenses can prevent these hidden costs from impacting your budget.
- Communication Gaps: You’d be amazed how many cost overruns boil down to poor communication. When your project teams, subcontractors, and clients aren’t on the same page, it leads to confusion, missteps, and—yes—additional costs. A small misunderstanding on-site, like misreading the design specs or missing a critical change order, can trigger expensive rework.
Cost overruns in architecture and engineering share a common theme—lack of foresight and preparation. Addressing these six key areas proactively can help prevent costly mistakes and set your projects up for success.
What’s an Example of a Cost Overrun?
Let’s imagine you’re an architect leading a major commercial project—designing and overseeing the construction of a sleek new office building downtown. At the beginning, your architecture firm estimates the project’s original budget for structural steel to be around $750,000, based on research, market data, and similar past projects. You feel confident this estimate will cover the steel framing and supports needed throughout the building.
Unforeseen Market Changes and Rising Costs
Everything seems on track until a few months into the project, when the global steel market shifts dramatically. Supply chain disruptions, combined with surging demand, lead to skyrocketing steel prices. Suppliers can’t keep up, and when they do deliver, costs are now 25% higher than expected. Instead of sticking to your $750,000 estimate, the actual cost has ballooned to nearly $940,000—an extra $190,000 that was never planned for.
Managing the Cost Overrun Impact
This isn’t a minor issue; it’s a full-blown cost overrun. That $190,000 has to come from somewhere, and since it wasn’t part of the initial project budget, you’ll need to dip into contingency reserves or reallocate funds from other areas. This could mean cutting back on finishes, delaying construction phases, or compromising on other design aspects.
Project Delays and Compounding Costs
The impact doesn’t stop at materials. Delays in securing steel affect the overall timeline, with project teams sitting idle, racking up labor costs while awaiting materials. Each day of delay affects installation, inspections, and finishing work—leading to further delays, increased costs, and disruptions to the entire construction process.
Addressing Client Concerns and Maintaining Trust
To make matters worse, your client is frustrated. They had signed off on the original estimates and are now facing significantly higher costs. Explaining that this overrun is due to uncontrollable factors, like global market shifts, may not ease their concerns. You’re now in damage control mode, working to maintain client trust while balancing the budget without compromising the final product.
This type of cost overrun might have been mitigated with a more thorough risk assessment during the planning phase. By reviewing steel market trends and projecting potential fluctuations, you could have allocated more to contingency reserves or secured early contracts to lock in prices before the spike.
How Do You Calculate Cost Overrun?
Calculating cost overrun allows architects and engineers to determine precisely how much a project has exceeded its original budget. This quick formula gives you a clear view of the project’s overspend as a percentage, making it easy to address cost control with stakeholders:
Cost Overrun (%) = (Actual Expenses – Budgeted Amount) / Budgeted Amount × 100
Using this formula helps you quantify overspend and better understand where budget adjustments may be needed.
Example Calculation
Suppose your budgeted amount for a project is $15,000, but actual expenses amount to $17,500:
- Subtract the budgeted amount from the actual expenses:
$17,500 (actual expenses) – $15,000 (budgeted amount) = $2,500 - Divide the difference by the budgeted amount to find the overspend ratio:
$2,500 / $15,000 = 0.1667 - Multiply by 100 to get the percentage over budget:
0.1667 × 100 = 16.67%
In this example, the project is 16.67% over budget. Calculating these percentages regularly helps you monitor spending and take corrective actions early to prevent cost overruns from escalating.
How to Fix Project Cost Overruns
Okay, so your project is already in overrun territory. It’s not a great place to be, but don’t panic—there’s still a way out. Here’s a step-by-step guide to getting your project back on track, minimizing further damage, and salvaging your budget.
1. Assess the Situation
First, take a deep breath and face the facts. You need a clear understanding of where things went off the rails. The best way to do this is by diving into your project management software. Look at your project progress and compare it to the original project budget. Where are the discrepancies? Is the overrun due to unexpected material costs, labor overages, or delays? Having this data at your fingertips is critical to making informed decisions.
The key here is to break down the overrun into its specific causes—don’t just look at the bottom-line figure. Is it scope creep? A lack of resources? Delays caused by supply chain issues or unforeseen site conditions? Once you’ve pinpointed the cause, you’ll have a better idea of how to tackle the problem.
2. Communicate with Your Team
Now that you’ve identified the issues, it’s time to get everyone on the same page. Call a meeting with your project teams and key stakeholders to review the situation. It’s essential to be transparent here—don’t sugarcoat the problem. Everyone involved needs to understand where the project stands and how the cost overrun is affecting the timeline and deliverables.
Be prepared to discuss the potential solutions you’re considering. This could mean trimming down non-essential elements of the project scope, adjusting timelines, or reassigning resources to where they’ll be most effective. Ask for feedback from your team on what can realistically be done to keep the project moving forward while considering cost control measures.
3. Reprioritize Deliverables
This is where tough decisions come into play. You’ll need to reevaluate your project deliverables and identify what’s absolutely critical to the project’s success. What can be delayed, reduced, or even cut altogether? If you’ve fallen into a cost overrun, some sacrifices will have to be made to get things back on track.
Here’s where you can involve your client, too. Discuss with them the possibility of revising the project scope. Clients are often more understanding than we think—especially when you present them with a well-structured plan to keep the project within a reasonable budget. Clearly communicate the trade-offs: What happens if they insist on keeping all elements? What’s the financial impact? Let them make informed choices about which aspects of the project are most important to them.
4. Tighten Spending Controls
Now that you have a revised plan, it’s time to clamp down on spending. If the project has already experienced cost overruns, you can’t afford further budget drift. Use your project management and budget management software to track costs in real time and monitor where every dollar is going. Implement stricter controls to ensure no additional funds are allocated without review and approval.
This is also the time to assess if you can renegotiate contracts with suppliers or subcontractors to reduce expenses. If certain costs, such as material prices, were underestimated, perhaps you can lock in fixed rates for the remainder of the project to prevent further price hikes. Tightening your grip on every aspect of spending will help limit further damage.
5. Reassign and Optimize Resources
When a project’s costs spiral out of control, you need to make sure you’re using every resource as efficiently as possible. Review your current resource allocation—are there areas where teams are idle, or equipment is being underutilized? Are there skilled workers or subcontractors who could be redeployed to more urgent parts of the project?
One option might be to bring in external consultants or specialists who can offer a fresh perspective on optimizing resources. In many cases, simply reorganizing your team can boost productivity and help avoid additional labor costs. Ensure everyone is aligned with the updated project plan, so you don’t waste resources on non-essential tasks.
6. Establish Contingency Plans Moving Forward
Once you’ve managed to stabilize the project, it’s crucial to ensure this situation doesn’t happen again. Build or revise your contingency reserves to accommodate potential issues in the future. Make sure your risk management plan is robust, and address any gaps that contributed to the cost overrun in the first place.
For example, if inaccurate project estimates or market volatility caused the budget blowout, be sure to tighten your estimating process and stay up-to-date on industry trends. Regular risk assessments and check-ins with your team can help flag potential cost issues before they spiral out of control.
7. Keep the Client Informed
Lastly, make sure to keep the lines of communication open with your client throughout the process. Clients appreciate transparency, especially when it comes to cost overruns. Keep them updated on the revised project plan, including any changes to deliverables or timelines. This will build trust and help manage expectations moving forward.
When you show your client that you have a proactive plan to bring the project back on track, it strengthens your relationship and gives them confidence in your ability to manage unexpected challenges. Let them know what steps you’re taking to prevent similar cost overruns in the future.
Fixing a cost overrun requires a combination of immediate action and long-term planning. By staying calm, assessing the situation, and pulling your team together, you can re-align your project with its budget and timeline. More importantly, use the lessons learned from this experience to improve your project management process moving forward, so that future projects stay on budget, on time, and on track.
Ways to Prevent Cost Overrun in AEC
While fixing a cost overrun is possible, the smartest approach is to prevent it from happening in the first place. By taking proactive measures, you can safeguard your project from budget surprises, keep your clients happy, and deliver on time. Here are some essential strategies to prevent cost overruns in the AEC industry:
Accurate Project Estimates
The foundation of any successful project is a well-thought-out budget, and that begins with accurate cost estimates. The problem in the AEC industry is that it’s all too easy to rely on guesswork or outdated data when projecting project costs. To avoid this, leverage project data from similar past projects and stay up-to-date with current market trends, particularly in material and labor costs. It’s also critical to anticipate potential price fluctuations, such as seasonal cost changes or supply chain disruptions, and build those into your estimates.
By using cost forecasting tools and industry benchmarks, you’ll create a more reliable project budget, reducing the chances of a cost overrun right from the start. Remember, accurate estimates require both precision and flexibility. It’s always better to be slightly over-prepared than to face the stress of trying to recover from an under-budgeted project.
Use Project Management Tools Like Deltek Vantagepoint
Project management tools are essential in today’s complex AEC projects, where tracking resources, budgets, and timelines can quickly become overwhelming. These tools provide real-time visibility into project progress, flagging potential issues long before they evolve into full-blown cost overruns. One of the leading solutions in this space is Deltek Vantagepoint—a comprehensive project management tool designed specifically for AEC firms.
Deltek Vantagepoint helps you manage everything from project planning to resource allocation and budget tracking. It integrates seamlessly with your team’s workflow, offering dashboards that allow you to monitor project costs, manage your project scope, and ensure everyone stays aligned on the project plan. When project changes arise, the software allows you to track their impact on your budget in real time, helping you make informed decisions that avoid unnecessary cost increases.
With the right project management software, like Deltek Vantagepoint, you gain a bird’s-eye view of every aspect of your project—allowing you to anticipate problems, adjust quickly, and stay within your original project budget.
Improve Communication Across Teams
Poor communication is one of the leading causes of project misalignment, which inevitably leads to cost overruns. In the fast-paced world of AEC, where multiple teams and stakeholders are often involved, ensuring everyone is on the same page is essential. The solution? Establish a regular rhythm of communication through weekly check-ins, clear documentation, and open channels for updates and feedback.
Project managers should take the lead here, ensuring that all key stakeholders, from subcontractors to the client, are aligned on the project deliverables, timelines, and any changes. Additionally, using collaboration features within your project management tools (like Deltek Vantagepoint) can streamline communication. When every team member has access to the latest project data and status updates, the risk of confusion, errors, and rework is significantly reduced—ultimately protecting your budget.
Conduct Regular Risk Assessments
No project is without risk, but the difference between a successful project and a budget disaster often comes down to how well those risks are managed. Regular risk assessments are crucial in identifying potential issues before they snowball into costly problems. In AEC projects, risks can range from weather delays and labor shortages to unforeseen site conditions or regulatory changes.
To mitigate these risks, conduct thorough risk assessments at key milestones throughout your project. This isn’t a one-and-done task. It should be an ongoing part of your project strategy, with adjustments made as new risks are identified. For instance, if you’re working on a high-rise project in a region known for unpredictable weather, build that risk into your timeline and budget from the start.
In addition, create contingency plans for each major risk. What will your team do if material costs unexpectedly rise? How will you handle delays due to a labor strike? Having a plan in place ensures that you can respond quickly and effectively, minimizing the financial impact on the project.
Build in Contingency Reserves
Even the most well-planned projects face unexpected costs, which is why every project should include a contingency budget. These reserves act as a financial buffer for unforeseen expenses, whether it’s a sudden material price hike or a subcontractor delay. Without a sufficient contingency, small disruptions can quickly balloon into a full-blown cost overrun.
As a rule of thumb, contingency reserves should typically be around 10-15% of the total project budget, but this can vary based on the complexity and size of the project. For example, larger projects with more variables, like infrastructure builds, may require a higher contingency percentage, while smaller or more straightforward projects can get by with less.
Work Closely with Vendors to Avoid Surprises
Vendor issues can derail a project faster than you’d think. Take the time to thoroughly vet your vendors—checking their reliability, pricing consistency, and delivery timelines. Clear agreements and well-defined expectations upfront go a long way in preventing sudden cost jumps or delays down the line. Regular check-ins with vendors during the project will keep things on track and minimize surprises.
Track Both Billable and Non-Billable Hours
Labor costs can get tricky without a clear view of where time is going. Tracking both billable and non-billable hours ensures you’re fully aware of where your budget is being spent. Keeping an eye on these numbers helps identify inefficiencies early and allows project managers to reallocate resources to keep productivity up. Plus, this data offers insight for future projects, helping you make more accurate labor forecasts and avoid unexpected expenses.
The key here is to be realistic—don’t underestimate the likelihood of unforeseen circumstances. A robust contingency budget not only keeps your project afloat during turbulent times but also provides peace of mind, knowing that you’re financially prepared to handle whatever comes your way.
Final Take on Cost Overruns
In the world of AEC, avoiding cost overruns isn’t about luck. It’s about meticulous planning, smart tools, and constant vigilance. By starting with accurate estimates, leveraging project management software like Deltek Vantagepoint, fostering clear communication, conducting regular risk assessments, and building in contingency reserves, you’re setting yourself up for success.
The proactive steps you take at the start of a project will determine whether you finish on time and on budget, or if you’re scrambling to recover from an avoidable cost overrun. Preventative measures are your best defense against budget overruns—and the key to delivering successful projects that keep your clients happy and your margins healthy.
Key Takeaways
- Cost overruns are common in the AEC industry, but they can be managed.
- Factors like underestimated material costs, delays, and scope creep often lead to budget issues. The key to avoiding overruns is proactive planning and quick adjustments.
- Uncontrolled scope changes can drive up costs, so it’s essential to define the project scope clearly and manage changes carefully. Accurate cost estimates based on updated data and past projects help prevent budgeting mistakes, while effective risk management makes it so you’re prepared for the unexpected.
- Ultimately, preventing cost overruns requires being proactive. Anticipating issues and addressing them early through planning, tracking, and communication will keep your project on time and within budget.
Frequently Asked Questions
What is an example of a cost overage?
A construction project where material prices increase unexpectedly, resulting in a higher total expenditure than planned.
How do you handle budget overruns?
Start by analyzing where the project went off-track, adjusting the project scope if necessary, and reallocating resources to bring the project back within budget.
What is overrun funding?
Overrun funding refers to additional funding required to cover project costs that exceed the original budget.