Construction Cost Overruns: An Industry in Crisis

It's evident: the construction industry faces a profound crisis. So, where do we go from here?

By almost any metric or standard in nearly every industry, a successful project is usually defined as “coming in on time and under budget.” Yet, delays and construction cost overruns are so rampant in the industry that they are perceived as the most significant challenge the industry faces. This perplexing problem has a name but….no real solution.

In this post, we revisit this entrenched problem and review just how bad this situation became in the industry in 2022.

 

Construction Cost Overruns: The Industry’s Silent Epidemic

 

According to McKinsey’s seminal analysis, “The Construction Productivity Imperative,” productivity in the construction industry has remained static for decades. Conversely, another industry in parallel, manufacturing’s productivity has soared over the same time period.

“Construction productivity has been flat for decades… In manufacturing, by contrast, productivity has nearly doubled over the same period, and continuous improvement has been the norm.”’

 

 

For decades, this critical challenge has persisted. Yet, it still appears to be insurmountable. As we’ve argued, the construction industry remains in a chronic state of pain.

In study after study and report after report, the stats don’t lie:

The numbers presented are certainly eye-opening and would catch the attention of any construction project manager. Construction cost overruns and project delays are pervasive challenges in the industry, affecting projects of all scales and scopes.

 

The Tangible Impact of Construction Schedule Delays

 

While the broader implications provide food for thought, it is crucial to understand the concrete consequences in today’s context. Scheduling hiccups lead to significant issues and financial losses for every stakeholder involved in the construction process. This includes clients, owners, developers, contractors, designers, site teams, and everyone else in-between.

For clients or owners, delays in large-scale projects can translate into missed opportunities for potential revenue. For instance, if an office building is late, every day it remains unoccupied results in lost leasing opportunities. Similarly, falling behind schedule on a sports complex could jeopardize significant events. This leads to loss of revenue, public criticism, and damage to a company’s reputation.

For contractors or subcontractors, mismanaged schedules can inflate costs significantly. Delays in payments can lead to higher expenses for materials and labor. Situations where workers are left waiting for essential equipment inflates costs and further extends the project timeline.

 

The Hidden Costs of Construction Delays to Society

 

But beyond the private costs to project stakeholders, what are the often invisible costs to our global economies? In their work, “The Construction Industry is in Crisis,” lean construction experts, Zabelle, Choo, and Arbulu, estimate that “there is over 1.6 trillion wasted annually.” They describe this incalculable and exponential waste as a crisis for the construction industry:

 

This massive amount of waste has profound implications for world economies and for society as a whole…As chronic cost overruns and delays continue to destroy value, the loss not only translates to increased project costs but also to delayed output of clean water, affordable energy, dependable communication, safe and efficient structures, and reliable transportation.

 

And, although many development projects begin with a gleam in the eye, large capital investment, and good intentions, project failure, often via “abandonment,” has become the rule rather than the exception. This occurs more often in developing countries, costing billions.

Project abandonment is a failed project that either doesn’t complete at various stages or completes and delivers the asset but is later abandoned due to a variety of reasons, including disrepair. In Nigeria,11,886 federal government projects were abandoned in the past 40 years (1971 to 2011), causing this country to be labeled the most expensive junkyard in the world.

However, while its investors—the nation itself, the UN, and World Bank—own the abandoned projects that lose financially, the local communities and “small family” ultimately pay the price in other ways. Specifically, housing development, one of the key projects for rising developing nations, is keenly prone to abandonment.

Housing development abandonment also adversely impacts the most industrious, wealthy, and developed nations on the planet. Currently, in Singapore, five built-to-order (BTO) housing projects have been delayed indefinitely. The contractors went bankrupt, leaving almost three thousand homebuyers stuck without homes. And as of now, all work at the five sites has completely stopped.

 

The Impending Infrastructure Crisis Propelled by Waste

 

Many of the critical buildings, roads, bridges, tunnels, highways, power grids, and other key aging infrastructures that are essential to our daily life and survival are at risk. ASCE’s new report card for America’s infrastructure states,

 

“Of the more than 617,000 bridges in the United States, 42% are at least 50 years old, and 7.5% are structurally deficient. To be clear, that’s roughly 46 thousand US bridges in poor condition, and recent estimates put our bridge restoration at 125 billion. Our roads, which are critical not just for transportation but for the distribution of goods aka the ‘supply chain,’ “received a “D,” with more than 40% of roads in poor or mediocre condition.”

 

Prolonged neglect of our roadways escalates costs, affects supply chains, and contributes to increasing inflation. While inconveniences like supply shortages are tolerable to an extent, the real disaster unfolds when lives are lost due to deteriorating infrastructure.

For instance, the tragic collapse of the Ponte Morandi bridge in Genoa, Italy, in 2018, which resulted in 43 deaths, showcases the potential danger of aging structures. Investigations later revealed that the bridge’s design, construction, and subsequent lack of maintenance were significant factors leading to its collapse.

A similarly distressing event occurred in the US with the collapse of the Surfside Condominium in Miami, Florida. Despite multiple warnings about the structure’s deteriorating state, necessary repairs were not undertaken. In 2021, this neglect culminated in collapse, leading to 98 deaths.

Such incidents are glaring indicators of the substantial challenges posed by delays and budgetary overshoots in construction projects. The industry must rise to the occasion and prioritize safeguarding lives by maintaining and upgrading our essential infrastructure.

 

Solution to Construction Cost Overruns: The Schedule

 

Billions are squandered each year on flawed construction, diminishing productivity, and expensive legal disputes. All of this leads to significant economic setbacks and, tragically, the loss of countless lives.

It’s evident: the construction industry faces a profound crisis. So, where do we go from here?

We are convinced that the key to addressing construction waste, habitual mismanagement, persistent delays, and budget overruns can be found within a singular element. It’s the construction project schedule.

Through construction schedule analytics, we see not just a solution but a revolutionary force for the industry. We envision a world where everyone has a secure home, where roads are efficiently paved, and where bridges stand resilient for centuries. A world genuinely fit for all.

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