The economic risks of a construction project: the complete picture

A construction project is by nature a multi-risk operation. Unlike industrial production, where the product is made in a controlled environment, in series, through settled processes, every site is a unique prototype, built outdoors, by a constellation of different parties, on ground whose exact characteristics are never fully known in advance.

Three structural factors amplify those risks in the current French context. Growing regulatory complexity, environmental regulations, accessibility, seismic and fire requirements, creates technical obligations whose cost is often under-estimated early. The volatility of material and labour markets, sharper since 2021, makes cost forecasts less certain than in the past. And the fragmentation of the industry, architect, structural engineer, services engineer, economist, site coordinator, contractors, multiplies the interfaces and therefore the zones of risk.

ℹ The rule of cumulative risk The economic risks of a project do not add up, they multiply. A project that combines an initial under-estimate of 10 %, a brief drift of 8 %, site variations of 5 % and inflation of 4 % during tendering does not exceed its budget by 27 %, it exceeds it by 30 %, because each gap is calculated on an already inflated base. That is why contingencies and preventive measures must be thought of as a system, not as a checklist.

The economic risks of a construction project fall into ten families. Each has its own mechanisms, its favoured phases of occurrence and its own preventive tools.

• Early risks, under-estimation and land: the risks that form before the design work even begins. Often the most expensive, because they compromise the viability of the whole project.
• Design risks, drift at developed and detailed design: the progressive growth of the brief without budget reassessment. The silent scope creep that turns a balanced project into an unfundable one.
• Tender risks: trapped contracts, under-priced bids, inflation between design and tender, badly defined packages. The moment contractual commitments are formed.
• Site risks, variations, disputes, the final account: the reality of execution. Abusive variations, contractor failures, delays that generate finance costs.
• Technical risks, architectural choices: the design decisions with a major economic effect: complex façades, basements, unusual geometries.
• Economic risks, materials and inflation: the volatility of material and labour markets. Contractual protection is the only effective tool.
• Contractor risks, insolvency, abnormally low bids: the liquidation of a contractor holding a package. Rare but catastrophic without preparation.
• Regulatory risks: normative requirements poorly anticipated, surfacing during design or construction.
• Land and planning risks: a third-party challenge to the permission, an undetected easement, a local plan that changes. Often fatal if not identified before acquisition.
• Design coordination risks: interfaces not addressed between trades or between engineers. The silent cause of 2 to 8 % of overrun on every project.

Not every risk is equally present at every stage. The matrix shows the intensity of each family by phase. ●●● = very active, ●● = active, ● = present, ○ = weak.

Reading the matrix reveals two critical moments: the concept and outline stage, where under-estimation and technical choice risks are at their maximum and where decisions are still reversible cheaply; and the construction stage, where site and insolvency risks peak but where decisions have become very expensive to correct.

Not every risk deserves the same attention. The most frequent are not always the most expensive, and the reverse. The table gives, for each family, its probability of occurrence and its financial scale on a fictitious reference project of 5 M€ of works.

ℹ Land risk: low probability, potentially total scale Land risk stands apart through its extreme asymmetry: its probability is moderate, a few per cent of operations, but its scale can be total. A third-party challenge to a planning permission blocks the operation for 18 months to three years, during which every holding cost continues with no income at all. On a 15 M€ operation with holding costs at 4 % a year, two years of blockage represents 1.2 M€ of additional financial charges, before legal costs and any penalties owed to buyers. That is why land due diligence before acquisition is not optional expenditure.

The economic case for anticipating risk is implacable. Every euro spent identifying and preventing a risk early avoids 10 to 200 euros of correction later. The table sets that out for the construction economist's interventions.

The last line is the most instructive: the absence of an economist on a project is a decision that has a cost, the overrun that is then borne. That is not a sales argument: these figures are orders of magnitude for framing, not measurements, and they illustrate a simple mechanism, the later an error is corrected, the more its correction costs.

The economic risks of a project are not only technical or contractual; they also have psychological roots. The same cognitive biases recur on every project, in every party.

Project teams, architects, clients, economists under pressure, tend to under-estimate costs and durations early on. It is not bad faith: it is a documented cognitive bias. The remedy: an estimate by reference class, produced by an independent economist with no emotional or commercial interest in the project.

The further a project advances, the harder it becomes psychologically to stop or reframe it, even when the economic signals are bad. "We have already spent 500 k€ on design, we cannot stop now." That sunk-cost logic amplifies every risk: it pushes towards continuing when the rational signal would be to stop or reframe.

An economist producing an estimate sometimes faces implicit or explicit pressure to keep the figures within the envelope the client wants. An estimate that is "too high" can cost the economist the appointment. That pressure compromises the independence of the analysis and generates structural under-estimation. It is one reason an independent external economist offers greater reliability than an economist embedded in the design team.

• Intervene early: an economist at feasibility avoids commitment to unviable projects. At outline stage they calibrate the ratios before the permission is filed. Each phase of progress reduces the cost of correction by an order of magnitude.
• Provide explicitly: every project budget must include an explicit contingency, not one melted into the ratios but clearly identified as a reserve. For example, as an order of magnitude, 15 % at pre-brief, 10 % at outline, 8 % at developed design and 5 % once the contracts are let. These rates are not standards: the MIQCP guide "Évaluer l'enveloppe financière prévisionnelle d'un ouvrage de bâtiment" (June 2008) recommends none and provides for a contingency "to be assessed case by case according to the type of operation, the profile of the client, the administrative or economic context".
• Settle the brief at developed design: developed design must allow the client to settle the brief definitively, in public procurement (R2431-11, 5°) as in the Ordre des architectes' model design contract for professional private clients, new works (V1 of 16 December 2021, art. 5.1.1.2). The brief can still change afterwards, but each change costs more the further the design has advanced; in public procurement, it goes through a negotiated amendment of the design appointment, which settles the amended brief and the forecast works cost, and adjusts the design team's fee and its commitment on that cost (L2432-2).
• Watch the weak signals: a contractor's failure is never wholly unforeseeable. Late payment to subcontractors, recruitment difficulty, abnormally low valuations are signals that should trigger heightened vigilance.
• Contract the protection: price revision clauses, updating provisions, effective delay damages and securities are the contractual tools that turn diffuse risks into concrete protections.

Each article develops one family of risk with its detailed mechanisms, its figures and its preventive tools.

• Under-estimation at concept and outline stage: causes, mechanisms and the remedy
• Budget drift at developed and detailed design: when the project grows and the budget does not
• Tender risks: under-priced bids, inflation and trapped contracts
• Site risks: variations, disputes and the final account
• Risks from technical choices: when the architecture costs more than expected
• Material and inflation risks: protecting yourself contractually
• Contractor insolvency during construction: what to do
• Regulatory risks: accessibility, fire, environmental, seismic
• Land and planning risks: permission, challenges, easements
• Design coordination risks: the interfaces that cost dear
• How to read an estimate to detect hidden risk
• Post-handover warranties: defects liability, two-year and ten-year cover
• Financing and carry risks
• Mandatory insurance in construction

The economic risks of a construction project fall into ten families, present at different intensities according to the phase. The most frequent and costly are early under-estimation at 5 to 20 %, brief drift at 5 to 25 % and site variations at 3 to 10 %. Land risk is the most asymmetric: low probability, but potentially total scale. The most profitable preventive measure is bringing in an economist early, an outline estimate that prevents an overrun a hundred times its cost returns a hundredfold. A significant share of projects exceed their initial budget: that is not an inevitability of the sector, it is a deficit of anticipation that five simple principles correct.

The nature of the figures quoted

The percentages and amounts quoted on this page are orders of magnitude for framing, not measurements. They illustrate mechanisms and proportions, and they substitute neither for a tender exercise nor for an estimate prepared on drawings.

• Under-estimation at concept and outline stage
• Budget drift at developed and detailed design
• Tender risks: under-priced bids, inflation and trapped contracts
• Site risks: abusive variations, disputes and securing the final account
• Financing and carry risks: what the appraisal does not show
• Mandatory insurance in construction
• Risks from technical choices
• Material and inflation risks: protecting yourself contractually
• Contractor insolvency during construction: the first 72 hours are decisive
• Regulatory risks in construction
• Land and planning risks: permission, challenges and easements
• Design coordination risks: the interfaces that cost dear
• Post-handover warranties: your rights and how to exercise them
• How to read a construction estimate to detect hidden risk
• Why construction budgets overrun, and how to prevent it
• How to compare construction costs between two building types
• The outline-stage estimate: a project's first budget assessment
• Construction economist or measurer: the differences