Budget overrun in construction: causes, scale and how to avoid it

Commercial pressure and the desire to start push costs down in the early phases. The concept estimate, precise to ± 20–30 %, is presented as a budget when it is only an order of magnitude. If the brief is not adjusted when the design moves on, the initial budget becomes an arbitrary constraint disconnected from reality.

The ground is the most under-estimated risk factor in construction. A geotechnical survey not carried out exposes the project to discoveries during excavation: unanticipated rock, a high water table, shrinkable clay, contamination. Those discoveries can multiply the foundation cost by two to five. The cost of a survey, 2,000 to 8,000 € according to area, is negligible against the overrun risk.

Every change to the brief after the outline stage generates rising costs. A wall moved at concept stage costs nothing. The same move during construction means demolition, rebuilding, an effect on the other packages and additional time. The rule of exponentially rising change costs applies in construction as in every complex project.

Early estimates often cover only the construction works, forgetting items that collectively represent 25 to 45 % of the total budget:

• Design fees, 10 to 15 % of the works envelope for small operations, 7 to 10 % for the largest, according to the orders of magnitude published by the MIQCP in 2008
• Technical control, health and safety coordination, structural warranty insurance, 2–5 %
• External works and utility connections, 5–15 % according to distance
• Landscaping, fencing, parking
• Furniture, equipment unrelated to the construction, signage
• Finance costs where the project is funded by borrowing
• Rehousing costs or the cost of operating during the works

Even a perfectly prepared site meets the unforeseen: uncharted services discovered, exceptional weather, a subcontractor failing, equipment delivered late. It is to cover those risks that the contingency, to be set according to the operation (of the order of 3 to 8 % of the works cost for new build, more for refurbishment: see below), is indispensable, and it must never be used as an adjustment variable to present an attractive budget.

Between signing a contract and completing an 18- to 24-month site, material prices can move significantly. Without a revision clause, the contractor in principle bears the rise, and passes it on in claims or in degraded quality. In an administrative contract, such as the contract of a legal person governed by public law, it is nevertheless entitled to an indemnity if an event external to the parties, and unforeseeable, temporarily upsets the balance of the contract and it continues to perform it (public procurement code, art. L6, 3°); this hardship indemnity is provisional and gives it no right to the revision of the financial clauses (Conseil d'État, opinion, 15 September 2022, no. 405540). The rise in steel and in structural timber between 2020 and 2022 weakened many contracts signed at a firm price without revision.

Refurbishment projects are structurally less predictable than new build. Older buildings reveal their surprises during demolition: asbestos, lead, wood-boring insects, poor structural quality, services out of standard. The contingency must be raised to 15–25 % of the works cost for refurbishment, against 3–8 % for new build.

• Carry out a geotechnical survey before developed design, without exception
• Definitively approve the brief before developed design begins; every later change will be expensive
• Require an estimate by trade from the outline stage, not just a global ratio
• Systematically build fees, insurance, external works, contingency and tax into the budget
• Never present an estimate to the client without an explicit precision band

• Check the coherence of the contractors' offers: a very low offer often conceals unrealistic assumptions that reappear as variations
• Insert a price revision clause as soon as performance exposes the parties to significant economic risks. On public contracts, a contract is concluded at a revisable price when the parties are exposed to major risks arising from the reasonably foreseeable change in economic conditions during the period of performance (R2112-13); the revision clause is mandatory for a contract with a period of performance of more than three months that requires a significant share of supplies, notably raw materials, whose price follows world market prices (R2112-14); a works contract concluded at a firm price must, for its part, provide for the updating of its price (R2112-10 and R2112-11).
• Hold 3–8 % of the budget in reserve for the unforeseen, outside the firm budget

• Put a monthly financial dashboard in place: commitments, balances available, forecast out-turn
• Institute a formal variation authorisation procedure: no variation without the client's written agreement and prior pricing
• Follow the monthly index to anticipate the contractual price revisions

The fundamental principle A forecast budget is never a guarantee of final cost; it is an estimate at a given moment, with a precision tied to how far the design has advanced. The best protection against overrun is the quality of the early studies, rigour in the change authorisation procedure, and a correctly sized contingency.

Articles liés : How to estimate the cost of a project · Financial risks in construction projects · Expenditure items on a construction site

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. The contingency rates cited are the author's orders of magnitude; the MIQCP guide (2008) recommends none and refers to a "provision to be assessed case by case".