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Construction Cost Overruns: An Industry in Crisis

Part I: The Construction Project Productivity Mandate  (Read Part II of this Series)

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 cost overruns in construction projects are so routine they’re basically expected—part and parcel of the industry, or better yet—simply the cost of doing business. Delays and construction cost overruns are so rampant in the industry that they are perceived as not just a major problem but the most significant challenge the industry faces. This is a perplexing problem that has a name but….no real solution.

In this post—the first of a 2-part series—we revisit this entrenched problem and review just how bad this situation has become in the industry in 2022. In our follow-up to this post, we provide a compelling case that while cost overruns appear too complex to solve and have no immediate remedy, the root of the problem lies in the construction schedule, and the only way to truly solve it is with robust construction schedule analytics.


Construction Cost Overruns: The Industry’s Silent Epidemic


According to McKinsey, in their seminal analysis,The Construction Productivity Imperative,” productivity in the construction industry has remained static for decades while conversely, another industry in parallel, manufacturing, has soared in productivity 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.”

Low Construction Productivity vs Manufacturing Over Time

For decades this critical challenge—the construction industry’s universal acceptance of the inevitability of poor performance with regard to the successful completion of construction projects—has persisted, yet 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 simply don’t lie:

These are some staggering numbers apt to make any construction project manager sit up and take notice. But construction cost overruns are not just modern occurrences or crises that only afflict inexperienced project managers or large projects in small third-world countries. Project delays and cost overruns in construction projects have not only been around since the beginning of civilization but are also a persistent intractable problem in the industry, adversely impacting the majority of projects no matter how big or how small.


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Construction Schedule Delays: A Problem as Old as History


All the projects listed below have one thing in common—being plagued by chronic inefficiencies, cost overruns, disputes, and scheduling delays that set these projects back years as well as over budget to the tune of millions if not billions in many cases:


1. The Great Pyramid at Giza | 26th Cent BC

Egyptian pharaoh Khufu spent all his wealth building this pyramid which is estimated to cost $5 billion in today’s dollars.

2. The Parthenon3 | 5 Cent BC

Fraught with significant project delays, construction costs on this lavish temple in ancient Greece ballooned to approximately $7-12 million in today’s currency.

3. The Palace of Versailles4 | 17th Century

French King, Louis XIV, notoriously drained the national treasury to build this extravagant gilded palace with miraculous gardens. It was truly the project that never ended and took decades to complete at an estimated $300 billion in modern currency.

4. Boston Central Artery/Tunnel Project | 20th Century

Otherwise known as “The Big Dig,” this project horror story started out as a 3.5-mile tunnel to reroute traffic and ended up as perhaps the most expensive construction scheme in U.S. history. It incurred so many project challenges that it took 16 years to complete (delivered 9 years late), with an estimated final cost of $22 billion or a cost-over of 190%.

5. Wembley Stadium | UK 21st Century

This project stands alone as simply as one of the best examples of hidden project overruns or the unplanned additional costs incurred to litigate ghastly and protracted construction disputes due to poor project management. In 2007, the Wembley Stadium project notoriously generated over $1 million dollars in photocopying costs alone just to deal with the legal battles costing nearly 30 million.5


The Real Costs of Construction Schedule Delays to Builders


While these are interesting cautionary tales, the truth is, poor productivity in modern times results in very real-world problems and losses for each individual construction project stakeholder—clients, owners, developers, contractors, subs as well as designers and architects alike. To the client or owner, the net loss of a large project schedule delay might equate to exponential loss of future revenue when their office building isn’t up and ready to lease day after day, week after week as an example, or it might equate to negative company PR, public scrutiny and damage to the companies reputation if, let's say, their sports complex falls behind, they can’t meet their opening date and an eagerly anticipated event such as a Cup final or Olympics host is forced to be canceled.

To the contractor or sub, the negative impacts of a poorly managed schedule might look like soaring overhead costs for materials and/or labor when the owner, for example, fails to pay the contractor on time. This could result in increased labor costs as idle workers sit around waiting on critical equipment needed for the job to be delivered while simultaneously extending the construction schedule timeline.

To the designer or architect, the casualties of late, incomplete, or poorly designed plans could cost him his job, if a forced unscheduled rebuild happens under his watch, or worse it could result in suspension or abandonment of the project leaving only a partially built shell in lieu of his dream. Talk about a dream deferred. These are very hard lessons and real tangible losses. See the Sydney Opera House failure.


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 from the astronomical waste that result from construction projects failing to deliver on time and on a budget? 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. Worse, it is the small developing country desperately trying to climb the economic development ladder that is often left holding the bill.

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

A case in point is the failure of the $10 billion housing project Ghana-STX. The project was supposed to lead to the construction of 200,000 houses to combat the staggering housing shortage in Ghana but was declared a failure by the president of Ghana and abandoned in 2011. It’s estimated that the Ghanaian government lost over $300 million due to cost overruns and petty disputes, but the losses to the Ghanaian economy were more profound. Not only did the nation’s poorest lose critical housing they desperately needed, but also the economic stimulus, as well as substantial job creation that was going to come with it.

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 due to the contractors going bankrupt, leaving almost three thousand homebuyers stuck without homes. And as of now, all work at the five sites has completely stopped.

Similarly, across the world right in the middle of San Francisco’s housing crisis, housing delays due to funding challenges have caused 214 housing developments for low-income residents to come to a screeching halt, years away from ever even breaking ground. San Francisco’s low-income and homeless were so close to a roof over their heads and yet, due to poor project performance and scheduling delays, it remains still, just out of their reach.


The Impending Infrastructure Crisis Propelled by Waste


In addition to the global housing crisis, we are also entering into an infrastructure crisis. 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.” Letting the growing “wear and tear” on our roads and highways go untreated for so long is unacceptable and we are now reaping the considerable consequences of our failure to maintain this essential infrastructure in the form of rising inflation and supply shortages. But not being able to get toilet paper or watching the cost of lumbar soar is hardly catastrophic—simply a nuisance.

However, what is catastrophic is the loss of life caused by aging infrastructure that fails to be maintained and updated. Like the US, much of the infrastructure built in Italy is at risk due to its advanced age. The collapse of Ponte Morandi in 2018, an aging bridge in Genoa, Italy, is one such example that resulted in 43 deaths.  It is now believed that failures in conception, design, and construction led to the bridge’s ultimate collapse as well as neglect to maintain the bridge and make necessary repairs over time.

Similarly, the Surfside Condominium collapse in Miami, Florida, showed in vivid detail the devastating consequences of failing to update infrastructure in the US. Despite reports of corrosion and extensive repairs needed, the Condo Association failed to update the building, and in 2021 the 40-year-old structure collapsed killing 98 people.

All these cases illustrate the staggering waste and loss due to project delays and construction cost overruns, accrued by an industry that has failed to hold itself to account.


Solution: The Construction Project Schedule


Billions have been wasted annually and across time on faulty construction, poor productivity, and costly litigation that has hindered if not destroyed economies and countries as well as taken hundreds if not thousands of lives.

The construction industry is in crisis. Now, what do we do about it?

In our next post, we suggest that the solution to rampant construction waste, serial mismanagement, schedule delays, and cost overruns all lie in a single component of the construction process: the construction project schedule itself.

We believe construction schedule analytics not only have the power to eliminate these problems but are also capable of disrupting the industry as well as ushering in a new era for society. A world where every person has a roof over their shoulders, roads are paved, and bridges last a hundred years. A world, in short, that’s worth living in.

That’s right... unlike other companies, we truly do think what we’ve built is powerful--powerful enough to change the world.


Find out how SmartPM's construction schedule analytics can help you reduce cost overruns and help your firm become profitable again. 

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Don't forget to check out Part II of this two-part blog series on how to solve the problem of cost overruns and schedule delays: "Construction Analytics: The Digital Revolution Transforming the Construction Industry"

Author: Lynn Langmade

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