What Overruns Are and What They Cost

Welcome

Hello, and welcome. This is Super Structures General Contractors — a national general contractor headquartered in Powhatan, Virginia — here to help you and your clients build something that lasts. We're glad you're with us, and we look forward to connecting with you.

Alright, What Overruns Are and What They Cost. Don't let the plain title fool you. Here's the part that actually matters on the job: An overrun is any cost or time beyond the approved budget and schedule, and on a thin-margin job a small one eats the whole fee. Learn it well and you'll start treating a two-week slip as the emergency it is.

A site-work contractor bid a commercial pad at $640,000 on a 21-week schedule with a $38,000 fee. In week three the excavator hit rock the geotech report never showed. The crew kept digging while the change order was "being discussed." Nobody logged daily rock quantities. When the change was finally priced in week nine, the owner disputed the volume, the contractor absorbed $58,000, and the job finished four weeks late. The company paid to build that project. Two habits would have changed the outcome: stop and price the change before continuing, and keep a daily log with quantities. This course is about building those habits and the others like them.

What an overrun is, precisely

• A cost overrun is actual cost above the approved budget: the original estimate plus approved change orders. Measure it in dollars and as a percent of budget.
• A schedule overrun is substantial completion after the contract date plus approved extensions. Measure it in days.
• Work the owner approved and paid for through a change order is not an overrun. Work you did and could not bill is. Keeping those two apart is the first discipline, because owners, PMs, and superintendents mix them up constantly, and the mix-up hides the real number.
• Overruns happen by cost code, not by job. A job can finish at budget overall while concrete ran 30 percent over and drywall came in 20 percent under. If you only look at the total, you learn nothing about which estimate was wrong.

How time becomes money

Every extra day carries general conditions: the superintendent's salary, the trailer, the fence, the dumpsters, equipment rental, temporary power and water, the builder's risk policy, the porta-johns. On a mid-size commercial job these run $2,000 to $5,000 a day. A three-week slip with no approved extension is $30,000 to $75,000 before anyone touches a tool.

Then come the acceleration costs of trying to catch up: overtime at time-and-a-half, a second crew that has to learn the job, expedited freight, out-of-sequence work that gets damaged and redone. Catching up almost always costs more per unit of work than the original plan did. Cost and schedule overruns feed each other, which is why a late job is almost always an over-budget job, and an over-budget job usually finishes late because the money for acceleration is not there.

The industry picture

Surveys of owners and contractors keep landing in the same place: only about half of projects finish on time, and large projects commonly run well past both schedule and budget. General contracting margins often sit in the low single digits, between 2 and 6 percent on many commercial jobs, so there is no cushion. A subcontractor self-performing work may carry 10 to 20 percent gross margin, which sounds safer until you remember that a 10 percent labor-productivity miss on a labor-heavy scope wipes most of it out.

The three costs beyond the dollars

• Profit. On a $2,000,000 job at a 5 percent fee, the fee is $100,000. A 6 percent overrun you cannot bill, $120,000, means you lost $20,000 building it, and you still carried the risk, the bonding capacity, and twelve months of your best superintendent's time.
• Relationships. Owners remember who finished late and who argued about money at the end. Repeat and referral work, the cheapest work to win, dries up quietly. You rarely find out why you stopped getting the call.
• Bonding and credit. Sureties and lenders read your job history through the WIP schedule. Profit fade, where a job's projected margin drops as it progresses, is the first thing they look for. A pattern of it shrinks bonding capacity and raises the cost of money, which limits the size of work you can chase next year.

Where the fee actually goes

Walk through a $1,500,000 job with a 6 percent fee, so $90,000. Daily general conditions are $3,200. The job finishes 18 days late with no extension: 18 times $3,200 is $57,600. Direct cost came in $22,000 over budget on two cost codes. Fee remaining: $90,000 minus $57,600 minus $22,000, about $10,400, or 0.7 percent of contract. One more bad week and the job loses money. Nothing dramatic happened on that project. It just drifted, a little late and a little over, and the drift took the fee.

Going Deeper (Intermediate)

Separate cost growth from overrun in your reporting. A job whose contract grew from $1,000,000 to $1,200,000 through approved change orders, and whose costs grew in step, did not overrun. A job whose contract stayed at $1,000,000 while costs went to $1,060,000 did. To see the difference you need five numbers tracked separately for every cost code: original budget, approved changes, committed cost (subcontracts and purchase orders issued), cost to date, and estimated cost to complete. With those five, the overrun has nowhere to hide and the conversation with the owner changes from "you went over" to "here is the approved scope, here is what you added, here is what it cost."

Also learn to read retainage and unapproved change orders as overrun risk. Work performed on a verbal promise sits in your cost to date with no revenue against it. If the owner never signs, it converts to overrun on the day you stop pretending.

Advanced / Pro-Level

Pros put a daily number on general conditions for every job at the start: add up the time-based costs and divide by working days. Then every schedule conversation becomes a money conversation: "that submittal sat for nine days, which is $28,800." They use that number to decide, in dollars, whether to accelerate or negotiate an extension, because sometimes a documented delay with a time extension is worth far more than a heroic catch-up that costs $60,000 in overtime.

They also know how outsiders read an overrun. A surety looks at the WIP schedule for profit fade job by job, and at whether the company's forecasts were honest early or optimistic until the end. Two jobs with the same final margin can look completely different to a surety if one was forecast accurately from month two and the other "surprised" everyone in the last month. Honest early forecasting is itself a form of overrun prevention, because it is what keeps your bonding capacity when a job does go wrong.

Practice Challenge

A $2,200,000 renovation carries a 5 percent fee. Daily general conditions are $4,100. The job finishes 12 days late. The owner approved a 5-day extension for a utility conflict but not the other 7 days. Direct costs are $31,000 over budget, of which $18,000 is unapproved extra work the super did on the architect's verbal request. What is the overrun, what is left of the fee, and what would you do about the $18,000? (Answer: fee $110,000; unexcused delay 7 days times $4,100 equals $28,700; direct overrun $31,000; total overrun $59,700 and fee remaining about $50,300, roughly 2.3 percent; the $18,000 is a change-order request you should still submit with the architect's emails and daily logs as backup, but treat it as an overrun until it is signed, and fix the process so the next request is priced before the work.)

In Practice

The contractor who knows the daily cost of the job stops a rock dig on day one and prices the change. The contractor who does not know it keeps digging because the crew is "already there," and finds out what it cost in week nine.

Common Mistakes to Avoid

• Calling approved, billable change-order work an overrun, and calling unbillable extra work "part of the job"
• Not knowing the daily cost of general conditions on every active job
• Treating schedule and cost as separate problems with separate meetings
• Measuring the overrun only at the job total, never by cost code
• Finding out at the end, when nothing can be done but argue

Takeaway: An overrun is any cost or time beyond the approved budget and schedule, and on a thin-margin job a small one eats the whole fee.

Educational content — not legal, financial, or contractual advice. Every project and contract is different; follow your contract documents, your company's procedures, and the advice of your attorney, CPA, and surety.