Factors Affecting Contractors' Risk of Cost Overburden

Abstract

Cost overruns create a significant financial risk to both contractors and owners. However, in spite of the risks involved, the history of the construction industry is full of projects that were completed with significant cost overruns. Contractors used to be able to cover their cost overburdens with their markups. However, with diminishing markups, even marginal cost overburdens can easily wipe out their profits and even lead to a financial overburden. Therefore, contractors need to identify major risk sources causing cost overburdens in advance to be proactive in managing them. This paper reviews and describes uncontrollable risk sources that affect the contractor's risk of cost overburden. Sources of these risks relate to factors affecting the cost estimate and the final cost of a project and include factors specific to the cost estimator, the project design, construction, and the project environment. The paper describes each of these factors in detail and gives specific examples based on a survey of the relevant literature.