Why do construction projects almost always go over budget?

(Cross-posted from my Posterous)

On the surface the question seems simple enough: why do construction projects almost always go over budget?

Let’s turn to Quora for a simple answer:

Because owners almost always choose the lowest bidder as their contractor. That lowest bidder will likely try to turn a profit in the change orders, forcing the project “over budget.”

If an owner were to select the BEST contractor for the job, likely not the lowest bidder, then the bid is more likely to be accurate and the project under budget.

Interesting. Theoretically, the cost of the project is the same regardless of which contractor you hire. However, that cost is a hidden one. As someone who is looking to hire a contractor you must make an educated guess as to how much this hidden cost should be. It’s the nature of the game.

In theory, you would hire whichever contractor whose price scheme most matches that of your own.

But emotions come into play. You are looking for an elusive deal.

You will end up hiring the cheapest contractor. But why? Well, because he’s the cheapest, right?

Remember that the total cost of the project is fixed, so the cheapest contractor isn’t actually the cheapest as they all cost the same. In other words, the “cheapest” project will go overbudget up to the point of the project’s actual cost.

So the question then becomes, why would a contractor purposely undervalue his bid? How many “over budget” projects must this guy complete before he realizes that he is grossly undervaluing his services?

Well, I’m here to tell you that he will never learn his lesson. You see, undervaluing his product is the strategy that this contractor has chosen to take. He has chosen to compete on the basis of price. His logic? Get the most customers by charging the least amount.

But the total cost of the project is fixed.

What that means is that regardless of which contractor you choose you will theoretically end up paying the same amount. In the end the customers who chose to go with the cheapest contractor will be unhappy as that contractor most likely went overbudget, but by then it won’t matter. Customer retention in the construction business is very low as most people don’t find themselves building houses very frequently.

So my advice to you is to pick the contractor that puts the highest price tag on his services because that contractor has chosen to compete on the basis of quality (and not price). Now why would he ever do that!? Because he knows that his product is superior. He need not undervalue it to appear cheaper because he believes that his potential customers will recognize his quality build and hire him because of it even though he appears to be more expensive.

In the end you will end up paying the same amount regardless of which contractor you hire as the price of the project is fixed, so choose the one who believes that the quality (and not the price!) of their services is superior to that of their competitors. You will end up with a better product.

It may seem a bit counterintuitive, but when it comes to construction if you want to get the most bang for your buck don’t be cheap!

You can find more on auction theory here.