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Financial

Cost Overrun

In Plain English

When a project costs more than what was budgeted or contracted.

Definition

A cost overrun occurs when the actual costs incurred on a project exceed the budgeted or contracted amount. Cost overruns can result from scope changes, design errors, unforeseen conditions, productivity losses, material price escalation, or poor estimating. In lump sum contracts, cost overruns are absorbed by the contractor; in cost-plus contracts, they may be passed to the owner depending on the contract structure.

Why It Matters in Bidding

Cost overrun risk is exactly what a bidder is pricing when setting contingency and markup; under a lump sum contract the contractor eats the overrun, so the estimate must anticipate where actuals can diverge from the bid. Recognizing overrun drivers during takeoff and scope review lets an estimator price risk deliberately rather than discover it mid-project.

Example

After award, a contractor hit a cost overrun when rock was encountered in trenching that the geotechnical report had not disclosed, forcing a differing-site-conditions claim to recover the unbudgeted excavation cost.

Related Terms

Change OrderContingencyCost to CompleteJob Costing

Frequently Asked Questions

Frequent drivers include scope creep and design changes, incomplete or conflicting documents, unforeseen site conditions, material price escalation, labor productivity shortfalls, and weak original estimating. On bid jobs, missed scope during takeoff and optimistic productivity assumptions are leading culprits. Schedule delays compound costs through extended general conditions and overtime.
It depends on contract type and cause. Under lump sum contracts the contractor absorbs overruns unless they stem from owner-caused changes or differing site conditions, which support change orders. Under cost-plus, the owner generally pays actual costs, though a guaranteed maximum price caps that exposure and shifts overage above the cap back to the contractor.
Perform thorough quantity takeoffs, review every addendum, confirm subcontractor scope coverage with no gaps or overlaps, and use historical productivity data rather than guesses. Carrying a defensible contingency sized to design completeness and clearly listing exclusions and allowances protects against the surprises that turn into post-award losses.

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