Most Building Projects Exceed Ballpark Estimates

No real estate developer, construction contractor or architect is surprised that the cost of the Washington Nationals baseball stadium keeps escalating.

Nor are homeowners who have built or remodeled a dwelling surprised.

All would attest from often-painful experience that construction cost overruns seem chronic, an inescapable part of building.

Why is it so difficult, after formulating an initial project budget, to design and construct projects to meet that budget?

Pre-design construction budgets are more art than science. They entail guesswork, optimistic assumptions and speculative judgment. And there is only one way to create a preliminary budget: comparability.

Project sponsors and planners analyze the cost of recent projects comparable in location, size, functional program and construction quality. They then extrapolate into the future, factoring in inflation, anticipated and unforeseen site conditions, other identifiable conditions unique to the new project and, finally, a percentage for unknown contingencies.

They check their extrapolations against industry-wide cost indexes for various building types: cost per garage parking space; cost per hospital bed; cost per hotel room or cost per student. The most commonly used index is cost per square foot of total floor area.

Preparing a preliminary budget is full of risks, as it requires putting a price tag on something yet to be designed. Consider the economic problems that frequently arise after a budget is set but before construction begins.

· Project size or scope increases. This results from changing needs, shifting market or financial conditions, or more stringent regulatory requirements. The cost of the Nationals baseball stadium is rising not because of change in size, but because of change in scope attributable to a parking strategy inadequately thought out and resolved at the start.

· Field testing reveals unanticipated site conditions. Soil borings may disclose organic fill, clay, rock or groundwater. Undocumented utilities, structures or residual toxic chemicals may lurk below the surface. Hidden structural problems may be uncovered in buildings being renovated. Always expensive to remedy, unforeseen site problems may seriously delay a project and can blow the budget.

· Building material price escalation exceeds predictions. Project budgets are sensitive to the cost of basic building materials -- wood, concrete, steel, aluminum -- that are market commodities. Inflation affecting a building's major components -- mechanical, plumbing, electrical and lighting systems -- also can wreck a budget, as can rising costs for exterior wall assemblies, windows and doors, interior partitions, ceilings and flooring.

· The construction labor market heats up. The law of supply and demand governs the building industry. When contractors are flush with work and skilled labor is in short supply, prices rise. When construction slows and contractors are hungry, prices fall. Because project planning and design can last years after initial budget adoption, a busier construction market inevitably increases costs.