Cost overrun
A cost overrun (also called a budget overrun or cost overspend) occurs when the incurred cost exceeds the baseline budget. It can be measured at the level of the whole project, a work package, a single item or a resource, and is usually expressed both as an absolute amount and as a percentage of the budgeted figure, which makes it possible to compare severity across projects of different sizes.
Its typical causes are quantity variations (actual quantities higher than the estimate), increases in material or labor prices relative to those in the budget, low productivity or worse output rates than planned, extra work not included in the bill of quantities, schedule delays and errors in the original takeoff. Catching it early is the core purpose of cost control: actual cost is continuously compared against the budget so the team can react before the deviation grows.
On public works, cost overruns are handled in a bounded way under public procurement rules: price increases caused by inflation are recognized through a price escalation clause (cost adjustment), and additional quantities or items through change orders and contract amendments, rather than simply being absorbed as overruns. On private projects, an unrecognized overrun is normally absorbed by the contractor and directly reduces the project profit.
Formula
Example
An earthworks item was budgeted at $2,000,000. Because of an excavation quantity larger than the original takeoff and a rise in the price of diesel, the actual cost of execution came to $2,300,000. The cost overrun is 2,300,000 − 2,000,000 = $300,000, equal to (300,000 ÷ 2,000,000) × 100 = 15% over the budgeted amount.
Frequently asked questions
How is a cost overrun calculated on a project?
You subtract the budgeted cost from the actual cost incurred up to the cutoff date: Cost overrun = Actual cost − Budgeted cost. To compare it across items or projects, it is expressed as a percentage by dividing that difference by the budgeted cost and multiplying by 100.
What is the difference between a cost overrun and a price escalation?
A cost overrun is any deviation of the actual cost above the budget, whatever its cause. A price escalation is only the price adjustment recognized and paid when input costs rise due to inflation during the project; on public works it is the formal mechanism that keeps that price increase from turning into an overrun the contractor has to absorb.
What are the most common causes of cost overruns in construction?
The main ones are: work quantities higher than those taken off, increases in material and labor prices, low output rates or poor productivity, extra work outside the bill of quantities, schedule delays, and errors in the original takeoff or budget.