Cost Overrun: A Comprehensive Guide to Legal Definitions and Impacts
Definition & Meaning
Cost overrun refers to the additional expenses incurred on a construction project that exceed the originally agreed-upon budget. This situation often arises due to unforeseen circumstances, changes in project scope, or mismanagement. In many construction contracts, there is a limitation of cost clause that permits contractors to recover these extra costs, provided they notify the relevant parties when they anticipate that costs will surpass a specified threshold, typically seventy-five percent of the budget.
Legal Use & context
Cost overruns are primarily relevant in the construction industry, where contracts are frequently established between contractors and project owners. These contracts may include clauses that outline how cost overruns are handled. Understanding this term is essential for those involved in civil law, particularly in construction law, as it can affect project financing, liability, and contract enforcement. Users can manage related legal documents using templates provided by US Legal Forms, which are drafted by experienced attorneys.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A construction company is contracted to build a new office building for $1 million. Midway through the project, they encounter unexpected soil issues that require additional foundation work, leading to a cost overrun of $200,000. The contractor had previously notified the project owner about the potential for exceeding the budget, allowing them to recover the additional costs.
Example 2: A residential renovation project was initially budgeted at $50,000. Due to design changes requested by the homeowner, the costs increased to $75,000. The contractor had a clause in the contract allowing for cost overruns, but failed to notify the homeowner in time, which complicated the recovery of the additional expenses. (hypothetical example)