We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
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.
Table of content
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.
Key legal elements
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)
State-by-state differences
Examples of state differences (not exhaustive):
State
Cost Overrun Regulations
California
Requires detailed documentation of cost overruns and timely notification to the project owner.
Texas
Allows contractors to recover costs if they can demonstrate that overruns were unavoidable.
New York
Has specific statutes governing public construction contracts, including cost overrun clauses.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Cost Overrun
Excess costs beyond the agreed budget.
Focuses on additional expenses incurred during a project.
Change Order
A formal document that modifies the original contract.
Change orders may lead to cost overruns but are specific requests for changes.
Contingency Fund
A reserve set aside for unexpected costs.
Contingency funds are proactive measures to cover potential overruns.
Common misunderstandings
What to do if this term applies to you
If you find yourself facing a cost overrun situation, consider the following steps:
Review your construction contract to understand the clauses related to cost overruns.
Document all additional costs and the reasons for the overruns.
Notify the project owner or relevant parties as soon as you anticipate exceeding the budget.
Consult with a legal professional if you encounter difficulties in recovering costs.
Explore US Legal Forms for templates that can assist you in managing your legal documents effectively.
Find a legal form that suits your needs
Browse our library of 85,000+ state-specific legal templates.