As construction costs continue to rise and funding becomes more difficult to secure, multifamily developers and funding agents are tightening their controls on construction cost overruns to help protect themselves against rising costs and project delays caused by contractor performance. While many rely on guaranteed maximum price contracts and performance bonds, some require construction cost overrun guarantees, which help protect budgets and schedules and ensure a steady stream of new multifamily housing projects.
While cost/overrun guarantees shift the risk of non-completion or budget overruns to the guarantor, there are many strategies that project teams can use to tighten controls over these risks.
Construction Cost/Overrun Guarantee Definition
A construction cost/overrun guarantee protects the project owner or developer against cost overruns and/or delays resulting from the contractor’s inability to perform. Under the agreement, a third party (the guarantor) will either pay for or reimburse the owner or developer for any costs exceeding the agreed-upon price and will complete and/or fund any work that hasn’t been completed due to contractor default.
Remedies for cost overruns include reimbursing the funding source for any excess costs or having the guarantor finish the work and draw the necessary funds from the funding source. The guarantor may be a project sponsor, parent company, company principal, or a financial institution or surety.
Agreements like this protect owners and developers from the financial impacts of contractor default-related overruns and delays. However, with accurate construction budgets and strict cost control measures, the guarantor’s exposure can be reduced.
Benefits of Implementing a Cost Overrun Guarantee
The main benefits of implementing a cost overrun guarantee include:
- Protecting funding sources and developers against project failure by ensuring that the work will be completed even if the project is over budget or delayed by the contractor's failure to perform
- Providing funding sources with remedies if the contractor fails to complete the work, including completing the work themselves or making the guarantor finish the project
- Shifting liability for cost overruns from the project owner or funding source to the guarantor
In the wake of rising construction costs and labor shortages across the industry, overrun guarantees are becoming, and will continue to be, more popular in multifamily development.
Trends in Cost Overrun Guarantees
According to Mortenson’s Quarterly Cost Index, construction costs increased 7.35% in 2025. The Associated General Contractors noted a steep increase in tariffs on steel and aluminum in 2025 (25% on March 12 and 50% on June 4). Prices have also increased due to inflation and skilled labor shortages.
Reacting to these increased costs, lenders and funding sources are tightening scrutiny and controls, with some mandating cost overrun guarantees for multifamily developments. Other trends that have developed in the past few years include:
- Requiring developers to fully cover costs, shifting risk to the owner
- Heavily scrutinizing the developer's financial status and asking for more equity up front, making financing more difficult to obtain
- Pushing for more guaranteed maximum price contracts, moving the risk for higher costs to the contractor
- Requiring value engineering early in the design process to help control costs during budget development
- Exploring prefabricated or modular construction methods to better manage costs and schedules
Due to the increasing popularity of these agreements, project teams must work harder at every stage to accurately predict costs and prevent cost increases or additional work that could affect a project’s budget and bottom line.
Strategies to Help Prevent Overruns
There are many ways that owners, developers, and contractors can help prevent cost overruns:
- Develop an accurate cost estimate based on real-world data. Reliable budgets, backed by years of local project experience, can help mitigate risk, improve reporting transparency, and support funding and project completion.
- Provide a clear scope of work with fully developed plans and specifications. Incomplete designs make it more difficult to accurately estimate costs during the budgeting process and can lead to increased change orders during construction. A complete design package enables more accurate cost projections.
- Add contingencies to the project budget. Contingencies provide additional funds in case of cost increases due to added material costs, schedule delays, or design changes.
- Clearly define the change management process. A clear process helps avoid unnecessary change orders and ensures that all project team members are aware of changes as they are happening.
- Regularly review project costs and projections against the budget. The contractor should provide an accurate accounting of all costs each month, along with projected costs to complete the project. The developer/owner and lender should review these regularly to catch potential overruns before they happen.
- Maintain clear and open communication among project team members. This goes a long way toward reducing overruns and keeping projects on schedule.
How James E. Roberts-Obayashi Corporation Approaches Controlling Costs
James E. Roberts-Obayashi Corporation incorporates all these strategies and others to help prevent cost overruns in each project. When it works with multifamily developers, it implements the following strategies:
- Provide construction budgets as the design progresses, performing a detailed quantity survey of building components, using up-to-date unit pricing, and obtaining subcontractor pricing as necessary
- This helps balance limited funding with construction costs, eliminating funding gaps.
- Help ensure that the scope of work is clearly defined by conducting detailed plan checks and specification reviews at each design stage
- This flushes out potential coordination issues and design inconsistencies before final pricing.
- Offer early value-engineering recommendations for alternative systems or components that may yield savings without compromising quality or design intent
- Provide real-time, transparent communication about project costs, schedules, and potential cost or time impacts. James E. Roberts-Obayashi Corporation’s schedules include funding forecasts, so owners and lenders know the required funding level and timing
- Leverage its ability to self-perform rough carpentry, siding and window installation, concrete, and interior finish installation to help control costs and keep projects on time
- Implement a strict change management process to reduce unnecessary change orders and work collaboratively to limit cost and time impacts when changes are unavoidable
- Provide regular cost and schedule updates to all project team members
By providing an accurate construction cost estimate and proactively managing the change management process, James E. Roberts-Obayashi Corporation supports your multifamily housing initiatives and helps you deliver successful, budget-conscious projects.
Discover how James E. Roberts-Obayashi Corporation’s cost-estimating solution can transform your development process by providing reliable, market-aligned budgets from the earliest stages. With enhanced cost transparency and proactive risk management, you can safeguard your project’s financial health and build confidence with funders and stakeholders. Contact us today to learn more about how we can support your affordable housing initiatives and help you deliver successful, budget-conscious projects.