Controlling and preventing cost overruns in defense construction projects remains a persistent and high-stakes challenge for construction project managers in defense agencies alike. Given the strategic importance of these projects and the complex web of interrelated risk factors, this study advances beyond conventional approaches by integrating Failure Mode and Effects Analysis (FMEA) with the DEMATEL (Decision-Making Trial and Evaluation Laboratory) method. Initially, 85 distinct cost overrun factors were identified from literature and expert input, each assessed via FMEA to compute a Risk Priority Number (RPN). The top-ranked threats included General Inflation (RPN = 810) and Exchange Rate Volatility (RPN = 729), reflecting their high severity and low detectability. To manage complexity, based experts’ judgment, these factors were systematically consolidated into 18 representative categories spanning external, material, labor, equipment, subcontractor, and financial domains. A DEMATEL analysis was then applied to model causal relationships among these categories. The results reveal that political and bureaucratic interference, owner-side financial instability, and macroeconomic shocks function as the primary root causes, exerting strong net influence on downstream effects such as design changes, material delays, and schedule slippage. In contrast, many commonly managed symptoms (e.g., labor productivity or material theft) are largely consequences of these upstream drivers. This study thus proposes a dual-layer risk response framework: Strategic-level interventions, including inflation-indexed contracts, inter-ministerial coordination, and dedicated defense construction financing and tactical controls targeting high-prominence effects. The findings advocate for a paradigm shift in defense project management: from reactive cost containment to proactive systemic risk governance, where financial and institutional resilience becomes as critical as on-site execution efficiency.