What is Cost Overrun? (Causes & How to Overcome it)

It would be great if every project were completed on time, under budget, and to the satisfaction of all stakeholders.

Even though projects occasionally falter, an efficient project manager is prepared to handle unforeseen circumstances. He does all that’s necessary to reduce risks before the project starts.

However, one challenge that every project manager will face at some point in their career is a cost overrun.

Precision is key in project planning. It is obvious that your project plan demands time and attention, given that roughly 28% of projects fail due to inaccurate cost estimates.

Therefore, project risks brought on by inaccurate estimates of cost, resource, benefit, and expected timeline might have an adverse effect on your company’s profitability and expansion prospects.

Let’s find the answer to the question of what is cost overrun and discuss how to execute projects while controlling project cost overrun successfully.

Meaning and Signs of Cost Overrun

An unexpected change in the project’s budget that raises the overall project cost is known as a cost overrun.

There are three main causes that could lead to it:

• Economic factors that arise as a result of errors in the project budget or project’s scope
• Technical factors, such as inaccurate estimations or data collection
• Psychological factors, such as scope creep or any drop in project commitment levels

In order to spot any indications of cost overrun, teams must ensure that they have a clear understanding of the project scope, project complexity, task level, and project progress.

The following are a few methods for promptly identifying potential budget overruns:

• Absence of an accurate budget overview of the project
• Not creating a work breakdown framework or linking expenses to certain tasks
• Using no project spending tracking tool
• Poor strategy for resource utilization
• Failure to evaluate similar past projects and historical data
• Failure to record project deliverables, resulting in scope creep or expansion that cannot be justified
• No contingency plan in place, resulting in out-of-control spending

Reasons for Cost Overruns

It is critical to prevent cost overruns in order for projects to compete successfully. However, you might still exceed your budget despite having all the necessary precautions in place.

Let’s take a closer look at the common causes of cost overruns in projects, in more detail, before learning the best way to control them

• 1. Inaccurate project cost estimates

  Getting the planning stage right is the first step in managing a project successfully. This includes generating precise time and cost estimates.

  A project’s budget cannot be created based solely on guesses. Any suggested expenses should be supported by evidence, such as sense-checked quotes from external sources and spending from previous projects with a similar scope.

  Finger-in-the-air budgets are never accurate and greatly increase your likelihood of subsequently dealing with cost overruns. It’s because you either severely underestimated the cost or time required for a crucial component or completely overlooked another variable.

• 2. No effective risk management

  When things go wrong, necessary adjustments have to be made. Considering the previous statement, you must remember that, at times, people become ill, suppliers go out of business, and software fails.

  While it is challenging, if not impossible, to plan for every circumstance, failing to include risk management during planning might result in unexpected delays and cost overruns.

• 3. Scope creeps

  Scope creep has an impact on 34% of projects across all industries. While in a perfect world, we would only ever need to complete the tasks that were assigned to us at the beginning, in practice, projects need to be adaptable. 

  This can entail organizing new deliverables or necessitating a complete project rework as a result of changes to the brief.

• 4. Ineffective collaboration and communication

  Financial costs are commonly associated with project delays, which are frequently brought on by communication issues. 

  Communication breakdowns can happen within the organization, such as when duties aren’t properly assigned or briefed, as well as if project managers don’t maintain contact with stakeholders.

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How to Overcome Cost Overrun?

Around half of large scale IT projects reportedly go over their allocated project costs by more than 45%, according to studies from McKinsey and the University of Oxford.

As the scope of technology projects expands and reaches a broader organizational base, any inefficiencies pose a significant risk to the entire organization.

With more than $66 billion lost yearly due to cost overruns, losing control of your project budget can have a negative impact on your company’s profitability.

Here’re some pointers to help you stay within your budget and avoid project cost overruns:

1. Effective project planning

Accurate project planning is one of the best methods to guarantee success. The more accurate your projections, the more likely it is that the project will stay within budget.

A thorough budget and risk management strategy can help you cover all the bases and bring the project on track to meet its intended goals.

2. Exercise caution while dealing with vendors

Several projects necessitate collaborating with other vendors. They may assist in a variety of ways, such as by carrying out particular duties, providing essential raw materials, or hiring subcontractors to manufacture products.

Before forming these important supplier partnerships, make sure your teams are conducting their due diligence. If not, these vendors can turn out to be unreasonably expensive, which would result in unavoidable cost overruns. 

To accomplish this, go over the following critical steps:

• Determine the vendor’s ability to accomplish the assigned duties and satisfy the needs of the business.
• Make sure the quotes are accurate by performing extensive checks.
• Check the vendor’s past performance to discover if they have a history of successful projects with other businesses.
• Conduct a thorough background investigation to ensure that the vendor can adhere to the project deadlines and standards specified in the contract deliverables.

3. Keep scope creep in check and maximize your resources

According to the PMI study, a project’s initial stages have the greatest impact on its overall cost. Multiple modification requests from internal team members, end users, and other stakeholders may result in project cost overrun.

Before authorizing any scope adjustments, review the project changes carefully and ensure the resources are also reassigned. 

You can achieve your project goals and make the project more successful and affordable by assembling a talented team with the best available resources.

4. Use a project management software solution

Providing your project manager with a flexible project management software solution can help prevent cost overruns and improve project efficiency.

Additionally, effectively managing project resources can aid in better work scheduling to prevent resource loss or waste.

5. Maintain an open line of communication

The project can stay on track by using a project management tool for seamless communication. Key stakeholders will receive a comprehensive overview of the project’s progress, and the project teams will have easy access to all the data required for their job.

6. Keep an eye on the project progress

Monitor the status of the project to avoid cost overruns. Use project management tools to spot minor issues and stop them from ballooning into more serious ones that could endanger the project’s success.

How to Calculate Cost Overrun?

Calculating cost overrun is uncomplicated, and you can calculate either the amount or the percentage of the overrun costs using the following formula:

• Cost Overrun Amount = Actual Expenses – Budgeted Amount
• Cost Overrun Percentage = (Actual Expenses – Budgeted Amount) / Budgeted Amount * 100%

Tips to Control Cost Overrun

There are specific steps you may take to bring the project back on track if the cost increase exceeds the project budget despite the best efforts of your staff. Having a firm grasp of the four main cost dimensions is essential for project success:

1. Uncover the real reason 

To identify the real causes of the cost overrun and project delay, investigate the specific tasks that went over budget more deeply.

It is totally plausible that one project activity used more time or resources than estimated, having a domino effect on the next project task in the process. Before making any decisions, consult with the other members of your team and do a thorough evaluation.

2. Handle project strategy, and stakeholders

Project strategy and stakeholders may receive less attention if scheduling processes and project budgeting are given too much of the spotlight.

Therefore, early identification of the project’s strategic importance can help keep it at the forefront of minds. You may assist project teams to avoid cost overruns and successfully complete the projects by coordinating business goals with the project timeframe.

3. Interact with your project management team

For projects to be completed successfully, a high-performance culture, team processes, and a common goal are necessary.

Instead of setting personal work goals, establish a group-based incentive system and seamlessly and organically incorporate change management practices.

In this way, every project management team member stays in the loop through accurate and prompt communication of project modifications, milestones, and important developments.

4. Rely on project management best practices

Your team will be more successful in completing the project on schedule if you have established tried-and-true project management practices.

Establish process discipline and develop a strict procedure for any modification requests with short turnaround cycles to prevent waste of resources. This promotes clear ownership and prevents team misunderstandings, leading to increased productivity.

Final Words

Cost overrun is an inescapable situation that every organization or project must deal with. But how to prevent or mitigate it greatly depends on the project manager as well as the project management team.

However, with adequate preparation and a thorough analysis of the projections, a business can limit the likelihood of a cost overrun with a proactive strategy.

Make sure your project meets its deadline and budget while delivering value to overcome the odds. 

Use project management and estimating software that offers you the capabilities you need to plan, monitor, create estimates, and generate reports to achieve effective project outcomes.