Inaccurate forecasts about costs, resources, benefits, and estimated durations can bring project risks that could impact your organization's profitability and growth opportunities. Take Apple canceling its much-hyped AirPower — a wireless charging mat — after spending almost two years on its R&D as a case in point.
Lack of proper cost management, inefficient project design, and underutilization of resources can lead to projects going over budget or even being canceled. Let's take a deeper look into cost overrun, causes of project delay, and how to successfully complete projects while managing cost overrun.
What is the definition of cost overrun?
Cost overrun is an unexpected change in the project budget that ends up increasing the total project cost. It can happen due to three primary reasons:
- Economic factors that occur due to inaccuracies in project budget or scope
- Technical reasons, including erroneous estimates or incorrect data gathering
- Psychological causes, including the presence of scope creep or any decrease in project commitment levels
What are the signs of cost overrun?
Teams need to make sure that they have a clear view of project progress to catch any signs of cost overrun. Here are a few ways to spot possible budget overruns quickly:
- Lack of a detailed project budget outline
- No contingency plan in effect, leading to unexpected costs spiraling out of control
- Not using any tools to track project spending
- Incomplete resource utilization plan
- Not tying costs to specific tasks or making a work breakdown structure
- Failure to review similar past projects and historical data
- Not documenting project deliverables, leading to unexplained scope creep
Common reasons for cost overruns in projects
For projects to succeed, it is important to avoid cost overrun. Even with all the checks and balances in place, you may still go over budget.
Before we can understand how to control cost overrun, let's take a closer look at the common reasons for cost overruns in projects.
Inaccurate project estimates
28% of the projects fail due to erroneous project estimates. Inaccuracy in estimates can result from both underestimation and overestimation of costs. Both are equally harmful and a consequence of intentional or unintentional forecasting biases.
To ensure positive project outcomes, estimates must be data-driven and precise.
With a dynamic business environment and frequently changing business needs, scope creep is often inevitable.
45% of projects experience scope creep, which is one of the most common factors of cost overrun in project management. Utilizing a detailed and thorough project tracking system can help in monitoring completed and pending tasks to control scope creep.
Lack of risk management
Every project manager creates plans hoping they will work out as intended. Unfortunately, it’s not as simple as that.
Unpredictable internal or external factors can cause unexpected project delays or lead to cost overrun. Having a risk and change management strategy in place can help your team avoid any financial losses.
Communication gaps within teams
29% of projects fail due to unclear communication. Not having a simple line of communication between project managers and stakeholders can lead to avoidable delays.
Such delays can cause wasted effort, misdirected resources, lost time, and cost overrun in project management.
Cost overrun example
Here's an example of cost overrun in a construction project. Say, for example, it's discovered that a number of fixtures were installed incorrectly. The contractor must make a change order to add the materials and labor needed to fix the errors. These additional requirements will result in higher costs, affecting the original project budget, while the extra materials, time, and effort required to install the fixtures correctly contribute to cost overrun.
How do you prevent cost overruns?
Research from McKinsey and the University of Oxford suggests that more than half of large IT projects overrun their defined budgets by over 45%.
As tech projects grow in scope and reach a wider organizational base, any errors pose a huge risk to the entire company.
With more than $66 billion lost annually due to cost overruns, losing control of your project budget can drag a company’s profitability downwards. Here are some tips to prevent project cost overrun and keep a tighter rein on your budget:
Plan projects accurately
One of the most effective ways to ensure project success is to plan them accurately. The more precise your estimates are, the greater the chances of the project staying within budget.
Having a detailed budget and risk management plan can help cover your bases and put the project on track to achieve its planned objectives.
Exercise due diligence with vendors
Many projects require collaboration with third-party vendors. Their support may range from performing specific tasks to supplying key raw material to subcontracting for product production.
Ensure your teams are doing their due diligence before establishing these key supplier relationships. Otherwise, these vendors may prove prohibitively expensive and lead to avoidable cost overrun. To do this, review these key steps:
- Understand the vendor's capacity to complete the predefined tasks and meet company needs
- Ensure the quotes given are accurate by completing detailed checks
- Review the vendor's track record to see if they have a successful project history with other companies
- Do a thorough background check to confirm if the vendor can meet the predefined quality and timelines as mentioned in the contract deliverables
Control scope creep and optimize resources
PMI research confirms that the initial stages of a project have the biggest influence on its total cost..
End-users, internal team members, and other stakeholders may input multiple change requests that can lead to cost overrun in the project. Conduct a thorough review before approving any scope changes and ensure that you reassign the resources too.
By bringing together a skilled team with optimal resources, you can have a more cost-efficient project that succeeds in its objectives.
Employ a project management tool
Giving your project manager a versatile project management tool can be helpful in increasing project efficiency and controlling cost overrun.
Have a clear communication channel
Using project management software for seamless communication can help keep the project on track.
Key stakeholders will get a broad overview of project progress while the project teams will have easy access to all the details necessary for their work.
Keep an eye on progress
To prevent cost overrun, keep an eye on project progress. Utilize project management tools to identify smaller issues and prevent them from growing into bigger problems that can threaten project success.
Gantt charts allow you to keep an eye on the project timeline, team workload, and any slippages in real-time.
What to do when costs have overrun
If project costs overrun despite your teams’ best efforts, there are some steps that you can take to get the project back on track. The key to project success is to master the four broad dimensions of cost:
Find out the real reason
Dig deeper into the specific activities that went off budget to figure out the real reasons for the project delay and cost overrun.
It’s entirely possible that one project task took more resources or time than expected, resulting in a cascading impact on the subsequent project task. Speak to your team members and conduct a detailed review before coming to any conclusions.
Manage project strategy and stakeholders
Too much focus on project budgeting and scheduling processes can lead to less attention being paid to project strategy and stakeholders.
Establishing the project's strategic value early on can keep the focus on the project. By aligning business objectives with project timeline, you can help project teams avoid cost overrun and deliver projects successfully.
Get the team on your side
A high-performance culture, common vision, and shared team processes are essential to delivering top-performing projects.
Create a shared project-based incentive structure instead of an individual work goal. Infuse change management strategies in a transparent and natural manner.
Through precise and timely communication of project changes, milestones, and key developments, every team member stays on the same page.
Stay true to core project management practices
Having tried and tested project management practices in place can help your team deliver the project according to plan.
Introduce process discipline and set up a rigorous process for any change requests with shorter delivery cycles to avoid wastages. This ensures clear ownership and avoids team misunderstandings, resulting in greater efficiency.
How to prevent cost overrun with Wrike
Defy the odds by ensuring your project delivers value within its timeline and budget. Achieve successful outcomes by utilizing project management software that gives you the tools you need to plan, monitor, and report.
Wrike allows you to create and deliver value to your customers, empowering your teams with the tools they need to complete top-performing projects.
Monitor project progress with visual Kanban boards and automate tasks to ensure on-time delivery. Start planning high-quality projects that arrive on schedule and budget with Wrike's free two-week trial.