Managing project costs is a critical aspect of project management. However, despite careful planning, projects often encounter cost overruns that can impact timelines, resources, and overall project success. In this article, we will explore effective strategies for dealing with project cost overruns and ensuring successful project delivery.
How Common Are Project Budget Overruns?
Let’s get some background on project cost overruns before we get into the details of why it happens and how to prevent them.
The budgets and predicted performance advantages of almost 1,500 projects were compared to the actual expenditures and outcomes by the HBR and the standard overrun was of 27%, but that statistic belies a considerably more frightening reality. One out of every six projects reviewed by the Harvard Business Review turned out to be a “black swan”, with an average budget overrun of over 200%, along with a schedule overrun that was roughly 70%.
Schedule setbacks, incompetent personnel, and project budget overruns were the most prevalent challenges for project delivery companies, according to some polls.
You might be wondering: if project budget overruns are such a regular problem in the project management industry, why have we not figured out the causes? And if we do know the causes, what can we do to avoid them? If there’s no way to avoid them, then is it possible to at least manage them? Keep reading to learn the answers to those questions!
Understanding Project Cost Overruns
Project cost overruns occur when actual project costs exceed the initially estimated or budgeted costs. These overruns can arise from various factors, including:
- Inaccurate cost estimation
- Scope changes or additions
- Unforeseen risks and uncertainties
- Vendor or supplier price fluctuations
- Inefficient resource allocation
- Delays in project execution
Identifying the Causes of Cost Overruns
To effectively deal with project cost overruns, it’s crucial to identify their underlying causes. Some common causes include:
1. Inadequate Cost Estimation
Poorly estimating project costs can lead to significant overruns. It’s essential to conduct thorough research, gather accurate data, and involve subject matter experts to create realistic cost estimates.
2. Scope Creep
Scope changes or additions during the project lifecycle can increase costs. It’s crucial to establish a robust change management process to evaluate and manage scope changes effectively.
3. Unforeseen Risks
Projects often encounter unexpected risks that can impact costs. Conducting comprehensive risk assessments and developing contingency plans can help mitigate the impact of unforeseen risks.
4. Poor Resource Management
Inefficient resource allocation can lead to cost overruns. It’s important to accurately assess resource requirements, monitor resource utilization, and make adjustments as necessary to optimize resource allocation.
5. Vendor or Supplier Issues
Fluctuations in vendor or supplier prices can affect project costs. Building strong relationships with vendors, negotiating contracts, and regularly reviewing supplier performance can help manage costs in this regard.
Strategies for Dealing With Cost Overruns
Once the causes of cost overruns are identified, project managers can implement strategies to effectively deal with them. Here are some strategies to consider:
1. Monitor and Control Project Costs
Establish robust project controls to monitor costs throughout the project lifecycle. Regularly track expenses, compare them to the budget, and take corrective actions if deviations occur.
2. Conduct Cost-Benefit Analysis
Perform a cost-benefit analysis to evaluate the impact of cost overruns on the project’s overall value. Consider the potential benefits, risks, and stakeholders’ expectations when deciding whether to proceed with additional expenses.
3. Revisit and Update Cost Estimates
If cost overruns occur due to inaccurate cost estimates, revisit and update the estimates based on the latest information. Use lessons learned from previous projects to enhance future estimation accuracy.
4. Implement Effective Change Management
Establish a structured change management process to assess and manage scope changes effectively. Evaluate the impact of each change on project costs, timelines, and resources before approving or implementing them.
5. Enhance Risk Management
Strengthen risk management practices by identifying and assessing project risks upfront. Develop contingency plans to mitigate the impact of risks on project costs and schedule.
6. Improve Resource Allocation
Optimize resource allocation by regularly reviewing resource requirements, availability, and utilization. Adjust resource allocations as needed to ensure efficient utilization and cost control.
7. Negotiate with Vendors and Suppliers
Maintain open communication with vendors and suppliers to negotiate favorable terms and pricing. Regularly evaluate the market to identify potential cost-saving opportunities.
What We Learned About Project Cost Overruns
It’s not uncommon to have a project go over budget. Cost overruns will happen to any project, be it a building project, an IT project, a medical project, or anything else. Budget overruns can occur on any project, although larger or sophisticated projects are especially prone to them. However, factors outside our control may have an influence on the cost of the project.
Things like inflation, extreme weather, and other factors can all have a role, but most times you can be sure there are plenty of other factors at play. Budget overruns are typically caused by insufficient analysis, not enough planning, and inaccurate estimation, among other issues.
We discussed some very prevalent causes of project budget overruns in this blog. We also discussed how to avoid and deal with overruns. Risk management can be one of the aspects linked with budget overruns that businesses should not overlook. Some dangers have the potential to knock companies to the floor. Many high deviations might lead to unfavorable outcomes like project cancellation or postponement, reduction of project scope, and customer trust loss.
Among the most effective methods for managing project budget overruns is to plan and use project contingencies, as well as the management reserves. Rather than allowing project expenditures to go over the budget, it’s much preferable and appropriate to employ reserves to continue being under budget.
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Dealing with project cost overruns requires proactive management and a systematic approach. By understanding the causes, implementing effective strategies, and closely monitoring project costs, you can mitigate the impact of cost overruns and ensure successful project delivery. Remember, effective cost management is essential for achieving project objectives and maximizing stakeholder satisfaction.
Understanding the information in this article is an essential part of project management and a vital part of the PMP exam. Improve your project management skills or prepare for the PMP Certification exam by taking a quality online PMP exam prep course.
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