Cost Overrun: How to deal with Project Cost Overrun.

Determining the budget for a particular project can be a tricky process. In fact, things can go haywire even after meticulous planning.

Cost overrun is a normal phenomenon within an organisational setup. If you have studied project management, then the phrase “cost overrun” or “budget overrun” would definitely ring a bell.  Now, the obvious questions that arise in your mind are, what leads to this situation? Or, how to prevent this situation from jeopardising the project at hand? Read more to find out everything about the project cost overrun.

What is a cost overrun in projects?

A cost overrun occurs when the expenditure to accomplish a particular project is greater than the amount allocated for that work. This term can be adapted to the budget of a government, an organisational department, or a team.

Cost overruns are a rather common phenomenon when running projects. This is why managers overseeing a particular project need to manage their budget meticulously. A cost overrun, also recognised as a cost increase, budget or underrated overrun, includes unexpected costs incurred in excess of budgeted amounts. Such instances take place when there is an underestimation of the actual expenditure during budgeting.

In simple terms, a cost overrun is the specific amount by which the actual expenses of a project exceed its budget. While this does not exactly indicate that the project will fail, but it does make achieving success quite difficult.

5 Common Causes of Cost Overruns in Projects

Having costs overrun your budget in project management is a prevalent issue. As a manager, it is your duty to look for inefficiencies and rectify them so that you can reap the profit, but it is never easy. Speaking of which, here are 5 of the most common reasons for project cost overrun that you need to be aware of. 

1. Lack of coordination among team members

Poor coordination among the team members working on a project could arise from a lack of strong leadership. In fact, even the experienced project managers can falter if “the right-hand doesn't know what the left hand is doing.” The lack of proper coordination leads to the duplicity of tasks, which ultimately jeopardises the deadlines and virtually guarantee cost overruns and project delays in the process.

You can introduce precise task lists and deadlines for each member of the team. This is one way to ensure they will never run out of tasks until the completion of the project at hand.

2. Lack of experience in project management

As an organisation expands, you need to increase the number of personnel to manage projects. Ultimately, nobody can turn into a good project manager without gaining experience first. Without proper experience, a mismanaged project can result in poor budget management and missed deadlines.

If you are putting an individual in charge of their first project, make sure to assign another person to advise or guide the manager in the process. Give your project manager enough room to make mistakes and learn from them. But it is also wise to have someone there to step in if things go over budget.

3. Changes in the scope

It is possible that the client may request more additions to the project at hand and demand better quality, more features, etc. All of these may demand more monetary resources. Now, if you don’t avoid this or start charging extra for the efforts you’re putting in, you’ll eventually find yourself with no room to manoeuvre down the line. In fact, you’d start losing money on the project.

It is vital to have strict rules from the beginning regarding how much you are willing to diverge in the course of this project. Also, if the client requests additional services, don’t be apprehensive of asking for more money.

4. Inadequate planning

Every project that you want to get through successfully must have a solid plan behind it. Without an appropriate project schedule, the plan is doomed to fail. To avoid such mishaps, you can walk through the project from beginning to end with all the people involved.

Having different individuals involved in the planning session (even if they aren’t project managers), is an excellent way to develop a solid plan. This prevents you from investing too much time and money into the project itself. This will also allow you to spot problems before they creep in.

5. Lack of appropriate contingencies

It isn’t uncommon for business owners to completely bypass the need for developing a contingency plan. It is also true that trying to get the "plan A" launched and off the ground often takes up too much time to focus on the “plan B”. However, your mind may already be programmed to device backup plans, just in case things go wrong. This, in fact, helps you with a project that demands not only a few tweaks and changes but also an overhaul.

A contingency plan could serve you by keeping a project on the right track, and by decreasing the cost overruns.

7 ways how to deal with project cost overruns

Like many other problems, budget problems are easier to create than to solve. You must keep your project within a strict budget if you want to be successful. Exceeding the budget of your project strains your client’s trust and your agency’s profitability. Given below are 7 simple tips to prevent project budget overrun.

1. Implement a plan of action

If you understand what is causing your budget overrun, you can develop an action plan and get the process on the right track. Sometimes, the management within an organisation is just trying to extinguish the fire. The most significant thing is to take the time to focus, device a plan and begin implementing it. You and your team must know exactly what should be done to complete the projects at hand on time.

2. Make sure to estimate accurately

Even after having a budget template in place, you will have to make estimations and assumptions specifically for your current project. Get an appropriate estimate by incorporating all of the resources that you will need to finish the project, assuming that they will only be productive 80% of the time. Also, make sure that you account for exclusions and constraints relevant to the project as well.

3. Interact honestly with your team

Sometimes, business owners tend to shield their teams from the bad news. Maybe it is because we all want our team to be upbeat and inspired or maybe we want to save our own value in the eyes of the team members. But this is wrong. If you have a good team, they might offer great ideas and even help you to save the business. Also, they will understand the priorities you set for a particular project. This way they will be able to function more efficiently and focus on the important aspects.

4. Employ cost management with the cost control system

If a project encounters budget overrun, it is crucial to have a cost control system that helps you to oversee the budget vs actual costs, subcontractor agreements, cash flow, change orders, including the ability to approve purchase invoices online. Project managers and company management must be able to generate real-time data and control key indicators, like the profit, cost forecast, completion percentage, and others. Outdated data can take away your crucial time and do not provide a clear picture. A cost management system helps you to save time, track your expenses and have more control.

5. Try to regain the budget for your project

One appropriate way to regain an additional budget is to negotiate better pricing or the terms for materials, renegotiate contracts with subcontractors, etc. But don’t quote a hefty price as that might ruin the relationship with your parties. Keeping fair pricing and good connections with your customers & subcontractors tend to be a long-term strategy for effective cost management for projects.

6. Consider the taxes within your project budget

Always make it a point to include tax in your project budget. You may notice that your client doesn’t have to pay for the withholding tax. However, planning your budget as if the client does pay this tax, will allow you to avoid any discrepancy between the actual and budgeted revenue. This will also offer you with some cushion in your budget in the event that the client doesn’t have to pay because you have already included the extra expense in the budget.

7. Always be prepared for the unexpected

Many projects go haywire owing to the lack of a proper risk management plan—a crucial element for any project. If you don’t recognise and prioritise risks or plan for risks, you will go over budget by trying to fix the unidentified risk.

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