Projects, and large projects in particular, can be sprawling undertakings with many moving parts. Coordinating a project and ensuring you complete it on time and on budget is challenging. The smallest change in a project can impact timelines and costs. That’s why effective planning is so important, especially when it comes to avoiding cost overrun.
Let’s look at what cost overrun is and how it happens. We’ll investigate how common cost overrun is in projects across all industries. Plus, we’ll see what project managers can do to prevent project costs getting out of control.
What is the meaning of cost overrun?
Cost overrun refers to when unexpected costs end up pushing a project over budget. A cost overrun can occur in any project. Cost overruns can have a huge impact on a project. They can lead to considerable delays or the failure of the project altogether.
There are several ways to avoid cost or budget overrun. They all start with good management of the project. It’s true that projects rarely go to plan. Costs can escalate quickly if left unchecked. With effective management, a budget outline, and ongoing monitoring, you can keep costs under control.
What are the main causes of project cost overruns?
There are many reasons why projects have budget overruns. Ultimately though, those reasons are summed up by bad planning and poor communication.
Here are four of the most common causes of cost overrun.
Underestimating project costs
A project manager needs to estimate project costs at the start of every project. This estimation will guide the project budget. If a budget isn’t accurate and doesn’t account for unexpected spending, you can expect cost overrun. Organizations who don’t develop a budget outline at all are walking a tightrope without a safety net. They have no way of aligning actual project spending with the original cost estimate. On the flip side, an accurate budget outline makes it easier to see when costs are escalating. For example, you expected to spend $50,000 within the first month of a 9-month project. You can see your actual spend is $75,000. This is a red flag that you may be looking at a cost overrun down the line.
A project’s scope is all the tasks a team must complete to deliver a project. The team has agreed to all of these tasks at the outset of the project. Scope creep happens when one party strays from that agreement and requests additional changes. Implementing these unexpected changes can often lead to project delays and cost overruns. Scope creep is common across all industries with 34% of all global projects experiencing scope creep.
Bad risk management
With any project there are risks. That’s a given. Not having a risk management plan that outlines all potential risks, and a plan for dealing with them, is perhaps riskiest of all. A good risk management plan will anticipate the unexpected, including unpredictable costs. It will have a strategy to deal with them. If an organization fails to plan for risk, cost overruns are almost inevitable.
Communication is the lifeblood of any project. It needs to flow from the project manager right through the team to the stakeholders and client. Elements within a project can change at any stage. A team member could run into difficulties. A shipment of critical supplies could be delayed. A specific technology requirement could prove problematic. A lack of communication can mean these unanticipated changes go unreported. This breakdown in communication could lead to a budget overrun.
How common are cost overruns?
It turns out, cost overruns are incredibly common. They can happen in any project but are most common in construction, manufacturing, and IT projects. Large IT projects typically run over budget to the tune of 45%, and software-specific projects average 66% in cost overruns.
Most organizations can weather the challenge of cost overruns. However, 17% of IT projects go so wrong they threaten an organization’s existence. These significant, catastrophic events happen more frequently than most people can imagine. Mega project failures like these tend to be more common in the construction sector where massive projects like the Channel Tunnel and the Three Gorges Dam go astronomically over budget.
In other cases, these so-called ‘black swan’ projects, can see cost overruns of between 200% and 400%. They can lead to the ultimate demise of an organization. In its report, McKinsey Digital outlines the impact cost overruns had on a large global retailer. The retailer embarked on a $1.4 billion project to modernize its IT systems. The retailer eventually abandoned the project. Consequently, the retailer suffered competitively. To regain competitive advantage the retailer launched a second project to develop a supply-chain management system. This time the retailer estimated the project cost at $600 million. This project also failed, and the retailer filed for bankruptcy.
Five ways to prevent cost overrun on a project
Conduct exhaustive planning
To ensure a project is successful you need to plan it out and be prepared to get into granular detail. The more detail, the better. Your budget or cost estimation will be part of your risk management plan. To get an accurate cost estimation you will need to look at the project from all angles. The more detailed you are, the more accurate your cost estimate will be. Once you’ve come up with your plan make sure you run it by all stakeholders. This will make sure everyone is aware of the plan and the budget.
Get to know your vendors or partners
If you are relying on third-party suppliers to complete a project, make sure you do your research. Cost overruns can often happen when supplier costs escalate. Make sure you assess your prospective vendor. Are they suitable for the job? What is their history of working on similar projects? Double-check all costs they provide to ensure they are accurate.
Stick to the original scope
Scope creep can be common in projects when stakeholders or clients request changes outside the original, agreed, plan. These changes can be costly and can have a direct impact on the project budget. If you have come up with an agreed plan, you should stick to the plan. Say no to smaller changes at the beginning to avoid feeling pressured into larger changes later.
Build clear and regular communications with stakeholders
Project delays can happen if there is a breakdown in communication. And project delays often lead to cost overruns. By developing clear and regular communication with all relevant parties you can ensure everyone has the same information. Open lines of communication also help to ensure you can resolve any issues quickly.
Continue to monitor the project’s progress
Without continuous oversight, the potential for cost overruns can go unnoticed until it’s too late. By monitoring a project’s progress, you will be better able to spot areas where spend is nearing the budget. This will allow you to make any necessary adjustments before costs spiral.
How can VT Writer help with cost overrun?
We’ve seen how important communication is to the smooth running of a project. To ensure complete transparency all communication needs to be clear. Confusing updates or directions can lead to errors, which in turn lead to delays and escalating costs.
VT Writer helps to ensure all communication is clear and understandable. Here are some of the ways VT Writer can help organizations avoid cost overrun.
- By creating a clear communication strategy organizations can avoid misunderstandings. Clear updates will highlight any problems that could turn into costly delays.
- By identifying long sentences and complex language organizations can avoid confusion.
- By eliminating passive voice project managers can be clear about everyone’s roles and responsibilities.
How can VT Docs help with cost overrun?
Organization and planning are critical to a project’s success. From the outset, a project manager will need to develop a detailed project plan, including a risk management strategy. Forming a budget, assigning responsibilities, outlining timelines, planning for risk and mapping out requirements are central to a successful plan.
VT Docs has a number of features that can help at this critical stage of the project. Here are some of the ways VT Docs can help organizations create a successful plan and avoid cost overrun.
- Creating a responsibility matrix (or RACI Matrix). This feature helps project managers to outline who is responsible for each task. This important step in the project is time-consuming but invaluable. The matrix offers a clear picture of who is doing what, and ensures your plan accounts for every responsibility.