- February 19, 2021
- by Kate Borucka
- No comments
The Standish Group research estimates the cost overrun for IT projects in the United States at $59 billion. Just 16.2% of software projects are completed on-time and on-budget, while in larger companies it’s only 9%.
One of the elementary factors for successful projects is controlling costs. What to do to avoid cost overrun on projects? And how to make sure you’re having enough budget to bear all the necessary costs?
Keep on reading to learn how to prevent exceeding your budget and deliver successful projects on time.
Table of Contents
Cost Overrun – Definition
Cost overrun refers to an increase in the costs that exceed the estimated project budget. Or to put it simply, it’s when you spend more money on a project than you planned.
So when you’re suddenly starting to experience cost overruns on your projects, that’s a sign you’re doing something wrong.
Cost overrun can damage your project or even be the reason for its failure.
Note: cost overrun isn’t an interchangeable term for cost escalation. The latter means an unexpected change and may be caused, for example, by inflation or fluctuations in the price of goods, materials, or services.
While it may be difficult to provide a specific cost overrun formula, you can follow the guidelines in the Practical calculation of delays and cost overruns paper available on the PMI® website.
Why Does Cost Overrun Happen?
The Catao Institute lists construction projects, infrastructure, tech and IT projects as one of the most budget-draining. That’s because these types of projects need proper planning and management, which is not always easy with the high demands of stakeholders. Shifting material and machine prices, design issues, labor problems, and changing prices in the economy also make it difficult to deliver successful projects.
Regardless of the project’s nature, cost overrun may happen in all sectors and all kinds of businesses.
While the causes of cost overrun will vary across projects and companies, there are several that are typical in project management.
Here are the most common causes of cost overrun:
- Underestimation of the actual cost during the budgeting phase
- Lack of engagement of project sponsors and stakeholders in the estimation process
- Inadequate forecasting methods, inadequate or not enough data to predict the actual costs
- Poor estimation of available budget
- Changing scope creep and objectives
- Design errors in the design phase
- Escalation of commitment – when people keep pursuing the goals although all the negative results, often because of the belief that a lot of money has already been invested so the project needs to be finished
- Poor time management methods
- Project managers who lack experience and training
- Lack of communication and collaboration between team members, departments, or stakeholders, and people engaged in the project
- Poor documentation of all phases of the project’s lifecycle
While cost overruns may be caused by external factors, most of the causes happen due to poor project management practices.
How to Avoid Cost Overrun – Effective Tips
Here are practical and effective tips that can help you prevent cost overruns on project. Let’s get right to it!
1. Carry risk analysis
Risk is an inseparable part of every project. But the more prepared you are to face difficulties, the less likely you’ll fail.
You know how the saying goes, nothing ventured, nothing gained. And while taking healthy risks can be beneficial, there’s always a chance for things to go south.
As suggested by the PMI, the risk for cost overrun increases when project sponsors, investors, and even project managers set optimistic estimates and assume that things will go smoothly. Naivety is one of the main reasons for cost overrun and project failure.
Thus, it’s necessary to carry a thorough analysis that’ll help you identify risk exposure. Prepare a risk mitigation strategy and think about how you can address the threats. Plan risk response approach to avoid damage to the project.
And finally, record your findings so you can regularly check-up on your proceedings because a stitch in time saves nine.
2. Document the process
Documentation is essential. Without it, you’ll easily go astray. It’s your main source of information about all projects, that keeps everyone in the loop.
This is why you need to document the process:
- It’ll help to clearly define the project scope with each person’s responsibilities, objectives, goals, project design, project budget, and due dates
- You can use documentation in risk management
- It’s a record of information that can help support the initial budget and scope when stakeholders and clients want to introduce changes
- Documentation helps to maintain compliance with the law and financial regulations
- It helps to determine whether the project is profitable and if you should continue carrying it out
- Protects client and the carrier
- You have higher transparency when people share information and want to collaborate
- You can easily assess at what point you started overbudgeting
- It’s proof of work, modifications, and changing resources
Documentation of your processes can help you keep coherence, avoid ambiguity, and understand the real reasons for cost overrun on projects.
3. Set the right estimates
Setting the right estimates is the key to avoiding cost overruns. Don’t put your project in jeopardy without the proper calculations by thinking that only the sky is the limit. It’s not.
Too much optimism and lack of specific assessments increase the risk for cost overrun. In his paper, Estimating, Werner G. writes about the optimism bias – a phenomenon that “refers to the inclination of individuals to believe that they are more likely to experience favourable events, and less likely to experience negative events, than other people.”
Optimism won’t save your project but the right estimates will. They’ll help to prevent naivety as they’ll show you realistic objectives for the project and will make it easier to determine how and when to deliver it, and whether it’s profitable.
👉 Read also our article about objectives and key results (OKRs)
4. Communicate & encourage collaboration
Communication favors collaboration. It helps to keep everyone on the same page and make sure there are no loopholes in the project.
It’s important to involve everyone in the communication process – client, project sponsors, team members, and stakeholders, especially, when it comes to budgeting. All sides can bring valuable information.
You all can provide estimates or expected rates for the planned scope of work based on experience or in-house databases.
It’s also crucial to look at everyone’s goals, how they correlate with each other and whether they don’t rule out each other or cause conflict.
Communication and collaboration also include regular consulting, check-ups, and honesty.
Here, it also comes down to creating unified and detailed documentation of the processes. It’ll be the reference point for you and your team, your client, and other people involved in the project.
5. Hire the right people
While it’s important to have the right tools and methodologies, it’s people who do all the work.
Make sure to hire competent employees. People who have experience, expertise, are willing to learn, lead, inspire, work in a team, and help each other.
Your team should include people who are open-minded, not afraid to take healthy risks, and easy to work with. A good team will support and motivate each other which will increase employee morale.
6. Be clear about deadlines
Don’t stretch the schedule but also don’t cut your target date. Have all materials, tasks, etc., delivered at a very specific time and no second longer.
Prolonged deadlines will require more people engagement, more resources, and more money. Too short deadlines, on the other hand, can cause flaws resulting as hurry fosters bad performance.
Additionally, it’s also a good idea to leave some buffer time for unexpected occurrences and time overruns.
7. Design project plan
One of the most common reasons for cost overruns is the lack of a proper project plan. Good planning requires smart and responsible project management.
So how to make sure your project plan will prevent cost overruns?
Here’s what you need to do to design a real-cost project roadmap:
- Identify stakeholders, clients, expectations, desired outcomes, and objectives
- Clearly define roles and responsibilities
- Prepare all stages in the project lifecycle
- Set and prioritize goals
- List all the necessary resources
- Agree on a specific scope of work with all the involved people
To prevent errors and document the plan, use project and task management software. It’ll help you identify the key elements, monitor the progress of works, and control risks.
Read more about creating a project roadmap.
8. Prepare for changes
In their article for Harvard Business Review, Nadim Matta and Ron Ashkenas write:
“Managers expect they can plan for all the variables in a complex project in advance, but they can’t. Nobody is that smart or has that clear a crystal ball.”
And that’s why you should create a workflow for changes—a specific, detailed plan according to which alterations will be enforced.
They also write about ‘execution risk‘—”the risk that designated activities won’t be carried out properly—but they inevitably neglect these two other critical risks—the ‘white space risk’ that some required activities won’t be identified in advance, leaving gaps in the project plan, and the ‘integration risk’ that the disparate activities won’t come together at the end.”
Thus, preparing for changes over the course of the project’s lifecycle lessens the probability of delays and budget overrun.
9. Avoid “nice to haves”
It’s important to focus on the initial road map for the product or project. And it doesn’t matter whether you’re creating construction projects or building a website. Unnecessary functionalities create more costs and take longer to finish.
So trim away unnecessary or even unwanted functionalities and stick to the original plan. And think if the so-called requirements are actually requirements at all.
10. Leverage technology
There are many tools that can help you prevent cost overruns on projects. One of the most popular is time tracking software that helps to track performance, control budget in real-time, and track estimated against actual cost.
It combines elements of task, project management, and accounting software so it’s easy to monitor cost at every stage of the project.
You can also use other tools:
- Accounting software – can help you manage complex financial issues
- Planning software – helps to visualize dates and create an optimal schedule
- Risk management software – to carry risk analysis and monitor threats to the project
- Data collection software – to gather all the important information about the project and visualize your data
- Collaboration tools – enhance collaboration within the project
- Communication apps – make it easy to exchange information and communicate with everyone involved in the project on all levels
Many of these tools can be integrated, others are stand-alone solutions, or have multiple functionalities.
Choose wisely and opt for those apps that most suit your business needs.
The right practices in combination with thorough risk analysis and proper tools can prevent cost overruns on your projects and save it from failure.
Don’t get discouraged if things don’t always go your way. Be prepared for all possibilities, adjust your plan, and you’ll achieve success! Good luck! 💪