5 reasons for budget/cost overruns

Effective project planning lays the groundwork for success yet challenges often arise beyond the initial blueprint. Among these hurdles, cost overruns in project controls stand out as a major issue and concern. Beyond the inherent complexities of large-scale projects, inadequate project management execution can lead to increased costs. A good project management team must swiftly identify potential sources of potential overruns early on and proactively address them.

In this article, we’ll begin by defining cost overruns before delving into the 5 most elemental and evident technical reasons for cost overruns in project controls. Additionally, we’ll explore how to avoid cost overruns while working on a project.

What is a cost overrun?

Cost overrun meaning

A cost overrun or budget overrun occurs when the actual cost of a project exceeds the initially estimated or budgeted cost, which was accepted as the cost basis for project execution. In other words, a cost overrun happens when a project ends up costing more than expected.

Cost overrun formula

Calculating cost overruns allows you to measure how much a project’s actual expenses exceed its planned or budgeted costs. You can express a cost overrun either as a specific amount or as a percentage.

Cost overrun= Actual Costs – Budgeted Costs

Cost Overrun Percentage= (Actual Costs- Budgeted Costs)/Budgeted Costs*100%

If the actual costs are higher than the planned or budgeted costs, it indicates a cost overrun. Conversely, if the actual costs are lower, it results in a cost underrun, indicating spending less than planned.

Project cost overrun causes

1. Design Errors

Design errors represent a significant cause of cost overruns in many projects. The project’s design serves as its foundation, providing a blueprint for achieving the client’s requirements and incorporating essential technical elements. In this practical world, design errors signify a misrepresentation of the project deliverables.

Consider the impact of design errors within the framework of the triple constraint (Figure 1). Later, during project execution, these design errors start manifesting, resulting in additional work, change orders, and other complications. These issues often lead to schedule delays or, in extreme cases, necessitate scope changes, ultimately resulting in cost overruns.

2. Unfeasible Cost Estimate

An unfeasible cost estimate is another common reason for cost overruns in project controls. Cost estimation is a vital part of a project, which goes hand in hand with the project design phase. If the cost is calculated based on a hunch (imperfect estimation) without considering proper escalations and contingencies, then the project undoubtedly faces cost overruns. In the early phases, people might not detect this, but it becomes more evident in the later stages.

3. Scope Change

Scope changes often lead to schedule delays or cost overruns. The project scope encompasses all the deliverables expected at the project’s completion. Thus, it serves as the foundation for project plans, estimations, schedules, quality standards, and baselines.

Several factors can trigger project scope changes, including inaccuracies in the initial scope definition, inherent risks and uncertainties, sudden changes of interests or in project funding. When the project scope changes during execution, it necessitates revisions to the entire initial project plan. This involves adjusting the budget, schedule, quality, and sometimes even the whole project team.

As a result, more time and resources are required compared to the initial baseline, contributing to potential schedule delays and cost overruns.

4. Project Complexity

Project complexity often is a contributing factor which results in project overruns and schedule delays.

Larger projects are particularly susceptible to budget overruns because they entail greater complexities during execution. As projects grow in scale and in implementation time, they become more vulnerable to various complications such as inflation, fluctuations in material prices, and currency exchange rates. All these factors necessitate additional budget allocations to supplement the initial budget for project completion.

Moreover, as project complexity increases, precision becomes paramount in executing plans. Neglecting this can cause a chain of delays, significantly derailing the project schedule and leading to budget overruns.

5. Lack of Resource Planning – Inappropriate and Inadequate Procurement

Another common reason for budget overruns and schedule delays is failing to plan the available resources effectively. Failing to estimate the resources that would be used during the project might lead to under assigning or over assigning resources to a task. This means an increase in the duration or a blockage, respectively.

Resource planning also matters with regards to the contract management system. Inadequate, irrelevant, or unclear information in the contract may cause long chains of negotiations, disputes, arbitration and mitigation due to work change orders and the quest for reviewed contractual agreement with new budgets and schedule. The result will no doubt be a project delay and cost overrun.

Conclusion

Even though cost overruns and schedule delays may seem to be inherited in most projects, they can be reduced or eliminated by controlling and monitoring projects meticulously. Identifying the causes of project overruns and delays and taking corrective actions in the earlier phases is a must in this sense.

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