6 Evident Reasons for Budget Overruns

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Voices_Marian_Cost Overruns_v2In recent times, it is extremely rare that a project is completed within its set budget. Proper planning is the key to a successful project, but there are few problems that are usually beyond the realm of planning. One of them is the budget overrun. It’s true that we can avoid certain problems through planning and proper execution but you can never predict exactly what would happen once you start a project.

Here are few of the some very common reasons that lead to budget overrun and how they could be avoided.

Underfinancing

One of the main reasons that cause budget overrun is underfinancing. Not allocating an adequate amount of budget to a project at the start will obviously lead to either budget overrun or failure. Assuming that a project will be a success, not allotting enough budget is downright wishful thinking.

  • How to avoid it: Explain to the sponsors beforehand about project overruns, and how it could be handled i.e. either through additional funding or scope reduction.

Unfeasible Cost Estimates

Cost estimation is an important process in a project and one common reason for budget overrun. If the cost is calculated on the basis of a hunch, or by inexperienced or unqualified personnel, then the project is unexpectedly going to face budget overruns. This might look fine at the earlier stages of a project, but often look unrealistic at latter stages.

  • How to avoid it: Seek help of expert staff members and subject matter professionals while making estimates of the cost of a project. Break down work into smaller portions and then make estimates. You can make comprehensive estimates by using cost estimation techniques like Parametric Modeling, 3 Point Estimate, Reserve Analysis, Bottom Up Analysis, Simulation etc.

Underestimating the Project Complexity

Large projects are usually at risk of overrunning its budget because the larger the project, the bigger the complications that may arise during its execution.

  • How to avoid it: Divide the phases of the project into smaller parts. Avoid planning extensively from the very beginning and leave room for changes or delays that may or may not occur during the project.

Prolonged Project Schedule

If the project is on schedule, that does not necessarily mean that the project budget is also being met. On the other hand, if project schedule is extended, that automatically translates into more time and money that needs to be put into the project. Project extension means staff and resources would be required for more time.

  • How to avoid it: Planning of critical phases of a project are extremely important as any deviation in any part of the project affects all that follows that phase; the time and cost that was initially allotted to it. If you are asked to extend the time of the project, clarify it to your sponsors that it will probably cost more than it was initially planned, since more time means more resources would be used.

Lack of Backup Plan

If you do not have a backup plan for any problem that might arise, then even the smallest delay in the schedule will cause an overrun.

  • How to avoid it: Always have a plan in case any problems arise. Your budget should estimate the cost of the project, but along with that there should always be room for some unexpected changes that can happen in the schedule or scope of the project. Leave room for changes in your budget plan.

Lack of Resource Planning

If you fail to effectively plan the resources that are available to you, then this would obviously lead to a budget overrun. One of the most common mistakes that cause overrun is the failure to estimate the resources that would be utilized during the project. They could be underestimated, seeing that contracting conditions change accordingly and may have increased from the time when the project was planned. On the other hand, they could be overestimated and would lead to blockage of resources that could have been effectively utilized elsewhere.

  • How to avoid it: This could be avoided by proper planning. Plan the scope, then estimate the cost, and time it would require. Then accordingly, allocate the budget to all the departments. Planning everything ahead ensures that you have a better understanding of all the resources and equipment you will need.

How about looking for a tool to avoid Budget Overruns?

The points made above all demonstrate different aspects that lead to budget overruns. There exist many tools/apps that can help in many of these and should be considered. Here are a few below that might set your projects on a successful path.

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Moiz Noorani

Moiz Noorani

Moiz is a member of the expert writer team for Project-Management.com. He has written more than 100 articles including project management software reviews, books reviews, training site reviews, and general articles related to the project management industry on this site.

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