I 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 a 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.
Top 6 Reasons
Here are few very common causes that lead to budget overruns and how they could be avoided.
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 they 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 the latter stages.
- How to avoid it: Seek the 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 budgets 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 the 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. Project management software is essential to keeping a project running on time and on budget. Here are a few below that might set your projects on a successful path.
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