How to Deal with Project Cost Overruns (+ Prevention Tips)

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KEY TAKEAWAYS

  • Project cost overruns refer to instances where project expenditures exceed the planned budget.
  • Inaccurate estimates, scope creep, and poor resource planning are some of the most common causes of project cost overruns.
  • Cost overruns can be avoided in many ways including defining project scope clearly, tracking costs and expenses, and employing the right project management software.

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Going over budget while managing a project can be a dreadful situation for project managers and business stakeholders alike. In this guide, we’ll dive into the specifics of this issue and strategies on how to deal with project cost overruns. 

Budget Overruns: How to Handle Them and Avoid Future Issues

Navigating the complexities of project management requires acumen, strategy, and, above all, vigilance. One significant hurdle often encountered? Project overruns—scenarios where expenditures surpass the planned budget.

Cost overruns are completely preventable, as long as you’re mindful of their causes, diligent in their prevention, and expect they may happen despite your meticulous preparations. To help you, we prepared a guide you can use to better understand this problem and prevent it from happening as you move on to your next project.

Top 6 Causes of Cost Project Cost Overrun

Going over budget is a common issue in project management. There are cost overruns in construction projects or projects dealing mainly with health care. No matter the industry, these scenarios are common but are nonetheless avoidable with proper knowledge and preparation.

Inaccurate estimates

Exceeding or “blowing the budget” occurs when actual spending surpasses the costs estimated. Although various factors can contribute to this, inaccurate estimates often serve as a primary cause.

In the competitive landscape of project bidding, teams may rush through estimations to secure contracts, resulting in figures that fail to align with actual work durations. Unforeseen delays happen, putting the success of the project in jeopardy. 

Scope creep

Scope creep refers to additional requests that fall outside the parameters of the initial agreement. These shifts are typically prompted by changes in original client requests, additional deliverables, or miscommunication.

For instance, a client might request the addition of an extra webpage to the originally agreed-upon website map plan. They may assume that endless iterations and revisions on the design are covered in the project quote, when they are not.

In the context of project management’s triple constraints—comprising cost, scope, and time, with quality at the core—scope alterations inevitably impact both time and cost. Expanding the scope necessitates either increased staffing or a longer project timeline, ultimately leading to adjustments in the project budget and schedule.

Poor resource planning

Resource management entails the identification, coordination, and allocation of the resources required by your team to reach project milestones and fulfill deliverables. It includes ensuring that all team members are equipped with the necessary tools, time, and information to make progress within the designated project budget constraints.

Inadequate resource planning can have significant repercussions on project budgets and may result in unanticipated requirements that were not included in the planned budget or over- or underqualified individuals being tasked with certain work, inevitably leading to budget overruns.

Unforeseen risks

Any unforeseen risks could have an immediate impact on a project budget, causing trouble in keeping the work within scope. Unexpected disruptions include natural disasters, supply chain disruptions, regulatory changes, market fluctuations, technological challenges, cybersecurity breaches, health and safety incidents, and labor strikes. Any one of these unfortunate events can cause chaos, even in the most proactively managed scenarios.

Technical challenges

These challenges encompass a range of issues including unexpected technical glitches, software bugs that require extensive debugging efforts, and compatibility issues with new technologies that require costly modifications or integrations within the project ecosystem. When encountered during project execution, these challenges can disrupt workflows, impede progress, and necessitate additional resources for troubleshooting and resolution that was not anticipated.

Economic effects

Extended-duration projects can be susceptible to economic influences, creating unique challenges. For instance, when a project team procures materials from overseas, they become vulnerable to fluctuations in currency exchange rates. Other economic factors such as inflation and wage regulations can impact material costs, adding complexity to project budgeting and procurement processes. These economic dynamics highlight the importance of proactive risk management and financial planning to mitigate the impact of external economic factors on project viability and cost management.

What to Do When Projects Go Over Budget

When there are project cost overruns, project managers must act swiftly and strategically. Here are some things you can do to get your project back on track and be better prepared for when you encounter the same problem.

Prepare a contingency plan

As you kick off your next project, be sure to envision various scenarios that could potentially lead to budget deviations. Anticipate the unexpected and prepare a solid standard operating procedure (SOP) for your team. This SOP should outline how you intend to manage costs, track expenses, and respond to unforeseen challenges.

Investigate the cause and adjust key areas

When faced with a project budget that’s veering off course, panic can set in. However, maintaining a clear head is crucial. Before acting or making any decisions, take the time to sit down with all involved and identify and understand the source of the issue.

Is the project over budget due to a schedule delay? Additional client requests? Unforeseen operational issues? Once you find out what it is, adjust as needed.

Dive deep to pinpoint the exact issue to make informed adjustments. Remember, emotions should not drive decisions; data and analysis should.

Communicate with relevant stakeholders

As you evaluate and come up with options, it is time to inform your clients and stakeholders about the situation and involve them in implementing changes. How you handle this delicate situation will determine the level of project and relationship success and outcome.

Be prepared, as it is not going to be an easy conversation. Consider who needs to be informed and tailor your communication approach accordingly. Expect some clients to initially react negatively because they will see this as a drain on their company resources. If your project is on a fixed contract, then upper management may be your audience.

Learning to communicate difficult financial details to stakeholders and management is an important skill for a project manager to master. It is never easy, but taking the time to fully investigate and provide facts when explaining the cause of the budget overrun and being prepared with options to move forward with the team’s best recommendation is usually supported and accepted.

Study past projects with similar challenges

By analyzing past projects, project managers can identify where and how things went south with the budget. Whether it’s underestimating resource requirements, scope changes, or inadequate risk assessment, recognizing these trends allows teams to proactively address them if and even before they surface again.

Lessons learned from previous budget challenges give project managers the opportunity to adjust their planning, allocate resources more accurately, and implement better risk management strategies. Each project provides an opportunity to refine processes, enhance communication, and fine-tune budget management. Prevent history from repeating itself and experience more successful projects moving forward. 

Identify cost-saving measures

Begin by creating precise project estimates. Understand project-specific costs, including equipment, salaries, and other expenses. 

Keep a close eye on the project budget throughout its lifecycle. Regularly update the budget to accommodate any unforeseen expenses or changes. Project cost management software that tracks time, wages, and budgets can be a valuable tool to help manage this.

Anticipate potential risks and allocate contingency funds. Unexpected requirements or resource cost increases can be mitigated with a well-thought-out contingency plan.

Optimize resource allocation to prevent unnecessary costs. Efficiently manage human resources, equipment, and materials to minimize wastage and maximize productivity.

Implement effective project cost management techniques

Taking action to maintain financial control and accountability involves overseeing that financial resources are allocated and distributed as they should be. Project managers should closely monitor expenses to be able to identify deviations from the budget early on so adjustments can be made to prevent cost overruns. Accountability is inevitable when stakeholders can track and see how funds are utilized throughout the project lifecycle in real time.

Unforeseen events can occur at any moment, pushing cost off the rails. Learning the basics of project management budgeting, implementing robust cost management practices, regular budget reviews, risk assessments, and contingency planning all allow project teams to proactively address potential cost escalations so there are no surprises.

How to Prevent Project Cost Overruns

Planning and proactively becoming prepared for anything is always the best solution.

Collaborate when doing estimates

To minimize the risk of inaccurate estimates, prioritize collaborative efforts with both internal team members and external stakeholders, such as subject matter experts and resource personnel. Whenever feasible, involve the individuals who will be directly involved in the project execution in the estimation process. This not only enhances their ownership of the project timeline but also reduces the possibility of discrepancies arising. Project managers may also proactively add an extra percentage onto estimates that are riskier, such as software programming hours and material purchases to help dilute any initial overages that may occur.

Clarify scope and requirements

A statement of work (SOW) is a comprehensive document outlining the scope of your project. It provides a clear delineation of both what is included and left out of the project scope. It can also include directions and a fee schedule for additional work by listing processes and the type of work and corresponding hourly rates.

By documenting your team’s commitments, you establish a solid foundation for managing additional requests from your client. In such instances, referring back to the SOW and reviewing it with your client helps determine if the request aligns with the predefined project parameters. This provides much-needed transparency and clarity regarding project scope and facilitates informed decision-making when considering additional requirements using a fair and open process.

Track costs and expenses

Tracking expenditures throughout a project is a crucial practice of project budget management because it can alert you to potential cost challenges before they occur. While this task may prove challenging without robust project management or resource management software, it can yield substantial benefits once established.

Offering transparency regarding project expenses will foster accountability among stakeholders, encouraging options when considering change and prompting greater mindfulness regarding their contributions and demands.

Monitoring and control

Budget management through constant monitoring and control is a great way to stay on track and within means. This practice will bring budgetary risk to the forefront by identifying discrepancies early on and allowing the project manager to proactively address them and prevent escalation. Having the foresight to implement corrective actions enhances decision-making, helps with budget optimization, establishes better budget management practices, and reduces the likelihood of budget overruns now and in the future.

Using project management software

Project management software plays a crucial role in preventing budget overruns by offering the following key functions:

Vendor management 

Project management software offers centralized vendor management, making it easy to track contracts, deliverables, and procurement processes, ensuring compliance and ultimately preventing cost overruns.

Stakeholder communication 

Communication and collaboration tools such as messaging, commenting, and document sharing are effective for stakeholder engagement. These allow you to provide real-time updates on progress, budget status, and issue resolution, promoting transparency and accountability.

Resource planning and allocation

Features for resource planning, allocation, and scheduling help project managers precisely distribute resources based on project requirements and availability. Tracking resource utilization will help avoid overallocation or underutilization of these resources for any type of work.

Risk management

Document potential risks, their likelihood, and impact on the project budget to support risk assessment and mitigation activities. Project management software provides tools for analyzing risk scenarios, assessing their potential impact on the budget, and implementing mitigation strategies. It also facilitates tracking of issues and deviations from the project plan, enabling early detection and resolution to prevent budget overruns.

Bottom Line: Preparing for Budget Overruns

While there are many factors that can contribute to a budget overrun, the most important thing is that you understand what they are so you can avoid them in the future. Preparing for them involves proactive planning, diligent monitoring, and effective risk management strategies. Moreover, it is important to keep in mind that maintaining open communication with stakeholders and conducting regular project reviews are essentials steps to take to address budget challenges promptly.

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