what can cause cost overrun

The Top 7 Causes of Cost Overruns and How to Avoid Them

Cost overruns can sink a project. Going over budget strains resources and damages stakeholder trust. As a project manager avoiding cost overruns is a top priority.

But what causes budgets to spiral out of control? Understanding the root causes enables us to adopt proactive strategies to enhance budgetary control. In this guide, we’ll explore the primary triggers of cost overrun and equip project managers with actionable tips to steer clear of budgetary pitfalls.

#1. Inaccurate Initial Estimates

Garbage in, garbage out. Unrealistic estimates inevitably lead to cost overruns. Common estimation mistakes include:

• Insufficient data and research during planning
• Overlooking complexities and unknowns
• Optimism bias and focusing on best-case scenarios
• Lack of stakeholder involvement and diverse perspectives

Having robust processes and checkpoints prevents bad estimates Perform thorough analysis of all costs during planning Consult experts to identify pitfalls. Involve stakeholders, especially finance teams, to enhance visibility into constraints.

Budget sufficient time for discovery to gather key details. Frame estimates as ranges, not fixed values. Pad estimates, build in buffers, and plan with contingencies.

Pro tip: Leverage historical data to create more accurate estimates. Evaluate past projects of similar scope and complexity. Derive benchmarks to inform estimates of budget, timelines, resources required.

#2. Scope Creep

When project scope expands uncontrolled, so do costs. Additional features, changing specifications, scope ambiguity, and gold plating by the team are common culprits.

Define scope clearly upfront and get signoff from stakeholders. Use change control processes for modifications. Assess impact on budget and have the client approve increases.

Avoid ambiguity in scope definition. Utilize user stories and acceptance criteria to prevent misaligned expectations. Institute change freeze dates to lock down requirements.

Pro tip: Turn scope creep into a future opportunity. Categorize out-of-scope ideas into a product backlog as potential future enhancements.

#3. External Factors

Market dynamics, economic shifts, regulations, resource constraints, and other external variables can disrupt schedules and inflate costs.

Build contingency plans for disruption scenarios like supplier delays, price hikes, staffing issues. Monitor leading indicators continually to get ahead of emerging external threats.

Maintain transparency with stakeholders when external events impact costs or timelines. Present data to demonstrate the factors beyond your control. Having trust makes it easier to handle unanticipated changes.

Pro tip: Negotiate contracts with buffers built in around potential external disruption scenarios. Include language about addressing cost overruns if they do occur.

#4. Ineffective Communication

Communication gaps create misalignment that results in rework, delays, and cost overruns. Key pain points include ambiguous requirements, inconsistent messaging, and lack of stakeholder coordination.

Create a centralized communication hub for project data and discussions. Document decisions and follow a formal change control process. Schedule regular touchpoints with stakeholders about budgets, risks, and blockers.

Lead post-mortems on past failures to identify communication weaknesses. Develop an action plan for improvement around issues like unclear specifications.

Pro tip: Designate single points of contact between your team and each key stakeholder group to streamline information flow.

#5. Resource Management Issues

Poor resource planning strains budgets through inefficient allocation, lack of role clarity, and overutilization. Team fatigue also reduces productivity, extending timelines.

Develop resource plans aligning needs to budgets. Define clear roles, responsibilities, and reporting structures. Monitor workloads proactively via capacity planning and burn down charts.

Empower team members to speak up about roadblocks, stress, and scheduling conflicts. Make adjustments early to optimize resources and avoid detrimental overwork.

Pro tip: Take advantage of workload balancing and resource management features in tools like Float to enhance planning.

#6. Unforeseen Circumstances

Black swan events beyond our control can disrupt even the most meticulous plans. From natural disasters to sudden regulation changes, unexpected developments frequently derail projects.

Rather than fixating on prediction, focus on responding capably when the unforeseen occurs. Develop contingency reserves and identify multi-modal mitigation strategies.

Build organizational resilience to navigate uncertainty. Foster transparent communication and collaborative problem-solving with stakeholders when the unexpected strikes.

Pro tip: When unforeseen events do occur, avoid knee-jerk reactions. Assess scenarios and make deliberate decisions aligned to project objectives.

#7. Lack of Risk Planning

Failure to anticipate potential threats leaves projects exposed. Issues get overlooked during planning and monitoring of key risk metrics falls by the wayside during execution.

Make risk management an ongoing priority, not just a planning checkbox. Create a risk register detailing probability, impact, and mitigation tactics for identified threats. Revisit it often and track emerging risks.

Utilize techniques like Monte Carlo simulations to stress test budget estimates based on risk scenarios. Quantify contingency reserves required to cover likely threats.

Pro tip: Assign risk owners to monitor and intervene on specific threats like resource constraints or regulatory changes.

The High Cost of Cost Overruns

Left unchecked, cost overruns can seriously jeopardize project outcomes and organizational stability. According to research by McKinsey and Oxford University, large projects across industries typically exceed initial budgets by 45% on average. In the mining sector, overruns over 50% are commonplace.

The reputational damage and loss of stakeholder confidence resulting from blown budgets present further obstacles to organizational goals. By cultivating disciplined estimation, risk management, and monitoring practices, project managers can evade the potentially dire consequences of cost overruns.

Empowering Teams to Stay Within Budget

Equipping project teams with the right tools and guidance is instrumental in the fight to maintain budget integrity. Here are impactful steps project leaders can take:

• Provide interactive training on estimating techniques and risk management practices

• Incorporate cost management into team priorities and incentive structures

• Facilitate open dialogue and collective problem-solving around budget risks

• Furnish real-time visibility into project performance metrics via PM software

• Allocate contingency reserves to absorb unforeseen shocks

• Conduct post-project reviews to identify process improvements

With the right foundation of practices, project teams become more adaptable, disciplined, and cost-conscious. Developing these competencies across your organization pays dividends through enhanced budgetary control and minimized cost overrun risk.

Over to You

Runaway project costs don’t have to be inevitable. While overruns still occur, you can shrink their likelihood and magnitude.

Follow the guidance to boost estimation prowess, scope control, risk planning, and monitoring. With diligence and stakeholder alignment, your next project can come in on budget instead of going over.

Here are three key steps to get started:

• Review past projects to pinpoint areas for estimation and planning improvements
• Develop contingency plans and reserves to buffer against disruption threats
• Incorporate cost management into team training programs and reward systems

The cost of cost overruns is high. Take action now to reinforce budget integrity and steer clear of budgetary pitfalls. Your stakeholders will thank you when projects keep costs contained.