Cost Overrun

Cost overrun is an unexpected change in the project budget that ends up increasing the total project cost. Project planning is all about accuracy. With about 28% of projects failing due to imprecise cost estimates, it’s clear that your project plan deserves time and attention.

Inaccurate forecasts about costs, resources, benefits, and estimated durations can bring project risks that could impact your organization's profitability and growth opportunities. Take Apple canceling its much-hyped AirPower — a wireless charging mat — after spending almost two years on its R&D as a case in point.

Lack of proper cost management, inefficient project design, and underutilization of resources can lead to projects going over budget or even being cancelled. Let's take a deeper look into cost overrun, causes of project delay, and how to successfully complete projects while managing cost overrun.

Cost overrun is an unexpected change in the project budget that ends up increasing the total project cost. It can happen due to three primary reasons: 1. Economic factors that occur due to inaccuracies in project budget or scope. 2. Technical reasons, including erroneous estimates or incorrect data gathering. 3. Psychological causes, including the presence of scope creep or any decrease in project commitment levels

Signs of cost overrun

Teams need to make sure that they have a clear view of project progress to catch any signs of cost overrun. Here are a few ways to spot possible budget overruns quickly: Lack of a detailed project budget outline, no contingency plan in effect, leading to unexpected costs spiraling out of control, not using any tools to track project spending, incomplete resource utilization plan, not tying costs to specific tasks or making a work breakdown structure, failure to review similar past projects and historical data, not documenting project deliverables and leading to unexplained scope creep.

Common reasons for cost overruns in projects

For projects to succeed, it is important to avoid cost overrun. Even with all the checks and balances in place, you may still go over budget. Before we can understand how to control cost overrun, let's take a closer look at the common reasons for cost overruns in projects.

28% of the projects fail due to erroneous project estimates. Inaccuracy in estimates can result from both underestimation and overestimation of costs. Both are equally harmful and a consequence of intentional or unintentional forecasting biases.

To ensure positive project outcomes, estimates must be data-driven and precise. With a dynamic business environment and frequently changing business needs, scope creep is often inevitable.

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