Preventing cost overrun on projects: 8 tips and tricks

The art of project management is difficult to perfect. Some initiatives run above scope, budget, and time limits. 

The secret to concluding a successful project is preventing expense overruns. If the project is completed beyond budget, the quality of the deliverables and timely execution may be thrown out the window.

Of course, committing to a strict budget is simple. Keeping prices low, though, can occasionally feel like a game of whack-a-mole because cost overruns can occur anywhere

What is a cost overrun? 

Unexpected expenditures that cost more than the project budget are referred to as cost overruns. Any project can experience cost overruns, but software development, manufacturing, and construction projects are particularly prone to it. A cost overrun, sometimes referred to as a cost rise or budget overrun, can occur for several different causes.

Causes of cost overrun

Lack of communication 

An undertaking that calls for collaboration and communication is a project. Being the link that holds your project sponsor, project team, and project stakeholders together is your responsibility as a project manager. Lack of communication may result in unforeseen changes to the project’s schedule or other problems that may increase costs.

Poor risk management

There are several possible dangers with each undertaking. The task of developing a risk management strategy, which lists all possible hazards and suggests mitigation measures to be used, when necessary, falls to the project manager and the project management team. Unexpected risks may impact your project if a risk management plan is not developed, increasing expenses and leading to cost overruns.

Scope creep

When the scope of your project is poorly specified, scope creep happens. Simply said, this means that throughout the execution stage, you’ll encounter unforeseen duties. Unexpected chores raise your expenses, making it more probable that you will go over budget and incur cost overruns. For instance, obtaining a PRINCE2® Foundation training & certification may not have been on your list of expenses, but it may unexpectedly creep into your list as you may want to attain further knowledge on the topic and the field. 

Insufficient project estimates 

You have a very high risk of experiencing cost overruns if your project budget is insufficient. Cost estimating is essential to project management success since each project manager must do so before establishing a project budget. Utilise all the resources you have, such as historical data or an expert panel, to assist you to determine project costs. 

Eight tips and tricks on how to avoid cost overruns on projects

1. Analyze costs before beginning a project, always
2. Establish clear expectations right away
3. Don’t undervalue the amount of labour required
4. Create a plan for resource management
5. Include a margin in your estimations
6. Projects should be phased
7. Implement the 80/20 rule
8. Continue to communicate after you have already done so

1. Analyze costs before beginning a project, always

Conducting a cost study before a project start is the best way to prevent a cost overrun. This will assist you in maintaining control over the project’s finances and any risk elements.

Here are three top suggestions to help you complete the cost analysis:

• Make a preliminary evaluation of the cost projection. If any areas have been overlooked, this must be taken care of right away

• List every single resource that will be applied to the project. The resources might be labour, machinery, supplies, etc. All of these will affect the project’s final cost

• Establish a reasonable finish date for your project so that you have enough time to monitor your progress and determine how much work remains. If you have not given yourself enough time to complete the job, a deadline extension might further increase project costs

2. Establish clear expectations right away

Project managers typically have to cope with unforeseen costs on large-scale projects. The importance of both parties knowing what is expected increases with the project’s complexity. Make sure your customer is aware that a project is a joint effort and that you are both accountable for its success. 

Be certain of:

• Billing for projects and rates
• What the customer may anticipate from you in terms of availability, communication, participation in conversations, etc
• How the project will be managed, organised, and evaluated
• What is and is not covered by the number of hours you provided, and how scope adjustments, overtime, and overruns will be handled
• How problems and hazards will be dealt with

3. Don’t undervalue the amount of labour required

A cost overrun typically occurs as a result of people underestimating the amount of work required for their project and not budgeting for all the expenditures necessary to meet the cost rise. So, be reasonable and obtain a precise cost estimate for your job.

Even if you think some expenses won’t significantly impact the overall cost of your project, make sure to include them all in your first budget. In this approach, when unforeseen issues develop as a result of inadequate planning, cost overruns won’t need to be taken into consideration later on.

4. Create a plan for resource management

Making an effective resource management strategy can help you make sure you have enough resources to complete the project’s objectives. 

Such a plan’s ultimate objective frequently involves making the best use of the resources at hand while also cutting expenses by discontinuing pointless or unproductive operations. 

The first stage in developing a successful resource management strategy for your project is to determine the availability of resources and assign individuals to tasks per their capacities and abilities.

5. Include a margin in your estimations

Numerous studies have shown that people frequently overestimate how much they are capable of doing. Due to this optimism bias, the real amount of time needed to complete the task is underestimated, which causes unanticipated change. 

Your early predictions will probably be a little bit idealistic as well. Because of this, it’s crucial to factor in buffers when estimating costs, setting aside additional time and money for the project’s initial budget. The ideal practice is to increase the scope of your project by at least 10 per cent.

6. Projects should be phased

A solid strategy and cost predictions throughout project execution are essential to cost management. To enable flexible budgeting, the cost must be assessed for each significant stage of the task rather than the entire cost.

An excellent way to cut costs is to break up bigger projects into phases so that they don’t have to be completed all at once. When a project is planned and carried out in phases, costs are only allotted for the individual phases, thus when the first segment is finished, we may already be aware of the additional costs needed to complete the remaining tasks for that project.

7. Implement the 80/20 rule

You must focus your time and efforts on the particular tasks that will have the most impact if you want to get the most for your money.

According to the well-known Pareto principle, if you concentrate on the 20 per cent of work that is most important to your client, you will achieve 80 per cent of your project’s goals. Change requests follow the same rules. Get the most valuable features out of the door by learning to filter them away. It will not only increase your influence but also enhance the experience of your clients.

8. Continue to communicate

Always have a direct line of communication with your client. Let them know how things are doing frequently through phone, email, and face-to-face check-ins. Share not only your achievements but also any problems or hazards you have encountered, along with what you are doing to resolve them. Send frequent reports on how your team is doing with the projected budget, milestones, and hours.

 Additionally, be sure to alert your customer if you notice even the tiniest hint of a potential overrun. When the customer is informed of the situation, it is far simpler to defend and collect payment for overruns than it is to do so after the fact.

Overall, unavoidable cost overruns are a component of large projects. Any significant project you work on will undoubtedly experience them sooner or later. The most crucial thing is to make every effort to keep them modest. It is more difficult to anticipate every potential issue with a project that is more complicated. You can’t see everything in advance. The most you can do is make an effort to foresee the most likely issues and ensure that you have thought through potential solutions. 
For those who are new to the field of project management, the PRINCE2® information & course will provide you with a wider knowledge on preventing cost overrun on projects.