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Nicole Tiefensee

19 Tips to Avoid Cost Overruns on Projects

Cost overruns are all too common when managing client projects. Here are our top tips to keep cost overruns on the low, while keeping your client and team happy.

Project management is a tough craft to master. Some projects go over budget, some over time and some over scope. Although factors influencing budgets, timescales, and deliverables alter from project to project, if you know what can potentially lead to cost overruns, you’re in a better position to prevent them. This article introduces 19 tips to help you avoid costly mistakes when managing client projects.

financial management of projects

What is a cost overrun?

Let's look at the meaning of a cost overrun first. By definition, a project cost overrun, also known as a budget overrun, occurs when the cost of a project is more than what was estimated.

Calculating the cost overrun on a project involves adding up all of the costs associated with it, including salaries, materials, subcontracts and other related expenses. This final cost figure is then compared to the original budget that was created for the project, and any costs that are not included are considered to be part of the cost overrun.

Any cost overrun may be due to factors internal to the project, such as scope creep or poor planning, or external factors like unexpected inflation. Thus, a cost overrun does not necessarily reflect upon the quality of the work done by the team; rather, it is an indicator of problems in planning, management, and control.

What causes cost overruns in project management?

A cost overrun can occur for many reasons. The original budgeted cost might have been incorrect because it failed to account for something essential. In general, there are three main reasons why project managers can experience a budget overrun:

  • additional hours and resources used than originally expected
  • unplanned events that require additional cost
  • cost mismanagement

Another cause could be an increase in labor costs compared to the original assumptions.

Budget leaks can be quite common on projects that involve construction of buildings, development of new technologies, and various government initiatives.

How to avoid cost overruns

Managing cost overruns is not an easy task, that's why it's important to do everything in project manager's power to prevent it. Here are our top tips to keep cost overruns on the low, while keeping your client and team happy.

  1. Always do cost analysis before starting a project.
  2. Set clear expectations from the start.
  3. Don't underestimate how much work is involved.
  4. Make a resource management plan.
  5. Build some buffer into your estimates.
  6. Split up projects into phases.
  7. Choose skilled project teams that completed similar projects before.
  8. Use the 80/20 rule.
  9. Communicate, communicate, and then communicate again.
  10. Be careful with fixed-price projects.
  11. Minimize waste and errors by giving your team support and training.
  12. Don't cut corners.
  13. Be realistic about your schedule.
  14. Thoroughly plan and track your projects and resources.
  15. Keep an eye on the actual cost of your project.
  16. Have a cost/schedule variance reporting system in place.
  17. Anticipate change.
  18. Stay away from 'nice-to-haves.'
  19. Educate your customers.

1‍. Always do cost analysis before starting a project

The best way to avoid a cost overrun is to conduct a cost analysis before the commencement of a project. This will help you to keep the possible risk factors in check and control over the financial aspects of the project.

Here are five tips to help you conduct the cost analysis effectively:

✓ Conduct a preliminary assessment on the cost estimate. If there are any aspects that have been neglected, then this has to be addressed at the initial stage itself.

✓ Identify each and every resource that will be used for the project. The resources may include labor, equipment, materials, etc. These will all have an impact on the overall cost of the project.

✓ Set a realistic deadline for the completion of your project so that you have ample time to keep track of your progress and know how much work needs to be done. A delay in the deadline may also lead to increase in costs of your project if you have not allowed yourself enough time from start till finish.

✓ Once you have a clear picture about what all needs to be done and how much it will cost, you can kick off the project.

2. Set clear expectations from the start

More often than not, it is on large scale projects that project managers need to deal with unexpected cost. The more complex the project, the more important it is for both sides to know what is expected. Ensure that your client understands that a project is a shared undertaking, and that you are mutually responsible for the outcome. Be clear on:

  • How the project will be run, structured, and reported on.
  • What’s included and excluded in the hours you quoted and how you will deal with overruns, overtime, and scope changes.
  • How issues and risks will be managed.
  • Rates and project billing.
  • What you are expecting of the client (availability, communication, input into discussions, etc.) and what they can expect from you.

If you're managing a design team that is working with a client, you may not be able to communicate everything that's going through your head before you start on a project. That's ok, and it's even better if you can't - it means you're bringing some creative energy to the project. But set clear expectations with your client about what will be included in the project and what won't.

If you lead a development team, this means setting clear expectations about what will be delivered by when and how much support will be provided afterward. Make sure there is no confusion over whether dev work includes bug fixes or whether the dev work is assumed to include all testing or whether updates are included or whether upgrades are included or any other critical details.

3. Don't underestimate how much work is involved

In most cases a cost overrun happens because people underestimated how much work their project required and were not prepared for all the costs they needed to cover the cost increase. So be realistic and get an accurate estimate of how much your project will cost.

Ensure all costs are included in your original budget if possible, even if they may seem unlikely to affect your project's bottom line. This way cost overruns won't need to be accounted for later on down the road when unexpected problems arise due to lack of preparation.

4. Make a resource management plan

The purpose of developing an effective resource management plan is to ensure that you have adequate resources to achieve all project objectives. Often, the end goal of such a plan is the optimal use of available resources and the reduction of costs by eliminating unneeded or ineffective operations. The first step in creating an effective resource management plan for your project is to check resource availability and allocate people to projects based on their skills and capacity. The estimation of how long you'll need each resource for should follow.

The plan should clearly state all the resources needed to achieve the objectives. The needed resources can be classified into three categories. They are:

* People - Manpower, skills, education, experience, etc.

* Machines - Computers, communication tools, vehicles etc.

* Money - Financial capital is one of the most important resources needed in order to run a business effectively.

Try Runn for successful project & resource management

5. Build some buffer into your estimates

A good deal of research shows people tend to be overly optimistic about how much they can accomplish. This optimism bias leads to the underestimation of the actual time that needs to be spent and results in unexpected change. Most likely, your initial estimations will be a tad utopian as well. That's why it's important to add buffers into your cost estimates, reserving more time and money for the original project budget. The best practice is to add at least 10% on top of your project scope.  

6. Split up projects into phases

Key to cost control is having a good plan and cost forecasting during the project execution. The cost must be estimated for each major stage of work rather than overall cost, to allow for flexible budgeting.

Splitting up larger projects into phases is a great cost saving tip because it means that cost doesn't all need to be done in one go! Planning and executing an entire project in parts means you will only have cost allocated per part so after completion of the first segment, we may already know how much more cost is required before completing the rest of our tasks on that project.

7. Choose skilled project teams that completed similar projects before

Choosing an unshakeable team means getting people on the project who have experience in planning and executing large projects with specific requirements. Having completed similar projects before means that they know how to avoid many of the common pitfalls that lead to cost overages.

Let's say you're in charge of planning the company picnic. Your budget is $4,000, and you want to plan a picnic that will wow your coworkers. So… do you hire your nephew and his friends who are really good at throwing birthday parties? Do you hire the event planning company whose prices are a little too high? Or do you hire a team that has thrown big corporate picnics before?

We think it's pretty obvious—you hire the team that has planned successful corporate picnics before! Because they've already been there, done that, and don't have to guess or make assumptions about what it takes to pull off a big picnic.

8. Use the 80/20 rule

To get the biggest bang for your buck, you've got to spend your time and energy on the specific tasks that are the most impactful! As in a famous Pareto principle, you'll get 80% of your project's results if you focus on the 20% of work that matters most to your client. The same applies to change requests. Learn to filter out the most valuable features and get them out the door. Not only it will maximize your impact, but also improve your client's experience.

9. Communicate, communicate, and then communicate again

Maintain an open and honest relationship with your client at all times. Check in regularly by phone, email and face-to-face and let them know how things are going. Share not only your successes, but also any issues and risks you‘ve come up against and what you are doing to mitigate them. Send regular updates on how your team is tracking against the estimated hours, budget, and milestones. And, if you spot even the slightest indication of a possible overrun, make sure to let your client know. It is a lot easier to justify and get paid for overruns when the client is aware of what is going on than to sort after the fact.

10. Be careful with fixed-price projects

Unless there are few unknowns, or you have done similar projects in the past, steer away from fixed-price projects. Fixed-price projects infer that you will assume all risks and take full responsibility for all costs and resulting profit and loss and you'll need very tight project control and a robust change management process (have you read our blog article on managing project change?) to keep your project on track and costs in check.

New to project accounting? Check our survival kit here:

11. Minimize waste and errors by giving your team support and training

Make sure your team has all that they need to successfully complete their work and grow in their field. Create a work environment where people are encouraged to ask for help, raise and discuss issues, and support each other. Limit the work in progress for your employees so they don’t need to context switch between projects, and be clear on how much time they have to complete an assignment so they can raise issues with you early.

12. Don't cut corners

Always remember to do things right the first time, especially on larger projects. Cutting corners can cost more in the long run because you may need to redo your work or even replace some of your materials if they are subpar. This can cost significantly more than if you had used good quality materials that only needed minimal changes to be perfect for use!

13. Be realistic about your schedule

If you find yourself constantly racing against time to complete the project on schedule with little leeway for overages, it may be time to reassess your project plan. Perhaps your cost estimates are based on unachievable milestones or unrealistic timelines. Take the time to re-evaluate all aspects of your project plan and update it with realistic cost estimates, accurate resource hours, achievable milestones, and realistic timelines that allow ample time for tasks to be completed without rushing.

14. Thoroughly plan and track your projects and resources

Good cost control starts with good planning. Use a tool like Runn to build out your project timeline, milestones, and any people you need to deliver the work. When it comes to resourcing, make sure you choose people who have availability, the right skills and the appropriate level of experience to get the job done. Once the project is underway, constantly track progress and changes. Many cost overruns happen because project managers didn't know the project was going over budget!

Runn gives you visibility to detect schedule changes and potential resource conflicts early so you can fix issues before they boil over and manage your client and their expectations.

15. Keep an eye on the actual cost of your project

One key to avoiding a cost overruns is to keep track of what the actual cost is. Actual cost is defined by the Project Management Body of Knowledge (PMBOK Guide) as whatever work you and your team have performed on your project, as well as any costs (direct and indirect) incurred during that time. Having up-to-date information about actuals is essential for successful cost control while the project is still in progress. You need two columns in your tool - one for the original estimate when you started the project, and another for the current estimate of how much it will cost when it's done.

Did you know? Runn helps you predict project spend.

16. Have a cost/schedule variance reporting system in place

In cost overrun control, it's equally important to monitor variances against cost and schedule limits on a frequent basis. Make sure you have cost and schedule variances calculated up front when building your cost estimates, so you know how much money you can spend without going over budget.

17. Anticipate change

Good project managers are aware that change is inevitable. If they are not, then they are in the wrong profession. They also know that when a project is over budget, it's very likely because of uncontrolled changes.

The scope of a project is never cast in concrete. Irrespective of how explicit your scope and requirements are, change often takes place well before the ink is dry on your scope statement. What you can do right away is learn to accept the perspective of change and coexist peacefully with it.

Your duty is to monitor requests for change, handle the situation, and guarantee effective governance whenever there is a reason for change. Remember that every change is justified by evidence of need, and that it adds value to the project. Change management methods must be established in advance, and you most likely already have them in place. If you don't, consider and build scenarios for how you could respond to change.

18. Stay away from "nice to haves"

It's critical to concentrate on the product or project's initial road map. It makes no difference if you're working on a construction project or a website. Unnecessary functionalities increase costs and lengthen the time it takes to complete a project.

So do rid of any extraneous or even undesired features and stick to the original design. Consider whether the so-called requirements are, in fact, requirements.

19. Educate your customers

Set up exploration sessions with your clients early on, even before the project starts, and build change management processes and tactics.

It's critical for your success and future collaboration to let clients in on your procedures and agree on what's best for both parties. When it comes to change management, make sure everyone is on the same page.

Set up weekly status meetings as you progress through the project's execution phase to keep everyone up to date on what's going on. Check that everyone's definition of change is consistent across all touchpoints.

Final thoughts

Cost overruns are an unavoidable part of big projects. Sooner or later, they will probably occur on any large project you work on. The important thing is to try your best to keep them small. The more complex the project, the harder it is to plan ahead for all problems that might arise. You can't foresee everything. The best you can do is try to anticipate the most likely problems and make sure you have considered how they might be solved.

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