Cost Overrun (With Causes and Ways to Prevent It)

By Indeed Editorial Team

Published June 9, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Project planning requires attention to detail and accuracy to manage the costs involved in the process. It's important for project managers to plan with care to avoid possible disruptions, such as improper time management or the underutilization of resources, which can lead to price overrun. Understanding cost overrun and its causes can help project managers successfully complete projects and avoid potential challenges in future projects. In this article, we define cost overrun, discuss its causes, and offer ways to prevent it.

What is cost overrun?

Cost overrun refers to an unexpected challenge in a project's budget that increases the total of the project's cost. It happens when a company spends more than they intend to on the initial budget plan. This can create a deficit in the original estimates of the project and its final costs. This situation may occur in any industry, but it's common in construction projects. It can happen as a result of various economic, psychological, and technical reasons. There are several variables that can affect a project, including:

  • Shipping costs

  • Equipment and resource needs

  • Skills gaps

  • Stakeholder changes

  • Project designs and expectations

  • Labour requirements

  • Availability requests

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Causes of cost overrun

It's important for project teams to ensure they have a thorough understanding of the project and the expected budget to ensure they work within the cost constraints. This issue can arise for many reasons, including miscommunications, administrative problems, and incorrect budget estimates. Here are some common causes:

Poor communication

Communication is important in the workplace, and especially when discussing budget plans. Excellent interpersonal communication skills are important between team members to ensure everyone understands the project's budget expectations. Proper communication requires clear expectations and details regarding any potential setbacks the project may face as it progresses.

It may be helpful to discuss any concerns that team members may have regarding the project. If issues occur because of poor communication, it's important to update communication methods to ensure the next task or project is more efficient. This can mean purchasing better communication tools, hosting weekly progress meetings, or using project management software.

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Leadership challenges

It's important for administrative and production teams to have excellent leadership skills to guide their team through any setbacks in the budget and direct everyone toward a more efficient method of production. An effective leadership team can help control the costs of the project by adjusting methods to better suit expectations.

When leadership challenges occur, it can affect a project's budgeting and timeline requirements. It may be beneficial to identify challenges by reviewing the leadership team's skills. It may be helpful to provide additional training courses to those in leadership positions to create a more cohesive team.

Design errors

Mistakes that occur during the design phase of a project can cause issues with the budget and alter the project's outcome. Design errors can include using the wrong materials, assigning too few team members to a task, or ordering the wrong equipment for the job. It can also include flaws that affect the integrity of the finished product, often resulting in the need for a complete redesign. It's important to minimize design errors by upgrading design software or processes, improving communication between designers, and ensuring team members stay current with their design skills and knowledge.

Change orders

When changes in the project plan occur, it can affect the overall budget. Sudden requests may include changes to the materials or processes. This can occur when project managers or other team leaders notice that the project isn't on track, and then request a change order. It may also affect the timeline of the project. This can severely affect large scope projects because it can mean re-buying thousands of units of materials and paying for extra labour. It's important to review project requirements regularly to identify incoming changes early, reduce the impact of the change, or avoid it altogether.

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Site management

The integrity of the work site can influence the budget and overall management of the project. It's important to manage a site well to reinforce safety and quality standards and help the team avoid accidents. A good project manager places site management and safety at the top of the priority list when creating a project plan and budget.

With effective site management, communication between management, labourers, clients, and other stakeholders typically improves. It's important to recruit experienced project managers and leaders. Meeting with project managers and leaders at the beginning and end of each day can reinforce project parameters and monitor progress.

How to prevent cost overrun

It's important to do proper cost analysis before beginning a project. This can mean establishing boundaries, setting expectations, and checking resources and supplies. Preventing price overrun requires attention to detail regarding the project's requirements and preparing for potential unexpected changes and delays by putting preventative measures in place. Here are some ways to prevent going over the project's initial budget plan:

1. Understand the project requirements

It's important for all project managers and team members to be able to understand the plan for a project before beginning any work on it. If any team members are unfamiliar with the materials or processes, it can cause issues to the project's budget plan. To improve the overall project understanding, it may be beneficial to slow down the project planning phase to allow for more peer review of the plans. Pushing back project planning can ensure an accurate understanding of the project's requirements before making any financial commitments or decisions. It can also allow for a more detailed budget.

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2. Check the vendor's capabilities

It's common for projects to require collaboration from other industries or third-party vendors. Their expectations can vary depending on the type of project, so it's important to research their capabilities before hiring them. It can also be beneficial to determine if the vendor can provide appropriate materials and labour within the project's timeframe and budget. Depending on the project, certain vendors may not meet the needs of the project plan, so it's good to set boundaries before the project begins.

3. Use project management software throughout the project timeline

Project management software can help unite team members working on the project. It can combine everyone who's contributing to the project on one platform. The right software can help plan budgets, meet project requirements, including materials and labour, and communicate with everyone on the project and the client to set continual deadlines and reminders. Project management software is a low-cost, high-versatility solution to overrunning the cost of the project. This type of software can organize projects on a visual platform where everyone can communicate more efficiently.

4. Monitor the project for accuracy and consistency

Project managers can oversee a project from start to finish to help account for any changes that may arise. This can mean monitoring the project's requirements and progress throughout the production and completion phases to ensure accuracy, efficiency, and quality. By having a skilled team and high-quality resources, a project can succeed according to its initial goals. It's important to monitor the timeline of the project to account for any delays or premature delivery. If a change order occurs, project managers can monitor the project after it's submitted to make sure the team meets the new project requirements.

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5. Keep clients and stakeholders updated

Clients or stakeholders have an important role in the project and expect a viable, finished product at the end. It's important to keep them updated on the progress of the project to prevent any delays. If a client feels their requirements aren't being met, they might pause the project or request a revision. When stakeholders receive frequent updates, communication among all involved parties typically improves, which can reduce the likelihood of a change order or halt to the project. Keep stakeholders up to date by communicating with them at least once per week.

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