The Causes Of Cost Overrun And How To Tackle Them

Going over budget may happen to the best of project managers. Here's how to manage this situation effectively.

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Clients and companies want to know exactly how much a project is going to cost them—and one of the things they want to avoid is cost overruns.

That’s why budget management is a significant part of a project manager’s job. In an agency environment, you’re generally working on projects that have fixed budgets, though in agile projects, clients might pay for a certain number of sprints.

In any case, you need to keep a watchful eye on your budget, to ensure you can prevent money issues. Let’s see how.

A simple definition of cost overrun

Put simply, a cost overrun is when the actual costs of a project exceed its estimated budget. For example, if you’ve sold a project for 50k and it ends up costing 80k, you have an overrun of 30k and someone has to pay for it. 😬

Why cost overruns happen

Here are the most common reasons why your budget may go over:

1. Poor scoping and misaligned expectations

It’s really important to have an agreement around what you’ll be delivering. This is why defining the scope of a fixed budget project is one of the first things you’ll do in the project planning phase and beyond. If the scope changes during a project, then the budget may also need to change to reflect that.

So, ensure you’ve defined the scope with your team and stakeholders to promote alignment and agreement. Document it carefully and thoroughly in a statement of work (SOW)—this will save you a huge amount of trouble further down the line. A one-line SOW that simply states your purpose leaves you wide open to scope creep later.

Additionally, make sure your SOW includes references to how your team handles change requests in a scope. This will help the client understand how to ask for changes and what the impact will be. You’ll need to estimate that impact on both budget and timeframes before you implement changes.

2. Underestimations

Estimating how long work takes is really hard and humans are often such optimists! Work with stakeholders and your team to create estimates early during the proposal stage.

It also helps to be official about taking estimates with a grain of salt—for example, add statements such as “subject to revision”. This isn’t meant to diminish the value of estimates, but to make sure everyone understands that the work isn’t done at the proposal stage. The discovery phase will uncover lots of information that you’ll use for more accurate estimates, and your budget will need to be updated accordingly.

Of course, some clients have fixed budgets that don’t allow any wiggle room. So, if your discovery phase exposes work that will push the budget over their maximum number, you’ll need to talk to your client to look at what can be cut from the scope. Perhaps you can deliver something in a future phase or reduce the deliverables to something simpler, in order to bring the costs down.

3. Unchecked scope creep

Changes to scope are a natural part of a project as you learn more about the systems, the users, the business operations of the client, and more. But, they need to be handled well so as not to blow the budget and cause problems. If you’ve agreed to deliver specific deliverables for a fixed budget, deviations will almost certainly cost you money.

Here are some examples of what scope creep can look like:

  • Additional work being briefed in without being estimated and approved
  • Multiple feedback rounds outside of what was agreed
  • Feedback or changes coming from “mystery voices”—people who haven’t been close to the project suddenly popping up with input
  • The team gold-plating features (the practice of making changes to a project that are outside of the original agreed-upon scope according to TechTarget.)

So, work with your team and client to create detailed tickets. These might include user stories, acceptance criteria, and definitions of done—all of which are helpful in bringing clarity to what is needed (and no more).


Pro tip: Turn scope creep into enthusiasm

Use scope creep to generate enthusiasm for the next phase of work. if you can't find the extra budget to include new ideas in the present phase, create tickets and keep them in a separate backlog—you can call it “future phase” or similar. This way the client and team can see that their ideas and suggestions haven’t been ignored, but are there as exciting future possibilities.


4. External factors out of your control

A third party service you have to use hikes its prices up; a member of your team falls ill and you have to hire a contractor to do the work; an unexpected change in policy or legislation results in additional work. Rest assured, sometimes projects go over budget and there’s nothing you could have done to prevent it. Unexpected costs can come out of nowhere.

In these situations, what you’ll need is to employ your strong communication skills. If you’ve built trust with the client, you can communicate what happened and work together to handle it.

The importance of trust: a real-life example

There’s one project that always stands out to me as a bit of a beast in terms of budget overrun. It included a third-party system that we simply hadn’t given enough thought to. We wildly underestimated how long it would take to integrate this system with the site we were building, and it was considerably more complex than we had initially thought. What’s worse, it only seemed to get harder the more we worked on it—so costs could be driven up even more.

Although it caused me a few sleepless nights, it was actually a good example of how important it is to have a good relationship with the client. We had difficult conversations, but they were also open and honest, and we were able to scope back other features in order to put more budget into this essential integration. We pushed back on nice-to-have features which went into the “future phase” backlog. Our agency took a bit of a hit, too, but it was a valuable lesson learned.

Even now several years on, I can look back on that project as an example of good stakeholder relationships and supportive senior management. We didn’t pretend nothing was happening, and we didn’t spring unexpected invoices on the client. We caught the issue early and didn’t shy away from difficult conversations.

Three signs your project is going over budget

How will you know a cost overrun is happening or about to happen? Here are three signs:

1. You can often see it in front of you!

Yes, sometimes, it’s obvious that your budget isn’t enough. If your scope or roadmap is significantly bigger than the time remaining, that’s a sure sign you need to have a conversation about budgets. This is because, typically, you price deliverables based on the time you think it will take to deliver.

Look at the backlog of deliverables: does the estimated time on those tickets surpass the budget you have left? That budget is likely allocated across different people and disciplines, so if you have X budget remaining for a specific designer but the estimates are greater than X, you should start talking with folks involved.

Similarly, if you and the client are expecting a monthly invoice of X and it’s actually Y according to your time tracking logs, that’s a very clear budget discrepancy.


Pro tip: Effective time tracking can save your budgeting

Float’s powerful resource management software has native time-tracking features that help you keep track of hours worked. You can set up rates for different team members, set overall budgets, and get reports on how much is spent. This way, you can evaluate actual time vs planned time and quickly spot overruns and other issues.

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2. Overtime is creeping up

If your team tracks their time effectively, you’ll be able to see this in real-time. People shouldn’t be working unscheduled overtime or be overbooked routinely. This will eventually drive up costs, but it can also indicate project management issues that you need to address.

You won’t necessarily be able to fix this alone, but you need to raise it with the people who can fix it.

If you’re using software like Float, you can get a bird’s eye view of everyone’s allocated work in real time, so you can always know if your team is overutilized.

3. You’re missing key milestones

Internal and external milestones are a key way to check in on progress against budget.

At a very basic level, that means: if you’re 50% of the way through the project, are you 50% of the way through the budget? Or, if you agreed as a team to have a specific deliverable by a specific date, and you don’t, then things might be taking longer than estimated. This fact burns through your budget and needs to be addressed.

Using milestones this way is more nuanced in practice (because not every task will have the same time estimate allocated to it), but it’s still a useful top-level check that encourages good budget management.

Four effective tips to handle cost overruns (and prevent them when possible)

We’ve talked about a few actions to take when you spot cost overruns. Here are the four top tips:

Tip #1: Define the scope of the project

Always involve your team and the key decision-makers on your client team. By including these stakeholders, you’re reducing the risk of mystery voices later on in the project doing a “swoop and poop”—this means providing late round feedback while the project has already progressed too far.

Tip #2: Manage that scope during the project

Even if you have a perfectly defined scope upfront, things may always change. Ensure you have a process for managing change in place and communicate it to the entire team in the project planning phase.

Watch for other forms of scope creep including gold plating and sneaking extra feedback in via backchannels.

Tip #3: Ask your team to track their time

Time tracking is often a dreaded task, but it’s very helpful to track hours against tasks your team works on.

This helps to give you a much more detailed look at how estimates are panning out and gives you a chance to support your team with shuffling their workloads and priorities accordingly.

Tip #4: Good communication is game-changing

Good communication with your client can be the solution to any budget overrun, delay, or other issue.

If you build up a strong, trusting relationship with your client team, problems that occur in the project are so much easier to resolve than if you’re on opposing sides. Start with a stakeholder map, then a tight stakeholder communication plan, and of course, always involve your client team in crucial decisions.



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