Nowadays, we rarely hear about projects that finish below a given budget. On the contrary, we hear about projects that need more people, more material resources and more time, which ultimately translates into additional costs that strain the project budget.
Although it is clear that project costs can be influenced by external factors beyond the project manager's control, there are at least as many factors that can be controlled from within the project, through appropriate project cost planning.
Here are six simple reasons that projects incur cost overruns -- and how to prevent them:
1. Underfinancing. You've probably heard about projects that start with an undersized budget ("We could only allocate that much for this project..."). Such projects will have a high risk of overrunning the initial budget, as well as a high risk of failure.
Mitigation: Clarify with the project sponsor from the very beginning how cost overruns, which are very likely to occur, will be handled -- for example, through scope reduction or additional funding.
2. Unrealistic costs estimates. Projects that have costs estimated based on gut feelings or inexperienced personnel are poised to face budget overruns. Biased and inaccurate cost estimates are likely to look unrealistic at a later stage in the project.
Mitigation: Break down the work into smaller and more assessable packages. Get help from subject matter experts and experienced personnel when estimating costs. Make the cost estimations comprehensible, by applying different estimation techniques (e.g., three-point estimates, parametric estimating or bottom-up).
3. Underestimated complexity. Many projects nowadays, especially larger ones, have constantly growing complexity. The Berlin Brandenburg Airport and Terminal 1 of Munich Airport, for example, were quite similar in scope, but conducted at different times (25 years apart). Yet Berlin Airport, the more recent project, continues to have considerable budget overruns and delays. One of the reasons: the underestimated complexity concerning the financing of the project, the construction of futuristically designed facilities and newer regulations.
Mitigation: Split the project in smaller work packages or phases. Avoid planning everything extensively from the very beginning (the planning alone of the Berlin airport project took 15 years). Plan iteratively -- per work package or phase -- and throughout the project.
4. Extended project schedule. Just because the project schedule is met doesn't necessarily mean the budget will be met as well. On the other hand, it is highly likely that if the project schedule is not met (for example, due to a project time extension), then the project budget will be blown thanks to additional costs that may pile up, since the project team and resources will be needed for longer.
Mitigation: Manage the project time and schedule well. Focus especially on the tasks on the critical path, which can have the most impact on both project schedule and costs. If you get asked to extend the project time, explain to your stakeholders that this probably will cost more. Remember the scope-time-budget project triangle. Time is money!
5. Improper buffer planning. If you don't plan (or plan improperly) for a budget buffer, the smallest deviation in scope or schedule will cause an overrun.
Mitigation: A budget comprises estimated cost and some contingency. Plan the contingency for unexpected scope changes, unusual weather changes or possible problems with suppliers. Consider a buffer for the costs that cannot be accurately or predictably estimated. Some of the cost estimates will be more accurate than others -- for example, commodity prices will be more predictable than labor costs for a specific service.
6. Improper resource planning. Labor resource costs could be one of the project's biggest expenses. If the project lacks labor resources, a later labor force acquisition will be an unexpected project cost. It can also mean a higher cost since the contracting conditions might not be the same as when initially planning the project. Similarly, resources allocated in excess will mean unnecessary allocated costs, plus unnecessary blocked resources that could have been useful on other projects.
Mitigation: First plan the scope, then the required work to be done, and then the related assumptions, dependencies and risks. This will facilitate a better understanding of the work needed to be done and hence will help better assess the right equipment, amount of resources and required skill sets.
How do you manage costs on your projects, and which measures do you apply to avoid cost overruns?
Bringing together all the aspects of a project -- including stakeholders, team members, software tools and project requirements -- is just the beginning. Once we gather all the pieces of the project, we cannot sit back and relax. Properly controlling a project hinges on using time management skills to see it through to the end. And those skills consist of these three types of actions:
Reactive. There will always be an aspect of the project that needs to be tended to: risks and issues that may need near turnaround resolutions or disparate interests of team members and stakeholders that need addressing. But it's how we've set the stage for our project that will help us steer the project to the finish line, so allot some time to plan for issues to come up. Always be aware of how your surroundings and other resources may affect your project and how they can be of value at another point. For example, when your project is heading into a critical situation and you have no resources that can help, have a contact at the ready who may be able to get an immediate resolution.
Co-active. This element entails taking collective action toward correcting an off-schedule project. While we set out to have a process for every action, somewhere along the line, the schedule starts slipping or team members aren't reporting bottlenecks or bad news in a timely fashion. In these instances, reset the tone of your project control. My technique is to keep the scope constantly visible, usually by making sure the agenda has it displayed. However, I didn't do this on a project years ago. The developers were making ongoing enhancements to the software, ones that would be very useful at a future point. Yet they were very off-scope. The co-active measure was to pull back on the enhancements and redefine the scope to get it to what the sponsor originally requested. I did so by meeting with the sponsor and development team manager and reviewing requirements from the standpoint of:
Proactive. But what if a project has components that are not fully defined yet? This is a situation in which we're not reacting to the existing project or controlling project issues, but instead considering the future: possible risks, another project's potential impact or information a stakeholder may want. Here I would recommend actively anticipating what may be helpful that has not yet been discussed. And this consideration can be addressed perhaps as an earned value chart, a report outlining project enhancements for future work or something as simple as organizing a meeting with sponsors to ensure there are no new impacts on the rise.
Are there any aspects to managing your time in a project that you see as helping to bring the project to a smooth close?
My last post on when to pull over a project to the side of the road generated much action on the Voices on Project Management Twitter feed. Here, I'll expand on that theme by highlighting the similarities in the makings of a race car and a successful project.
Today's race cars are a marvel of engineering and performance. They achieve these results while being extremely complicated and operating in harsh environments. However, to the spectator, racing appears to happen easily and naturally. When we see a race car whiz by, we don't see the many hours of planning that go into achieving both high speed and durability.
Therein lies the parallel between race cars and projects. As project practitioners, we need to consistently ask ourselves whether our "project race car" is ready and able to win the race. This includes design and preparations before the race as well as vigilant monitoring of performance.
Here are four essential components of a "project race car" that have to be well engineered and constantly monitored for your project to be a success:
How many times have you started a project "race" though one of the previously mentioned components was missing? What is the most frequently omitted element in the "project race car"?
For an insider look at car racing, read about a recent keynote speech on Formula One by Mark Gallagher at PMI® Global Congress 2014 -- EMEA.
Documentation is an important aspect of a project manager's job. We document to keep us aware of status on projects. We use it to stabilize spending and keep a paper trail of events and circumstances. So, what should you capture and how should it be maintained? Here are a few tips to make sure you're capturing usable documentation.
Now that you know how to maintain documentation, we'll review which documents should be retained in my next post.
What are your must-have tips for documentation on projects?
One of the regular challenges I hear coming from the project management community is the idea that our organizations are setting unrealistic goals. This is a tremendous challenge because setting unobtainable goals can lead to project failure, low morale and a culture of insecurity.
It's vitally important to spend time working with our project management offices (PMOs) and sponsors to develop realistic timelines and goals that are achievable in the short- and long-term. Why? Because this is going to help maintain motivation throughout the project as each milestone is obtained. Additionally, it will help you communicate progress more effectively to your sponsors and gives you the capability to set clear, reasonable expectations at the start of the project. Here are three ways you can set better goals that motivate your teams, sponsors and stakeholders:
While it isn't possible to control every variable on every project, a project manager can make great strides in team performance by using goals to set proper expectations.
What helped you set proper goals in a recent project?
Read more about PMOs and their impact on strategy implementation in PMI's Strategic Initiative Management: The PMO Imperative.