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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?