How will you complete the project....

I'd summarize it in two:

1. Buget overrun happens all the time. Even projects in mature organizations exceed budgets in 30% of cases. Thus, no panic.

2. The Project Manager must ensure that sponsor is informed ASAP on the budget deviation (good budget management skills are required). Presenting problems (budget overrun) must also come with presenting potential solutions. It is a good practice to present them both in order to show proactivity and leadership accumen.

If software or not, customer-based or internal, fixed price or estimation, budget overruns happens all the time.

I had a fixed price contract where our legal department went into negotiations with the customer, and they payed three times the original sum. Olympic games and construction projects are famous for 2 digit times overruns, everybody knows it (hence politics).

You have a problem when this surprises the sponsor. Sometimes project managers are set up as scapegoats for flawed contracts and estimates. They get fired and the show goes on. So keep your reports honest. No watermelon reporting.

This is where servant leadership does not help.

This happens very frequently in fixed price software services projects.

If you are a software services company and delivering to an external customer who agreed to pay a fix priced then you must complete the project anyway on your own money. If you did not have a large margin of profit then you will deliver with a loss. The contract in this case most likely would not allow you to re-plan, change the scope, etc you will typically have to deliver on the original plan but later than planned. Also you will have to support all the additional costs for late delivery.

If it is an internal project then the sponsor will have to decide what to do next. Some of the options are:
- terminate the project
- pump more money into it do deliver according to the original plan but later
- pump more money in but also re-plan eventually by changing the scope.

The reasons you got into this situation are very important. If the reason are purely technical (the team is unable to complete the work on time) then you can't do much on the project management side and usually the PM is not blamed for this.

However I have seen software projects fail commercially because the scope was not clearly defined and the customers were asking for more and more things to do and the PM was unable to prove that those things were out of scope (the scope was not clear). This is a purerly PM failure who can ruin a project even if the technical team does a great job on delivering.

In my opinion on fixed priced external projects is where the PM bring most value, because his control over the scope is vital for these projects. Also good PMs can convince customers to put more money in even if it was the vendor's fault that the work was not delivered on time.

If software or not, customer-based or internal, fixed price or estimation, budget overruns happens all the time.

I had a fixed price contract where our legal department went into negotiations with the customer, and they payed three times the original sum. Olympic games and construction projects are famous for 2 digit times overruns, everybody knows it (hence politics).

You have a problem when this surprises the sponsor. Sometimes project managers are set up as scapegoats for flawed contracts and estimates. They get fired and the show goes on. So keep your reports honest. No watermelon reporting.

This is where servant leadership does not help.

I know a software development project where the vendor was far behind the schedule and they tried to ask for more money from the customer. The customer's project director however refused to pay and forced the vendor to deliver what they had promised in the contract.

The software vendor had no choice but to work for more than a year for free and suffered a loss of over 1 million Pounds (the project was in the UK). If they had refused to do that they would have ended up in Court.

The real issue here is that the delay can be caused not only by the vendor not being able to deliver what they have promised but also the customer may cause the delays. Having a good PM in this type of projects is vital for the vendor in order to secure profit. The customer however may also have a very good representative (for instance a PM) that is able to tell when the vendor is pulling their leg.

The bottom line: if you are delivering a fixed price customer project and you are late because of you fault and the customer knows it then you must deliver some parts of the project for free and you risk suffering a loss.

In internal projects where you are not expecting direct income from the project itself being late is not as severe as in a customer fixed price project.

Since the project for you is already a cost and not a direct source of income you can just pump more money into it if you think it is worth it. This would indirectly negatively affect your income but if you have the money and the project does bring a lot of benefits then you can do it.

Ganesh,
yes, a troubled project needs to go with all the cost , schedule and scope control. Often replanning and rebaselining is done and then you need accurate data. Also should you go into negotiations or litigation you need evidence. If the PM is replaced, the successor needs best information.

Agree with Adrian that losses can be high and some contractors can go bust. My old company replaced a PM by a loss-minimizer then. BTW this is a rare example of changing a charter midway from reach objectives to get out of here.