Project managers put a meticulous level of care into the financial side of project planning. But, if that's the case, why do projects go over budget? Well, in short, it's complicated!
When it comes to problems in project management, budgets are right at the top of the list. According to the Center for Creative Leadership, budget and time limitations are the biggest cause of stress for project leaders, towering above the challenges of change management, meeting high expectations, and responsibility for helping other team members develop their skills.
It's no surprise that budgets are a source of worry: after all, if the money runs out, the project will grind to a halt. But why do projects go over budget? Is there a way to avoid excessive project expenditures? Let's look at why this happens, and consider how a project manager can act to prevent cost overrun challenges.
Unfortunately for project managers, cost overruns are not just a big problem, but a common one. According to PMI's Pulse of the Profession 2021, 35% of project failures were related to budget problems in 2021. Wellingtone reported that only 43% of organizations completed most of their projects within budget during 2020 – leaving more than half of companies experiencing budget overruns on a regular basis.
Construction management usually comes out as the worst-affected industry for cost overruns, partly due to the fact that they are handling large projects with high costs. Within this industry, as many as 86% of projects are found to exceed their initial estimate, each construction project costing an average 28% more than anticipated.
That said, budget overruns are not just a problem for engineering firms. Handling project budgets successfully can make a significant difference to your profit margins, no matter which industry you are in.
Projects can exceed their budget for a number of reasons, and cost overruns can occur no matter the stage of the project you are in. Although different projects have their own financial challenges, there are a few key culprits for budget overruns.
Proper planning during the project's initial stages is crucial for its success, especially when it comes to money. Small inaccuracies in initial estimates can add up to large errors in the overall budget. Worse, you may not become aware of these inaccuracies until the project is in full swing.
Because of the potential impact of inaccurate project estimates, it's worth spending time on the project cost estimation process. The actual costs of previous similar projects is a good place to start, but make sure to take into account any differences such as the availability of specialist project teams, market conditions that affect supply costs, and the constraints of the project schedule.
The project scope dictates the project specifications, in terms of the resources, timelines and deliverables. It essentially guides the project manager and team on what needs to be done.
Scope creep occurs when there is an alteration to the existing project scope. Maybe the customer needs more features, or you find they've tasked one of your team members with an extra deliverable that wasn't discussed before. These minor adjustments can cause unexpected costs on top of the approved budget, and if they're not handled carefully, they will lead to project overruns.
Often, some scope changes can be accommodated - indeed, a degree of scope change is sometime expected. But this requires proper documentation to avoid scope creep.
A scope baseline, set at the beginning of the project, is a great way of managing expectations by defining exactly what is going to happen.
Communication with stakeholders is an important part of managing a project – and a budget! Discussing planned costs with a client at the very beginning of the project may be intuitive, but successful project management involves more cohesive communication throughout the project lifecycle.
Good communication improves your resilience in the face of unexpected change – and almost every project changes in some way between planning and completion. As well as the client, it includes coordination with groups or individuals directly involved in the implementation like specialists, suppliers, and the rest of the project team.
Poor communication, on the other hand, can lead to costing inefficiencies if members of the team are not all on the same page. This can happen when there is a lack of understanding of the project, whether with the project goals, scope, objectives, or the costing and timeline itself. As well as exceeding the initially-planned budget, this inefficient approach can lead to time delays and cause the project to miss its deadline.
Nobody like to focus on what could go wrong in a situation, but the reality is that sometimes things go sideways. For this reason, contingency should be planned into every project.
Rather than relying on your Plan A working out, it's important to identify the risks and prepare a contingency plan – along with a contingency reserve in your cost baseline. When plans need to change, project managers employ their contingency plans to make sure deliverables will be met, without needing to draw funds from other aspects of the project.
But not all organizations are prepared with their Plan Bs. They may have an alternative mapped out for certain risks, but if this isn't reflected in the budget, it can lead to cost overruns.
Many organizations fail to consider their resources when creating budgets. This can result in overspending on certain resources and then needing to find additional funding to see the project through to completion.
Careful resource planning makes for more accurate cost estimates and easier budget management. Poor resource planning, on the other hand, can lead to financial constraints and may result in complete project termination. It can also affect stakeholders' confidence in the project due to unrealistic budget plans during the project's early stages.
Resource planning can make the difference between a project going over budget or not. This is particularly true for professional services where resource costs are a large proportion of the total cost. If the original budget fails to take into account the higher costs of specialized resources, the project will inevitably need more money to achieve the output required.
It may seem commonsensical to say that you can protect your project from overrunning its budget by planning carefully. But it isn't far from the truth. The trouble is, you really need to be able to plan in great detail, with a high level of oversight and accuracy, in order for your project to deliver quality, on time, and in budget.
Having a little help tracking all the moving parts can make the process much easier. A resource management tool, for instance, can produce accurate resource cost estimations, and allow you to track resourcing costs in real-time while the project is underway.
There are other benefits of resource management tools that can help you cover all your project expenses. Here are some:
Project resources need to be allocated efficiently if budgets are to be met. That includes the most dynamic resource of all: people.
If project managers have a clear view of the team's capacity and utilization, they can make sure that the project workload is distributed equally. No one is overloaded, and no one is sat on the bench, so the work can progress sustainably and steadily.
When you have clear representation of data and live insights into each resource's current billings, revenue, and utilization rate, it's easy to track the actual project costs and keep on top of your financial management.
A resource management tool also helps with current and future project budgeting. It offers a better understanding of historical data for benchmarking and developing future budgets. Cost control helps you create a visual financial outlook based on charges and rates with up-to-date reports. It lets you know your organization's position and allows you to forecast how you can scale your business.
The most important step in preventing cost overruns is creating an accurate project budget which includes all aspects of the project scope, accounts for the necessary resources, and allows for contingencies. From there, the project manager can monitor the actual costs against the cost baseline, to keep the project on track in terms of its expenses and resources.
A reliable resource management tool that integrates data on your resources and the project budget can be an asset towards the project's successful delivery.
Use Runn to manage all your resources and effectively create the budget to tailor-fit your team and your next project. We'll help you to run your business with ease. Try it with your team today!
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