Cost overrun, or budget overrun, occurs when project costs exceed budgeted amounts due to factors like improper budgeting, unforeseen scenarios, or scope creep. Key reasons include inadequate financing, lack of leadership, unforeseen circumstances, and communication breakdowns among project teams. Effective planning, vendor management, scope management, and stakeholder communication are essential strategies to mitigate the risks of cost overrun.

1. Cost overrun, also known as budget overrun,
is the scenario when the cost of a project or
business tends to increase than what was it
budgeted for and can be due to the increase of
cost due to improper budgeting or
underestimation of the actual cost on account
of some unforeseen scenarios which was not
accounted for during the process of budgeting.

2. Following Diagram Shows The Impact
Of Cost Overrun On Project Situation.

3. • Cost overrun is generally prevalent in
infrastructure, building, and IT projects,
which sees a lot of unexpected costs
during its phase of project completion.
• They are primarily on account of three
factors like political reasons, psychological
reasons, and technical reasons.

4. Characteristics Conti…
• Primarily it is due to lack of financing, lack of
coordination, unplanned cost, or project
delays.
• It is always uncertain, and budgeting for the
same is not possible. It is deemed to happen
when certain phases of a project or business
tend to cross the actual budgeted cost.
• The measurement of cost overrun is different
for different industries or companies.

7. • #1– Estimates
Cost regarding the business may be underestimated
due to factors like personal bias and complicated
procedures involved in the completion of the task.
We can use the reference class forecasting
methodology to enhance the chances of deriving
more accurate estimates. The problem is that the
best of forecasts may prove wrong to calculate the
perfect estimate, and thus keeping a contingency as
a part of the budget is always a good practice to
face adverse scenarios in the future.

8. • #2 – Risk
Risk can be any scenario for which we cannot
assign a probability. They cannot be predicted
earlier and, at times, are not within the control of
the business like natural calamity, which may
delay the completion of a project or vendor
performance, which may eventually hurt the
business. A proper risk management plan may
help the business mitigate the risk to some
extent, but risk stands to be the primary type that
is faced by every business or project.

9. • #3 – Scope Creek
Scope creek is defined as occasions when
unaccounted activities crop up in the project or
business, which was not included in the budget
or the actual cost. It can happen when the
management goes on adding features to the
project as and when it is evolved or required or in
the cases when the project team gets too creative
and begins the inclusion of undocumented
activities. Project management and controls are
primarily designed in such a way to prevent such
scenarios by the constant reassessment of the
budget.

10. • #4– Cost Escalation
Cost escalation is more related to economic
factors like inflation, which may include the
rise in the price of a particular item over a
period that was not accounted for in the initial
budget.

11. “Figuring Out The Core
Causes Of Construction Cost
Overrun Is Essential To Take
Preventive Measures That
Helps Eliminating Risks
Associated With Construction
Projects”

12.  Cost which is unplanned: Unforeseen scenarios may
bring about a couple of activities that were not initially
taken into the plan or budget. It can be due to technical,
political, or psychological reasons.
 Communication Breakdown: A misunderstanding
between two departments or people involved can bring
about unnecessary costs.
 Change in Project Scope: Event, which leads to scope
creek, is one of the prime reasons. Scope creek is
defined as occasions when unaccounted activities crop
up in the project or business, which was not included in
the budget or the actual cost.

13.  Underestimation of Project Complexity: Certain
phases of project or business are so complex that proper
budgeting of it is, at times, a tough job. This is more likely
involved with large, expensive projects.
 Inadequate Financing: Financing serves as the
backbone of every business or project. The capital
shortage may eventually lead to cost overrun, where the
project or the business may face a crunch in funding their
common activities.
 Lack of Leadership Experience: A relatively
inexperienced management or inefficient management
may lead to improper planning of the project and
inaccurate project budgeting. Thus over time, the project
may fall victim to wrong budgeting and fall into a case of
cost overrun.

14.  Absence of Contingency Plan: Business also
suffers when there is no backup planning or a
contingency plan for unavoidable scenarios. A
backup plan is a must, especially for large scale
projects as some deviations from the usual
budgeted cost may cost millions.
 Project Delays: Delays in the project completion
from its usual planned completion eventually
gives rise to cost overrun as those activities which
extend beyond the completion deadline were not
accounted for in the budget.

15. FACTORS INFLUENCING COST OVERRUN
 Delay In Progress Payment
 Inaccurate planning and scheduling of project by
contractors.
 Rainy Weather
 Non availability of experienced technical staff of
contractor
 Excessive work in hands of contractors.
 Poor liquidity of contractors.
 Shortage of labours.
 Delay in approving extra work and variation
 Poor site management and supervision of
contractors
 Ineffective time management of contractors

20.  1. Thorough Project Planning
The best way to stop cost overrun is to plan against it
before executing a project. The more thorough and
accurate your estimates, the more likely you’ll stay within
budget. There are risks, but those can be accounted for
with an exhaustive risk management plan. When planning
for any project, you must consider all possible scenarios,
using historic data, interviews and experience. Once that
plan has been detailed, have it signed off by the
stakeholders of the project, so everyone is on the same
page in terms of expectations.

21.  2. Know Your Vendors
Many projects are going to contract with outside
vendors, whether to do specific tasks, or supply
materials and equipment. A relationship with any
outside vendor opens your project up to cost overruns
that are often beyond your control. Therefore, it’s
critical to do due diligence before relationships are
cemented. First, understand the capacity of the vendor,
and if they’re going to meet your needs. When the
vendor quotes a cost, make sure it’s accurate. Then,
before signing the contract, do a bit of background-
checking to see if the vendor meets deadlines, and
what others have to say about working with them.

22.  3. Keepto PlannedScope
Scope creep is one of the biggest threats to sending a
project into cost overrun. Change requests always bog
down the desks of project managers. These come from
stakeholders or clients, but also from team members. They
all have wants and needs. Many of them may be
appropriate and even beneficial to the project. However,
too many changes can drastically impact the project,
making cost overruns unavoidable. Think long and hard
about the big picture before you increase project scope.

23.  4. Use a ProjectPlanning Tool
It’s a given a good tool is going to make a project
manager’s work easier, add to the productivity of the
project, and increase efficiencies. It will also assist
in keeping cost overrun at a minimum. A scheduling
tool like a Gantt chart is going to help keep the
project on track and prevent cost override.

24.  5. Keep Stakeholders Updated
If there isn’t a clear line of communication
between stakeholders and project managers,
delays are inevitable. Delays lead to cost
overrun. There is too great a risk work will start
on the wrong thing at the wrong time. This
wasted time threatens to send the whole project
off track. Stakeholders as well as teams need
proper communications, but each should get the
right information. Teams want details, and
stakeholders want broad strokes, to make sure the
project is progressing as planned.

25.  6. Monitor Progress
The real-time dashboard from ProjectManager.com
is also ideal for tracking progress of a project as it
happens, not after the fact. Before issues become
problems that threaten to take the project off-track
and over-budget they can be resolved. The real-time
dashboard measures not only the project’s progress,
but the team’s workload, timelines for planned and
actual completion, including project slippage, and
much more.

26.  7. ReassignResources
You’re going to respond by reallocating resources if
you discover a project spending more than budgeted.
But you can also prepare for that scenario by evaluating
resources beforehand, and placing them where they’ll
be most effective. This is especially true with your
most valuable resource: your team. By assembling the
most experienced and skilled team members you can
have a more productive and efficient project. These
resources might cost more, but if you’ve done your
planning and set aside funds you’ll save money on the
backend when there are fewer issues to handle.