Proper planning is the key to a successful project, but of course, there are a few problems beyond the realm of planning as it is not always possible to predict what would happen after a project starts.
One of the major problems is the cost overrun. Besides the underlying nature of massive and complex projects, poor execution of project management leads to increased costs. A good project management team must be capable of identifying the possible sources of cost overruns early and mitigate their effect.
This article will present the 5 most elemental and evident technical reasons for the cost overruns and the ways to dodge them while working on a project. Let's get started!
1. Design Errors
One major reason for cost overruns in most projects is design errors. Project design is the base of everything. In order to execute a project, proper representation of the client's requirement, as well as the blue print to achieving good technical input are required, which are both based on the project design. In this practical world, design with errors means the wrong or insufficient representation of the project deliverables.
Let's try to link this scenario to the triple constraint [Figure 1] and see the effects. Wrong design leads to the wrong application of plans and techniques in the project. Later, in the execution phase of the project, these design errors start showing up, causing extra works, change order, etc. which lead to delays in schedule or in the worst-case scope change, which eventually leads to cost overruns.
2. Unfeasible Cost Estimate
An unfeasible cost estimate is another common reason for project cost overruns. Cost estimation is a vital part of a project, which goes hand in hand with the project design phase. If the cost is calculated based on a hunch [imperfect estimation] without considering proper escalations and contingencies, then the project undoubtedly faces cost overruns. This might not be detected in the early phases, but in the later stages, it becomes more evident.
3. Scope Change
Scope change could lead to a delay in schedule or cost overruns. The scope is the term that defines the entire deliverables that are expected at the end of a project. Therefore, it can be said that all project plans, estimation, schedule, quality and baselines are usually designed in the initial project scope.
Project scope change could occur as a result of wrong initial scope definition, inherent risk and uncertainties, sudden change of interest, project funding change, etc. A change in the project scope during execution creates a need to change the entire initial project plan, which results in the redevelopment of the budget, schedule, quality and even the whole project team. This means more time and resources will be needed compared to the initial baseline.
4. Project Complexity
Project complexity often is a contributing factor which results in project cost overruns and schedule delays. Large projects are usually at risk of overrunning their budgets because the larger the project, the bigger the complications that may arise during the execution. With the increase in a project's implementation time, the project can be affected by factors like inflation, change in material prices and exchange rates, all leading to a requirement of additional budget to supplement the initial budget for the completion of the project.
Apart from this, as the complexity of the project increases, the need for being more precise increases while executing the plans. Neglecting this might cause a chain of delays, thereby significantly shifting the schedule of the project, which in turn results in budget overruns.
5. Lack of Resource Planning - Inappropriate and Inadequate Procurement
Another common reason for budget overruns and schedule delays is failing to plan the available resources effectively. Failing to estimate the resources that would be used during the project might lead to under assigning or over assigning resources to a task. This means an increase in the duration or a blockage, respectively.
Resource planning also matters with regards to the contract management system. Inadequate, irrelevant or unclear information in the contract may cause long chains of negotiations, disputes, arbitration and mitigation due to work change orders and the quest for reviewed contractual agreement with new budgets and schedule. The result will no doubt be a project delay and cost overrun.
Conclusion
Even though cost overruns and schedule delays may seem to be inherited in most projects, they can be reduced or eliminated by controlling and monitoring projects meticulously. Identifying the causes of overruns and delays and taking corrective actions in the earlier phases is a must in this sense.
About Cleopatra Enterprise
Cleopatra Enterprise is the innovative and industry-leading Project Cost Management Software for industries such as oil & gas, chemical, mining, pharmaceutical, infrastructure, and construction industries. With a mission to help companies complete projects within time and budget, Cleopatra integrates cost estimating, scheduling, cost control, and project benchmarking.
For more than 20 years, Cleopatra Enterprise has been used by more than 500 industry-leading companies in 75 countries to control technical projects and turnarounds and improve project performance. If you'd like to talk to an expert about our software Cleopatra Enterprise, please request a demo now.
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