How To Avoid Project Cost Overruns
Whether you’re working for a client or on an in-house project, there are fewer conversations more difficult to have than the one that starts: “We’ve gone over budget.” Many of the projects that hit the local and national news are initiatives that went wildly over budget. You can probably think of projects in your industry that are known for overspending. And as most executives would rather their names were out of the headlines (at least in connection with failing projects), it’s prudent to avoid cost overruns.
Of course, cost overruns aren’t always big news stories. Small cost overruns might seem insignificant individually, but if every project overspends by 2%, that adds up across a year. It could mean the difference between end of year bonuses for everyone or a stressful New Year. Overspent project budgets aren’t inevitable. With some good planning, robust tracking and an engaged, supportive group of stakeholders, you can keep your projects on budget every time. Here are our top tips for how to do exactly that.
1. Carry out detailed planning
Good budget control starts with good planning. Often, cost overruns happen because the project wasn’t effectively planned in the first place. The team left out a significant requirement – that’s an extra cost. The estimates weren’t comprehensive – that puts up the cost.
Project sponsors and clients often want the team to start working as soon as possible. And by that, they mean completing the execution of the work. They often don’t see the value that comes from thinking time. But the planning and initiation activities that help start a project effectively and with the best possible chance of success. However, an appropriate length of time planning will save you days, weeks and even months of work further down the line, and keep costs in check.
Avoid the overspend:
- Choose an estimating approach that is suitable for the work you are estimating and apply it sensibly
- Spend enough time planning the work – rush and you are more likely to miss something
- Use analytics from previous projects to check whether your estimates are realistic, especially comparing projects from the same client or in the same industry.
2. Equip project managers to track progress
Give project managers the tools they need to adequately track and manage their projects. Many cost overruns happen because project managers didn’t know the project was going over budget. Good project management software and expense tracking will help you spot early trends and do something about them.
Professional services tools should enable project managers to:
- Create detailed project schedules for the work in a format that works for the team
- Share the plans to manage expectations and to gain buy in for delivery dates
- Allocate resources to tasks efficiently, in a way that provides transparency for the whole team
- Track forecasted and actual expenditure.
When you’ve got a detailed, published, approved and communicated project schedule and associated cost information, you can work with confidence. Project managers should be making time each week to review forecast and actual budgets, forecast and actual resource allocation and progress against the project schedule. With this information, they can address any problem areas before they become too big.
Avoid the overspend:
- Give project managers access to professional project management tools
- Make sure they know how to use them efficiently
- Use peer reviews to provide an informal check on progress and another pair of eyes to spot potential problems.
3. Manage scope creep
Scope creep is where the boundaries of the project are pushed over time, and more and more “stuff” finds its way into the project. It’s the, “Can you just…?” queries from clients. It’s the, “Could you also add…?” requests that are hard to say no to. All of these seemingly small interactions add more work to the project. And, as more and more professional services work is being carried out under fixed price contracts, more work doesn’t equal more revenue. In fact, it equals the same revenue for more work, undermining the profitability of a project.
Even when you aren’t working on a fixed price basis, you still might not choose to have your project team tied up delivering little extras for project sponsors. In some cases, the situation can get so extreme that the project never closes! The project team become a group of people delivering ad-hoc enhancements. While that might be OK, you want to end up in that situation through a conscious choice, not because it happened accidentally and now you can’t do anything about it.
Avoid the overrun:
- Educate your project team so that they can identify scope creep
- Implement a change management process and stick to it
- Make sure project contracts allow for extra work to be carried out at an additional cost.
4. Engage stakeholders
Another key reason for budget overruns is when lack of stakeholder engagement causes delays. It’s sometimes difficult to work out exactly who needs to be involved in the project, but if you get it wrong, it can be a costly mistake. For example, if your project team fail to include a department in the requirements phase, you may be held up later – when you realize they should have been involved. You’ll have to rework the project, building in their requirements. All that costs more and takes more time than if you had identified their requirements at the beginning and built them in from scratch.
Equally, gaining authorization on a project can take time and add to project cost if the right people aren’t aware that the project is happening. Involving extra people in the approval process adds effort all round.
Avoid the overspend:
- Establish the core stakeholder group as early as possible
- Involve them in decisions that affect them
- Ask them if the project affects anyone else, and involve those people too
- Make sure the right approval process is in place, on your side and on the clients’ side.
In summary, avoid project cost overruns is possible when you take a sensible approach to planning and monitoring the work. Good planning gives you a solid, realistic starting point. Good monitoring helps you identify which areas are likely to go off track, giving you enough time to make changes to the project management approach, so you can bring the work back in line with expectations again.
One of the fundamentals of avoiding cost overruns is being able to accurately track time. Check out our blog 5 Tips for Managing a Remote Workforce, which shows you how to go beyond simply capturing time to efficiently managing the workforce.
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