What are the most common causes and impacts of budget overruns and underruns?

1 Causes of overruns

Budget overruns occur when the actual costs of a project or activity exceed the allocated or forecasted budget. Poor planning and estimation, scope creep, ineffective management and control, and unforeseen events or issues are some of the most common causes of overruns. Poor planning and estimation can occur due to unrealistic assumptions, incomplete information, or insufficient analysis. Scope creep is when the project or activity expands beyond its original objectives, requirements, or specifications, without adjusting the budget accordingly. Ineffective management and control is when the project or activity is not monitored, tracked, or reported properly, leading to delays, errors, rework, or waste. Unforeseen events or issues are unexpected or unpredictable factors that can increase the costs or reduce the revenues of the project or activity.

2 Impacts of overruns

Budget overruns can have a range of detrimental impacts on the project or activity, such as compromising quality standards, extending duration, reducing scope, and causing stakeholder dissatisfaction. This can lead to reduced customer satisfaction, efficiency, value, and trust. It can also affect the project's reputation, competitiveness, productivity, profitability, functionality, and innovation. Furthermore, it can result in frustration and conflict among stakeholders such as customers, sponsors, investors, suppliers, or employees.

3 Causes of underruns

Budget underruns occur when the actual costs of a project or activity are lower than the allocated or forecasted budget. Common causes of underruns include overestimation and contingency, scope reduction, effective management and control, and favorable events or issues. Overestimation and contingency can lead to a budget that is too high for the actual needs and outcomes of the project or activity, while scope reduction can be caused by lack of customer demand, stakeholder support, or external opportunities. Effective management and control involves clear communication, coordination, accountability, and authority among the project team, sponsors, and stakeholders. Favorable events or issues can decrease costs or increase revenues of the project or activity.

4 Impacts of underruns

Budget underruns can have positive or negative impacts on various aspects of the project or activity, depending on how they are managed and communicated. Quality, schedule, scope, and stakeholders can all be affected. For example, a surplus budget can improve quality standards, shorten the duration, expand the scope, or be shared with stakeholders to increase trust and loyalty. However, if quality is already satisfactory or the schedule is optimal, the extra budget may not add much value or create unrealistic expectations. Additionally, if the surplus budget is not communicated or distributed fairly it could lead to confusion, resentment, or conflict among stakeholders.

5 How to avoid or mitigate overruns and underruns

Budget overruns and underruns can be avoided or mitigated by following some best practices and techniques, such as creating an accurate and realistic plan based on reliable data, sound analysis, and reasonable assumptions. Additionally, the scope should be managed clearly and flexibly, with regular monitoring and tracking of the budget to identify any deviations. Proactive risk management should be used to prevent potential issues and any unforeseen events should be addressed quickly. Finally, transparent communication and fair distribution of rewards or penalties should be upheld.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?