Cost overruns and underruns are deviations from the planned budget of a project, and they can have significant impacts on the project's performance, quality, and reputation. In this article, you will learn about the common causes and effects of cost overruns and underruns in projects, and how to avoid or mitigate them with effective cost planning and control.
A cost overrun occurs when the actual cost of a project exceeds the estimated or budgeted cost, while a cost underrun occurs when the actual cost is lower than the estimated or budgeted cost. Both cost overruns and underruns can indicate problems with the project's scope, schedule, quality, or risk management, and they can affect the project's profitability, stakeholder satisfaction, and competitive advantage.
Projects are often subject to cost overruns due to a variety of factors, such as poor estimation techniques or assumptions, scope creep or change requests, inadequate contingency or reserve funds, unforeseen risks or uncertainties, inflation or currency fluctuations, delays or rework, resource shortages or inefficiencies, poor communication or coordination, and contract disputes or claims.
Projects are often subject to cost underruns, which can be caused by overestimation techniques or assumptions, scope reduction or cancellation, excessive contingency or reserve funds, favorable risks or opportunities, deflation or currency appreciation, acceleration or innovation, resource surplus or optimization, good communication or coordination, and contract savings or incentives.
Cost overruns can have a variety of detrimental effects on the project's performance, quality, and reputation, such as a lowered profitability or return on investment, stakeholder dissatisfaction or trust, a damaged reputation or image, increased litigation or arbitration, reduced scope or quality, compromised safety or compliance, increased stress or conflict, and lost market share or competitive edge.
Cost underruns can have a number of positive effects on the project's performance, quality, and reputation. These include increased profitability and return on investment, improved stakeholder satisfaction and trust, an enhanced reputation or image, decreased litigation or arbitration, expanded scope or quality, ensured safety or compliance, reduced stress or conflict, and a gained market share or competitive edge.
To avoid or mitigate cost overruns and underruns in projects, effective cost planning and control techniques should be applied. This could include using reliable estimation methods and tools, defining clear scope and change management processes, allocating adequate contingency and reserve funds, identifying and managing risks and uncertainties, monitoring and adjusting for inflation and currency changes, controlling and reporting on schedule and quality, planning and managing resources and costs, communicating and coordinating with stakeholders and contractors, as well as negotiating and managing contracts and claims.
Regularly review historical data including, materials, direct and indirect costs, including hourly rates etc. Increase skills of staff in areas not meeting estimated targets etc