Preventing Cost Overrun on Projects: My Top 7 Tips [Plus a Bonus]

The list of prominent project cost overruns is enormous. It runs from large defense contracts to the Sydney Opera House, and from Olympic Games events to the International Space Station. But don’t think that, just because international attention is elsewhere, your small project is immune to cost overruns.

Cost overruns are an occupational hazard for Project Managers. But this does not mean that they are inevitable. Indeed, it’s my proud boast that none of the commercial projects I led were either over budget, nor delayed.

So, what did I learn that enabled me to prevent cost overruns on my projects? And, come to think of it, why does it matter?

Our Agenda

In this article, I’ll cover:

• What is a Cost Overrun, and Why Does it Matter?

Then, I’ll look at my seven (plus one bonus) ways to prevent cost overruns:

1. Careful Budgeting and Estimation
2. Effective Project Planning
3. Scope Management and Control of Change
4. Procurement Discipline
5. Good Governance and Effective Oversight
6. Robust Monitor and Control Régime
7. Effective Project Management Planning and Tracking Tools
8. BONUS: The Nimble Elephant in the Room: Agile
9. Honorable Mentions: Other Factors in Preventing Project Cost Overruns

Let’s go…

What is a Cost Overrun, and Why Does it Matter?

When your project spends more money than its sponsors expected, that’s a cost overrun. And that expectation is set out in your project budget, so one solution is clearly to set a higher budget! That’s not often an option, though we’ll return to budgets in our first tip.

Why Project Cost Management Matters

But this matters because, as a professional Project Manager, your job is to spend someone else’s money and to put their reputation at hazard. So, you need to be careful.

They almost certainly have other uses for money that are not in the budget. So, overruns are probably going to place aspects of their business at risk. And the reputational impact can also have a profound effect on their business. One part of you should always be thinking of your employer’s or client’s cash as your own. Treat it with that much care and attention, and you’ll be on the right track.

So, before we even get to preventative measures, you need the skills to exercise the essential elements of project cost management. The link takes you to a full article, or you may prefer a video:

With good basic project cost management under your belt

Cost Overrun Prevention #1: Careful Budgeting and Estimation

Bloating the budget to ensure there is more than enough cash available is neither ethical nor likely to be possible. But good budgeting practices will give you the best possible chance of keeping within your planned costs.

Estimation

The first among these is good cost estimation. And add to this a few rounds of review, checking, and challenging the thinking, to stress test every assumption. If you can get your base assumptions right, and use sound methods to move from assumption to estimate, your budget is likely to bake in achievable costs.

More on estimation in this guide: ‘Project Estimation: Master the Art and Craft’, and this video: ‘How to Estimate Project Costs: A Method for Cost Estimation’.

Contingency

The second good budgeting practice is to build in sufficient (yet reasonable) contingency. To me, this means avoiding a simple ‘plus X percent’ approach. Look at the various work streams in your project and identify the different levels of uncertainty and risk associated with each. Then, allow different levels of contingency for each.

Cost Overrun Prevention #2: Effective Project Planning

The triple constraint of time, cost, and quality (or scope) ties together cost and schedule. We’ll see, in tip 3, how scope and quality connect too. Good project planning is therefore an essential cost control discipline.

Clearly, schedule delays cost money, so a robust project program is essential. But this also means taking account of the resources (people and materials) that will deliver this.

To help with your planning, you might like this article: ‘Project Planning Process: Navigate the Many Steps You Need’ or this video: ‘Project Planning Process – How to Build Effective Project Plans | Video’.

Couple these with this article (which complements the one you are reading now, rather nicely): ‘Project Planning Mistakes and How to Avoid the 12 Most Scary Ones’.

Team Members as Key Success Factors

Your project plan must thus include rigorous allocation of the right resources. And, when people are key success factors, you must treat them as such. Be sure to plan for, and implement, good training and team-member support throughout your project. For more on this:

• Everything You Need to Know about How to Build a Great Project Team
• Project Team Leadership 101
• Do You Know the Four Essentials of Project Team Leadership?
• Project Team Performance: Boost it with 25 Powerful Strategies
• Effective Teamwork: Do You Know How to Make it Happen?

Of course, getting the right (human) resources is also key, so do check out our article, ‘Project Human Resource Management: Complete Survey of its 6 Themes’, for more on this vital aspect.

Cost Overrun Prevention #3: Scope Management and Control of Change

The third corner of the iron triangle is scope (or quality). And scope creep is one of the major causes of project cost overruns. You budget everything properly and then some stakeholder comes along and says:

‘could you just…?’

And there goes your budget!

We have a video on ‘How to Prevent Scope Creep’.

Change Control

An effective change control process is a critical part of the solution to managing scope creep. It makes sure only the right changes get accepted. And, when they do, it builds the case for them, secures the funding, and can cut other scope items to keep within the original budget. For a full guide to Project Change Control, check out this link.

Or, watch these two videos:

1. Change Control 101 – Your Guide to Project Change Control
2. How to Manage the Change Control Process

Cost Overrun Prevention #4: Procurement Discipline

Another source of leaking cash is whenever you buy stuff: materials, licenses, equipment, or people. Especially people! So good procurement discipline is another way to prevent cost overruns on your project.

I’ll highlight two aspects, and recommend you read ‘Project Procurement Management 101 [All the basics you need to know]’ for more detail.

Tight Tender and Contracting Process

From the tender specifications to day-to-day contract management, the whole procurement cycle is vital. But often the mistakes come at two points:

1. Poor tender specification that is too loose in the specification of what you need, or leaves out certain details. Get this right and you have eliminated a major source of overruns.
2. The contract is not solid, because the wrong people paid attention to it. I don’t say you shouldn’t let procurement professionals or lawyers run this part of the show. But too often the project manager and your technical experts leave it to those people. They fail to spot errors or omissions that you could have. I made a short video, ‘Should a Project Manager Get Involved in Contract Negotiations?’.

For more information, do take a look at our videos, ‘Competitive Procurement: How to Run a Tender Process’, and ‘What goes into Tender Documents? (Getting a Competitive Tender Process Right)’.

Contractor Capabilities

Contractors – whether supplying goods or services – have an interest in being confident about their capabilities and those of their products. This makes it critical that you assess their claims with rigor and objectivity. Look for evidence and, the bigger the impact of a potential project failure or cost overrun, the more scrutiny you need to apply.

Cost Overrun Prevention #5: Good Governance and Effective Oversight

Regular viewers of my videos and readers of my articles will know I am a big advocate for good governance. Because it works. More than that, I observe is a disproportionate impact in preventing project failure… when done well.

Two particular governance approaches will specifically help mitigate the risk of cost overruns.

A Stage Gate Process

A stage gate process adds significant control for you and the governance tier of your project. And you can use it to ensure that your project stays on track, financially by linking the release of funds to gateway reviews.

A Project Financial Officer

On big projects, your role as Project Manager will be huge. So even if you have the skills for effective day-to-day budget monitoring and control, will you have the time? I’d argue the case for a dedicated financial officer for your project – and I’d introduce one at a smaller scale of project than is common. They do not need to be full-time, but they do need to have proper financial training.

Cost Overrun Prevention #6: Robust Monitor and Control Régime

I hope the title of this tip is obvious and doesn’t need explaining. You need to track all elements of project progress if you are to stay in control of your costs. If you do need more information, then I recommend ‘Monitor & Control Cycle: What is it? All You Need to Know’.

I want to focus on one approach that I have found helpful.

Work Package Monitoring from your WBS

I will always use my Work Breakdown Structure as the basis for two things:

1. Creating an Organizational Breakdown Structure from which I can define Work Packages and allocate Work Package Managers
2. Creating a Cost Breakdown Structure that allows me to allocate budget responsibility to my Work Package Managers

Now, I can track spending at a granular level, and hold individuals responsible for their own budget component.

Cost Overrun Prevention #7: Effective Project Management Planning and Tracking Tools

None of the above relies on any form of automation or software. Project Managers like us have been doing all of these things for centuries, using nothing more complex than a paper ledger and a pen (quill?).

But why not harness the power of well-designed software to:

• Make life easier
• Access information more quickly
• Ensure reliable figures (subject to the rule of ‘Garbage in: Garbage out’)

A good Project Management Information System (PMIS) is solid investment in managing costs (as well as much else).

The Nimble Elephant in the Room: Agile

I can’t close this article without addressing the elephant in the room. There are Agile proponents out there who will say that Agile methods prevent cost overruns. And, yes, they do, in the sense that some users take Agile as an excuse for not creating a budget. No budget means no overruns. Simple!

But it also means no control of expenditure. So, what you really get is a failure of accountability and good governance.

Agile as a Way to Prevent Overruns

But agile methods, used well, can create a project that converges more quickly on a robust solution. Used properly, Agile PM can avoid nugatory spending on failing solutions, and provide a mechanism to stop at ‘enough’.

There are many ways that selecting the right agile processes, and applying them effectively can set your project up to succeed. And, by succeeding, I include delivery within your client’s budget.

Honorable Mentions: Other Factors in Preventing Project Cost Overruns

Everything can affect the costs of your project. So, what other factors are relevant in preventing project cost overruns? Here is my list of ‘honorable mentions’.

Stakeholders’ Expectations

A major cause of cost overruns is when stakeholders demand additional work because what the project produces does not meet their expectations. Spending time at the outset to properly consult, inform, and negotiate with stakeholders to match project plans to their expectations is an investment well made.

Quality Assurance

Good QA practices mean a ‘right first time’ mindset. This avoids the need for remediation when either testing uncovers failure modes or the Quality Control (QC) process finds defects.

Leadership and Management

Never underestimate the impact that good leadership and management can have on the running of a project. But, if anything can have a bigger impact, it’s poor leadership and management!

Cost-cutting

I guess the final thing to consider when facing the possibility of cost overruns is the scope you have for cutting costs, to keep your project on budget. There will be many ways you could consider, but often it will be only a few that are technically and politically possible. Examples of options include:

• Reducing quality standards (which can include cheaper components)
• Reducing the cost of resources (either numbers or quality)
• De-scoping your project
• Swapping bespoke components for commercial off-the-shelf (COTS) components
• Check out our videos: ‘Pressure to Reduce Your Project Budget’, and ‘How to Anticipate Future Budget Challenges to Your Project’.

So, to conclude…

Events can conspire against the most diligent Project Manager. But there is no excuse for a failure to control costs. And, even if you cannot completely prevent project cost overruns, I say that you can take many steps to minimize them.

What Are Your Cost Overrun Ideas?

What are your ideas for preventing cost overruns? If I have missed anything you have tried, please do let us know, below.

Disclosure: Thumbnail image made with ChatGPT.