There are many reasons companies start projects. Many departments can work on different projects in a medium-sized to large organization. The Project Management Office (also known as PMO) manages the successful execution and initiation of projects within an organization. Project cost overruns are a common occurrence in every organization.
In this post, we will cover the following:
Three examples of real-life project overruns
Common reasons for project cost overruns
How to avoid and manage project cost overruns
The role of the Project Manager Officer in project success
Let’s take a look at each one one by one.
Researches on Project Cost Overruns
Before we get into the details of project overruns, let us do some research on project cost overruns.
Analyzing 1,471 projects was done. We compared their budgets and projected performance gains with the actual costs and outcomes. This Harvard Business Review (HBR), research revealed that the average overrun was 27%. However, this figure hides an even more alarming number. The graph of the budget overruns for the projects shows a “fattail” – a large number with huge overruns. HBR found that nearly one-sixth of the projects it studied had a black Swan, with an average cost overrun of 200% and a schedule overrun close to 70 percent.
We found that schedule delays, incompetent resource, and project cost overruns were the most common problems in project delivery organizations after surveying our 425 participants.
If project cost overruns are a problem in project management, then what are the causes and how can they be prevented? And how can we manage it if it is not possible to prevent it? Let’s look at them now.
Real-life Project Cost Overrun Cases
We will be presenting three real-life budget overruns due to different reasons.
Case#1: A sales manager sells a technically impossible solution. The result: The project team works on new features, which causes a 17% budget excess.
Case 2: The vendor team’s access papers to the premises are not approved by HR on time. Result: The vendor visits the premises two days later, and it costs $13,000 to the company.
Case 3: Two days after the deadline, the finance department approves project budget. The result: The project team’s resources are left waiting for two days, and the organization is charged $37,000.
These are real-life cases of project overruns from our clients. We have trained over 200,000 professionals. I’m sure you have also experienced similar cases where “non-project” people were responsible for project overruns. We have therefore launched PM Core(tm), Project Management for Business People Training program, to increase project management awareness among nonproject people.
Our findings are supported by PMI’s research on PM competency. According to PMI’s research project management competence of business people can increase the speed and quality of a project’s completion by 49% and 40% respectively, according to PMI.
Reasons for Project Cost Overruns
There are many reasons that project costs can exceed budget in an organization. Uncertain scope definition, insufficient estimation, unanticipated risk, incompetent resource, and unclear scope definition are all common reasons for project cost overruns. These reasons will be discussed in detail below.
1- Uncertain Project Scope
A scope that is unclear, ambiguous, or confusing can cause problems. The project team will only do what they think they understand from the scope. Sometimes, resources make assumptions that could end up being wrong. There will be undesirable outcomes if the scope wasn’t clearly defined, communicated well, or understood correctly. These may lead to the need for f