Understanding cost overrun + prevention techniques

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Does it ever feel like there’s just too much project and not enough budget?

(Does it ever not feel that way?)

It’s not just you — only 34% of businesses report completing projects on budget half the time or better. 

In other words, most businesses (66% of them) go over budget on more than half the projects they complete.

Project managers are constantly concerned with project planning, timelines, forecasting, and even risk management. Yet, despite their best efforts, the actual costs often end up somewhere north of the project estimate (and project budget).

This problem goes by numerous names: project overruns, budget overruns, and the one we’re using for this article — cost overruns.

What is cost overrun?

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Put simply, cost overrun is when a project costs more than it was supposed to. If a project exceeds the budget that clients and/or internal team members agreed to, then the project has overrun its budget.

It’s a simple definition because this isn’t a particularly complicated concept. But let’s be real, “we ran out of money” or “you guys spent too much” doesn’t have the most professional ring to it.  

“Cost overrun” is a more business-y way to phrase it, which is how we ended up here.

But whatever you want to call them, cost overruns are a problem. They cause extra trouble for some agencies because of the fickle, intangible nature of creative work. 

For example, if the client demands a total rework of a deliverable, that work costs your agency real money. If your contract doesn’t allow you to bill for it, you’ll be stuck with a cost overrun you may not be able to fix.

Potential warning signs of cost overrun to be aware of

The good news is cost overruns don’t usually happen without some warning. Client services businesses that learn to read these warning signs can anticipate the common causes of cost overrun and pivot before they put too much of a dent in the operating budget.

Planning and budget issues

The simplest and most common cause of budget overruns is committing to a budget without a full understanding of what you’re committing to.

Vague statements of work — all too common in creative contexts — lead to inaccurate estimates and give clients Titanic-sized loopholes to exploit.

Not having enough detail in your budget or failing to include a contingency plan are other red flags in this category.

One more? Failing to learn from history. Previous projects with the same client or projects of a very similar nature can provide a planning and budgeting template. At a minimum, they can help you predict what you should watch out for this time around. So make sure to use this historical data, not ignore it.

Scope creep and changes

Our other contender for “most common route to cost overruns” is the dreaded scope creep.

Project scopes change frequently, but uncontrolled change or additions to the project scope can sink a project. Promising more (expanding the project’s reach) without getting more (increasing the project’s budget) will leave you wondering why the project wasn’t as profitable as it was supposed to be. 

Not only that, but scope creep can also lead to team member burnout.

Kimberly Sack,  product marketing senior manager at Deltek, explains:

“The impact of scope creep . . . can spread like wildfire if not managed quickly and effectively. It can affect not only your current project but ultimately your entire organization, straining resources and impacting many facets of your business along the way.”

Another manifestation of scope creep, sort of a hidden variety, is when a project or a client requires frequent revisions and rework. Sometimes, this is just a client being a bad client (needlessly picky or high-maintenance, for example).  

But often, high revision rates happen because project requirements and scope were not properly fleshed out to begin with. 

Financial indicators

Sometimes, the finances themselves tell the story. 

Especially in long-ranging, complex projects, it may be difficult to trace any one reason for cost overruns. But you should still be able to see when your spending is higher than expected compared to the planned budget.

Pro tip: Noticing financial red flags often kicks off a broader process of identifying why you’re spending too much. Not sure where to start on that hunt? Try the other warning signs we’re covering in this post.

Miscommunication among team members

On the basic level, all cost overruns happen because people have conflicting ideas about the project.

You think the creative campaign is ready to launch, and the client suddenly wants it all done in a different shade of blue.

One of the creatives on your team spends three working days on something they thought was key to the project — but it isn’t within the scope at all.

So, whenever you notice a higher degree than normal of intra-team miscommunication, watch out — cost overruns could be lurking around the corner. Do what you can to understand and resolve the miscommunication before there are any more dollar signs attached.

Strategies for preventing cost overrun

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Noticing that cost overrun is happening is a big deal — but it still doesn’t solve the problem. These four strategies will help you get to the root issue, preventing costs from getting out of control in the first place.

1. Conduct a cost study before the project starts

Often, analyzing project costs before you start the project in earnest will give you clearer insights into those costs. Armed with more knowledge, you’ll maintain better control of costs and be prepared with a mitigation plan for any project risks, should they turn into reality. 

Not sure where to start for a cost study? Look at project metrics from lookalike projects with other clients, as well as similarly-sized projects from the current client (if they exist).

2. Set clear project expectations

Remember those Titanic-sized loopholes? The clearer and more specific you can make your project expectations, the better. You’ll shrink those loopholes into much more manageable sizes — and maybe even close a few entirely. 

By setting clear, detailed project expectations, you’ll help to mitigate scope creep on your project. You’ll also have better footing when it’s time to say “no” to a requested change. 

3. Accurately assess the amount of labor required

Many businesses undervalue the amount of labor required for a specific project. 

Getting this right is tough stuff. It’s difficult enough when you’re making widgets or car parts. And you’re most certainly not.

For example, in the agency world, not every video or social media caption or piece of brand creative fits neatly into a specific time increment, and rework can quickly balloon the amount of time a specific deliverable takes. Inaccuracies and underestimation are common with labor projection, leading to unexpected costs. 

Inaccurate assessments of required labor in any client services business will quickly lead to cost overrun, so do what you can to account for these variables and unknowns in your initial assessments. (And then add some padding.)

4. Make an effective resource management plan

Part of effective project cost management is creating an effective resource management plan. 

Whether you’re handling project management at a nonprofit, a creative agency, or a Fortune 500 enterprise, a strong resource management plan can help you understand your true resource needs. In turn, you can obtain enough resources upfront to complete the project objectives.

Cost overrun examples

Here are two examples of cost overruns that occur every day.

Let’s say you’re an IT service provider, trying to score a local contract that’s a bit of a big swing. If you land it, you’ll increase your annual revenue by 25%. However, it’s a local municipality with strict budget controls and constraints — and they’re requiring fixed bids.

You bid $87,000 for a contract to take on most of their IT needs, and you win the bid!

Everything’s going great — until a few weeks into the engagement when the scope of their IT infrastructure troubles starts to become clear. Suddenly, you understand that meeting expectations is going to require far more work than you accounted for in that $87,000 RFP.

Here’s another example. Say you’re an architecture firm working with a client on a building design, and part of their contract includes add-on landscaping architecture. As your engagement progresses, you discover major irrigation issues leading to standing water and drainage problems. 

The problems are fixable, but require additional foundation work and structural reinforcement. These additional resources will cost about $20,000 more than what the contract currently outlines, leading to cost overruns. 

Find out how Teamwork.com can help your client services firm prevent cost overrun

Teamwork.com’s suite of operations and project management tools helps client services teams understand and map out project scope from the initial planning phase through project completion. It’s the ideal place to plan your project timeline and track project progress, leading to more successful projects.

With a clear view of your project timeline, you can better understand the implications of scope changes and their impact on cost estimates and project budgets.

Plus, Teamwork.com has powerful integrations with the other software tools you’re using. So you can stay focused on the work itself, instead of fiddling with finicky software or doing the same work in multiple places.

See more of what Teamwork.com can do for your business now - get started now for free, view our comprehensive pricing plans, or book a demo today.

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