Cost Overrun Management: Best Practices for Agency Success
Cost overrun can happen to the best of us, but it doesn’t have to tank your project’s success.
In this guide, you’ll learn more about the main causes of budget overrun, how it impacts your project, and best practices to successfully safeguard project delivery.
Key Takeaways
- Cost overrun is defined as a difference in the planned and actual cost of a project.
- The negative effects of cost overruns often include decreased return on investment (ROI), lower quality of project deliverables, and overall reduced operational effectiveness and profitability.
- Cost overruns stem mainly from oversimplified planning, unrealistic schedules, shifting requirements, and poor communication.
- Some key strategies for mitigating cost overruns are careful project estimation, focusing on risk management, and implementing the latest project management tools for improved analytics and project strategy.
Defining the Cost Overrun
A cost overrun is an increase in your project budget, usually due to unexpected costs such as technical issues and changes in scope, or inaccurate estimations in the project plan. Overruns can have a significant impact on your project accounting by causing delays, reduced quality, and ultimately decreased profitability.
Cost overruns within 5-10% of the original budget are usually considered minor enough to be covered by internal adjustments, such as choosing cheaper solutions, lowering ambitions, or using contingency funds if allocated. Above 10%, project management is usually required to request additional funding to manage the overrun.
However, it’s important to remember that specific thresholds and responses can depend highly on your industry, agency, and type of client engagement.
The Financial Effect of Cost Overruns
According to research by McKinsey, large IT projects run 45% over budget and 7% over time, while delivering 56% less value than predicted. Although most of these challenges are successfully weathered by agencies, as many as 17% of projects underperform so badly that they threaten the continued functioning of the business.
Cost overruns often have an impact on:
- Return on Investment (ROI): Cost overruns can lead to projects going over budget, which results in lower ROI. Additionally, time delays can impact the financial planning of an agency, impacting cash flow and the ability to invest in other opportunities.
- Quality of deliverables: In order to mitigate cost overruns, project managers might have to resort to cutting certain tasks from the scope and reducing quality. This can lead to failed client expectations, reducing overall satisfaction and the potential for further cooperation.
- Resource utilization: Unexpected changes such as scope creep might require people to be reallocated from different projects. This can impact the overall effectiveness of the organization and result in overburdening certain key team members, impacting morale and productivity.
Learn how to optimize your resource utilization in crisis times:
Main Causes of Cost Overruns
When it comes to project management, research distinguishes three main common causes of cost overruns:
- Viewing the project statically: productivity is assumed as a constant, the possibility of reworks isn’t factored into scheduling, the interconnectivity of tasks is diminished, etc.
- Oversimplifying the project planning and execution process in order to reduce the complexity for project managers, i.e., analyzing design functions individually
- Perceiving each project as unique instead of taking a systematic approach and applying learning between client engagements
Source: The Dynamics of Project Performance
According to the McKinsey research mentioned above, some additional causes of overrun on IT projects include a lack of focus (13%), unrealistic schedules (11%), shifting requirements and technical complexity (9%), skill issues (6%), and other causes. These factors can be attributed to poor planning, inadequate resource allocation, and lack of communication between project stakeholders.
Strategies for Preventing Cost Overruns
While preventing cost overruns might not always be possible, there are some strategies and best practices you can utilize to mitigate them.
The essential part of managing your project costs comes during the project planning phase. This includes creating detailed, well-researched project plans that accurately reflect the scope, timeline, and resources required.
However, providing an accurate time estimate that considers potential project risks is not always simple. Utilizing project management software with real-time insights can help you identify the best project team for the specific project, as well as implement proper planning across all task levels.
This is a person, this is how much that person makes, this is our overhead, this is how much we’re charging our client. The tool gives us full transparency, across the board. From our standpoint, Productive erases the seed of doubt.
Manage Your Project Cost Overrun
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Risk Management for Positive Project Outcomes
Effective risk management is another key strategy. This involves identifying potential risks early in the project life cycle and developing mitigation strategies for each identified risk.
Some examples of potential risks are:
- Skill Risks: These risks arise from discrepancies between the project’s requirements and the team’s capabilities. Good workforce planning can avoid the risk of capacity gaps and project delays.
- Scope Risks: Project scope risks involve the possibility of objectives expanding beyond the initial plan. While scope creep is a reality for many projects, implementing a change control process to evaluate the impact of any proposed changes can help manage it.
- Communication Risks: According to research by PwC, effective communication is associated with a 17% increase in finishing projects within budget. Misunderstandings or information gaps are best addressed by establishing effective communication channels and points of contact, as well as holding regular feedback sessions.
Industry Trends for Project Management Teams
Finally, it’s good to consider some of the best agency project management strategies.
Methodologies such as agile have seen significant growth within software development teams, increasing from 37% in 2020 to 86% in 2021. The same research from Digital.ai reports that the trend is repeated in non-IT industries, with adoption being doubled in a year’s time.
Since agile project management emphasizes flexibility, iterative progress, and adaptability to change, it can be useful in quickly addressing issues such as inaccurate project estimates.
productive’s Gantt chart is a key tool for managing project scope
Additionally, when determining the composition of your team and shaping your agency’s hiring strategy, evaluate the potential benefits of integrating a specialized role like a cost estimator. Cost estimators focus on predicting the costs associated with a project, including labor, materials, and other expenses. Their primary focus is on creating accurate cost forecasts and budget proposals.
Software Solution for Managing Cost Overruns
According to The Global Agency Landscape 2022 Report, 52% of agencies use disparate tools with some level of integration, while only 14% of agencies utilize an integrated platform that enables real-time analysis.
Despite these results, comprehensive software solutions can bring many benefits to your project budget management, as well as overall business performance. This includes:
- Standardized data: A unified platform allows you to maintain data consistency, making it easier to compare and analyze information across different projects or departments.
- Simplified allocation: Getting insights into the availability of your resources across multiple projects is simpler with tools that keep everything in one place, including time off requests.
- Streamlined administration: All-in-one tools can greatly reduce the effort and time necessary to complete repetitive tasks by combining various features such as billing, project documentation, sales pipelines, and more.
An example of a popular comprehensive platform for agency management is Productive. We’ll explore some of its key features in more detail in the following section.
Productive – The Best All-in-One Tool for Managing Budget Overruns
Productive is an integrated software solution for agencies of all shapes and sizes. It offers a variety of financial management features that support project cost overrun management, including budgeting, billing, project reporting, financial forecasting, and more.
GET FULL CONTROL OVER YOUR PROJECT BUDGETS WITH PRODUCTIVE
Key Features Include:
- Budgeting: Productive provides project budgeting with cost rate and budget management for hourly-priced, fixed-priced, retainer, and hybrid models. With its automated warning system for budget overruns, you can set up custom alerts to support early detection and proactive management of potential cost overruns.
- Billing: With Productive, you can streamline your cash flow with integrated invoicing and purchase order features. Pull billable hours data or simply invoice the remaining amounts on your fixed budgets. With purchase orders, you can control your external expenses on one platform.
- Resource Planning: Productive’s resource planning enables real-time insights into utilization, profitability, and revenue. By scheduling your resources, you can view your projected revenue, profit, and budget burn during the entire project timeline. Any changes to your scheduling are immediately reflected, enabling data-driven change adoption.
- Time Tracking: Productive’s time tracking feature allows for easy recognition of billable and non-billable hours. Employees can simplify their time management with an integrated timer that has a desktop widget, as well as manual entry and automatic creation with bookings. The added time off management feature eliminates the need for an additional HR tool, increasing operational efficiency.
- Reporting: Productive offers more than 50 agency-focused templates that can be enriched with project-specific data thanks to custom fields. Create reporting dashboards, send updates via email, and get key data from sales, tasks, resourcing, budgeting, and other essential project activities.
Additional features of Productive include Project Management, Sales, Docs, and Automations.
Productive also includes integrations with specialized accounting software, such as Xero and QuickBooks. You can pull data from Productive, copy your invoice into external apps, and continue working from there. Other integrations include Google Calendar, Slack, HubSpot, Zapier, and more.
Productive provides a 14-day free trial, so you can check out what it offers first.
Responding to Unavoidable Cost Overruns
Even if you’re utilizing the strategies mentioned above and using the best software solutions available, cost overruns might still occur. In these times, it’s important to understand how to respond to them effectively.
I think that in project management there’s a tendency to focus solely on profitability, but it’s inevitable that projects will go over budget, and that’s ok. However, it’s important to have transparency on where that stands, and Productive gives us that visibility.
Read the full story: Seven2 Saves Hours on Operational Tasks Each Week Using Productive
Here are the main steps to take once you’ve identified a current or potential cost overrun.
- Analyze: First, determine the cause of the cost overrun — did it happen because of scope creep, inaccurate cost estimates, poor communication, or something else entirely?
- Review: Go through your current project plans and adjust them to accommodate for the cost increase. Consider strategies such as reducing non-essential expenditures, reallocating resources, or renegotiating contracts.
- Communicate: During this phase, it’s important to keep all essential stakeholders up to date. Along with improving your client relationships, transparent cooperation is an important step toward finding the best solution.
- Learn: Make sure to note down your findings and integrate them into your future project planning and risk management strategies.
Takeaway: Managing Cost Overrun for Professional Services
Managing cost overrun is a core process for keeping your projects on track, even when they’re outside of the original project budget. The best project manager will utilize a combination of strategic planning, diligent risk management, and transparent communication in order to tackle these challenges.
In this process, modern software solutions play a critical role. They can help streamline your day-to-day processes, gather key agency insights, and drive improvements for all future client engagements.
If you’re looking for a tool that combines project and financial management into one intuitive platform, consider booking a demo with Productive.
FAQ
What causes cost overruns?
The main causes of cost overruns are poor estimates during the project planning phases and project delays caused by scope creep or unexpected changes. Regular monitoring and clear communication can help mitigate these issues.
Is cost overrun a risk?
Cost overruns can pose a risk to your project progress and agency finances. Some best strategies to manage this risk are to monitor costs regularly and implement adjustments when necessary, as well as maintain transparent communication among all stakeholders.
What is cost time overrun?
Cost and time overrun refers to a project exceeding its original budget and timeframe due to internal or external factors. Both of these factors significantly impact project success, so addressing them promptly is crucial to avoiding additional expenses.
What are cost overruns in project finance?
In project finance, cost overruns are unexpected expenses that exceed your initial budget estimates. They’re one of the main challenges of successful financing, including revenue recognition and keeping track of expenses. Inaccurate estimation, schedule delays, or changes in scope often cause cost overruns.
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