What is budget (cost) overrun & how to foresee it

As humans, we tend to be optimists. This can be a serious problem when creating project budgets. Instead of being rational, cautious, and precise, our perception gets clouded, making us think things don’t take as much time, effort, or money as they actually do in reality.

But it’s not just our eternal optimism that gets us into financial project trouble. Sometimes, it’s things we have no control over. Things that pop up out of the blue and surprise us just when we thought everything was going to plan.

To get to a point where not even surprise costs can catch you off guard, you either need to have a whole lot of experience, or you need to read this article. We tell you what budget overruns are, what causes them, and how to foresee and prevent them.

What is budget overrun or cost overrun?

Budget overrun or cost overrun is when the final cost of your project turns out to be greater than you planned in your original budget.

This can happen for five reasons:

• Poor planning or miscalculated budget
• Unexpected costs midway through project
• Scope creep
• Delays & timeline changes
• Inefficient resource allocation

According to a KMPG report, while 85% of survey respondents say they have completed more than 50% of their projects in line with business intent and to their stakeholders' satisfaction, only 74% say more than half of their projects stayed within budget.

That means while overall project success rates are high (when it comes to projects fulfilling their purpose), cost overruns are still more common than most businesses would like, and landing a realistic budget remains one of the biggest challenges for project managers.

So, is there anything you can do to prevent blowing the budget, or at the very least, minimize the blowout?

To find out, let’s take a deeper look at some of the causes and the warning signs you can pick up at the start or during your project.

Causes of cost overruns & how to foresee them

The biggest problem with budget overruns is that by the time you identify the cause, it’s usually too late to make changes that will lessen the negative cost impact. In many cases, it’s a matter of taking learnings from past projects and applying them to future plans.

There are four key causes that lead to cost overruns. We explain each one in detail and give you a couple of tips on how you can identify them as early as possible.

Inaccurate estimates (time, resources & cost)

If there’s one thing that’s sure to cause a budget overrun, it’s an inaccurate estimate. These miscalculations made in the early project planning phase can become ticking time bombs that trigger each other during project execution.

Most inaccurate estimates are made with time, resources, and costs. Here are some ways to spot them early on.

Time:

• Vague task descriptions
• Large tasks not broken down into sub tasks
• No buffer time included
• Setting time estimates without historical data as benchmark
• Not taking business environment conditions into account

Resources:

• Misalignment between actual resource availability
• Overestimation of resource capacity or efficiency
• Unaccounted sick or holiday leave
• Inaccurate skill assumptions

Costs:

• Underestimated resource costs and market changes
• Overly broad or undefined project scope
• Inaccurate resource or labour estimates
• Not including hidden costs 

How to foresee inaccurate estimates

Project managers need to plan their budgets with the expectation their estimates will end up being off the mark to some point. So, when you set a time, resource, and cost budget estimate, you should always incorporate a buffer.

The recommendations are:

Unaccounted overheads (operational costs)

So many project plans fail to include all overheads in their costs. These are things like administrative and support function costs, utilities, third-party costs, and regulatory and compliance changes.

When you don’t account for planned and unplanned indirect costs, two things happen that cause your budget to overrun:

1. Tap into core project task budget – To make up for these unaccounted costs, chances are you’ll have to tap into core project deliverables budget, taking valuable funds away from your primary mission.
2. Utilize direct project resources – The other option is to utilize your project-centric resources to avoid paying for additional support. This might put a strain on your team and extend their task delivery timelines.

How to foresee unaccounted overheads

There are a couple of ways you can foresee the most common missed overheads:

• Make a list – Make a list of all your overhead costs and have an experienced colleague review it to see if you’ve missed anything.
• Look back at past projects – Take a look at your past project closure reports and, specifically, your financial summaries to see what unplanned overhead costs ended up impacting your project budget negatively.

Scope creep (add-ons during project)

Highly experienced project managers have honed their skills and know how to manage scope creep. However, if you’re relatively new or are working on a larger or more challenging project, you might fall victim to pushy stakeholder requests for add-ons.

Scope creep causes a budget blowout on three fronts.

More features

The first and most common is requests for more features.You might have one or several project members or stakeholders making suggestions to add or expand items or features to the original project plan. These may be valid suggestions, but because they haven’t been thought through and analyzed in detail. The risks associated with adding them are extremely high.

More funds & resources

If you choose to succumb to suggestions and include additional items to your plan (no matter how small or large they are), you automatically create a huge discrepancy in your budget and resource allocation plan. Because this item or feature was not planned for, the project doesn’t include any information around the funds or resources required to deliver it.

More risk factors

Aside from all the risks that exist because this was a last-minute addition, this invading new item may completely steer your team’s focus off the primary goal of your project. It can quite literally derail your entire project and escalate risk factors that may not have been an issue initially.

How to foresee scope creep

To foresee scope creep, you need to be continuously alert to warning signs that could lead to additional items being added to your project deliverables. Some of these signs include:

• Early stakeholder insights – During the project scope development stage, you find stakeholders are divided on whether to add or leave out certain features and it’s a constant discussion item.
• Project not going to plan – Another scenario where scope creep can occur is when the project isn’t progressing well due to the lack of a vital feature or element that was missed in the initial scope agreement.

Unexpected circumstances (resource, industry changes & tech failures)

Things rarely go to plan; that’s why great project managers always have contingency and change management plans in place. They are there for all the what-if situations that might become your reality.

Some of the most common situations where unforeseen circumstances change your budget balance include:

Resource and industry changes:

• Loss of project sponsor or team member
• Regulations linked to your project initiative may change
• Industry or market changes make project iterations necessary

Delays and disruptions:

• Delay in funding or approvals
• Leadership or strategic business changes
• Late deliverables affecting timelines
• Technology and paperwork clearance

Tech failures:

• Inadequate tools to run the project
• Actual tech failures where work ceases

How to foresee unexpected circumstances

This group of causes is hard to foresee because they are unexpected hiccups that ‘might’ happen. However, in some scenarios, common sense and experience might help you see them coming before they arrive.

• Previous experience – If you’re working with a tech provider or team member you’ve had issues with in the past, either change the provider or adjust your plan to make up for potential delays.
• Volatile industry or business environment – Leadership and strategy changes within the business or government, as well as regulatory changes create volatile environments for projects.

How to prevent budget (cost) overrun

The best way to prevent a budget or cost overrun is to plan thoroughly and use the right project management tools. These two vital things will make it easy to monitor and keep on top of your project budget, plan, and timeline.

Build a comprehensive budget plan & breakdown

When we say comprehensive, we mean your entire project budget plan needs to be broken down to the finest detail. It needs to include absolutely every possible cost, and you may even want to factor in a miscellaneous cost for unforeseen circumstances. If you’re an agency and want some tips on how to create a realistic budget plan, then check out our project budget guide for agencies.

When you finalize your budget plan, you can use a tool like ActiveCollab to set a project budget so you can track and monitor spending. The tool has a budget tracker that shows you what portion of the budget has been spent and an alert that notifies you when you’ve spent 80% of your budget.

Time-track billable & non-billable tasks

If you’re looking to manage your overhead costs better, one way to do that is by time-tracking billable and non-billable hours and tasks within your project. This will give you a clear breakdown of how your team’s working hours are distributed across client deliverable tasks compared to in-house administrative tasks. Ideally, you want:

• 70-80% of your people’s time to be dedicated purely to client projects
• 20-30% to internal projects like innovation, growth, and development

ActiveCollab lets agencies and service businesses set tasks and expenses as billable and non-billable, and it also lets you track your team’s hours. At the end of the week, month, or quarter, you can view your reporting dashboard to see if you are within your profitability and budget margins.

Use previous projects to set realistic estimates & allocations

One of the best ways to achieve realistic cost, time, and resource estimates is to look at your historical project data. Ideally, you want to revisit projects that are similar to the one you are running to see how much time and resources certain tasks took.

When you use ActiveCollab to run your projects, you can view timelines like the one below to see exactly how much time certain tasks took. You can then base your estimates on real-life figures and add additional time buffers just to be sure you stay within a safe zone.

Monitor progress & deviation from initial budget plan

While tracking project progress might not completely prevent budget overruns, regular monitoring can minimize cost blowouts. This is because you’ll catch potential budget risks early and take action before they become a bigger problem.

When you set a project budget in ActiveCollab, you can track spending via the dashboard, and set multiple, customized budget alerts like the ones below to notify you when cost reaches a specific percentage value. This can serve as your red flag warning.

Use ActiveCollab to prevent budget overruns & monitor costs

A budget or cost overrun is what you get when you spend more money than you have on a project. It can be a creative project like a marketing campaign, a software product launch, or any other project that has a set budget, limited resources, and a concise timeline to stick to and follow.

ActiveCollab is a platform that helps all types of teams manage projects more efficiently and prevent cost overruns. It does this by giving you the tools you need to have a clear overview of how your project is tracking against your initial plan from start to finish, which is exactly what our budgeting and profitability feature is about!

For every project you create, you can allocate a set budget to the project and individual project tasks. By setting hourly rates and dividing tasks into billable and non-billable, you can quickly see what proportion of your funds are being spent on project deliverables and how much is going to overheads.

So, if you’re a service business delivering projects for multiple clients simultaneously, and you need a more robust system that will alert you to potential budget overflows and risks and help you make better time and budget estimates for future projects, ActiveCollab might be the tool for you.

The only way to know is to try it. Sign up for our 14-day free trial or book a demo to have one of our people walk you through the platform.