Budget overrun is an unexpected increase in project cost related to the planned budget. It occurs when the actual cost of a project exceeds the initial budget set for that project. A budget overrun can occur due to a number of reasons, including miscalculation of costs, underestimation of project duration, fluctuations in currency values, unexpected delays, and sudden changes in scope. To prevent budget overruns, project managers must closely monitor costs and progress, and adjust the budget accordingly.
Example of budget overrun
- A construction project that was initially budgeted at $2 million ended up costing $2.5 million due to unforeseen circumstances such as bad weather and rising material costs.
- A software development project was scheduled to be completed within three months, but took six months due to unexpected bugs and technical issues that had to be resolved. The additional cost of the project was $500,000.
- A marketing campaign that was expected to cost $500,000 ended up costing $1 million due to higher-than-expected costs for media placement, printing, and other related services.
Best practices of budget overrun
- Create an Accurate Budget: A well-defined, accurate budget is the cornerstone of a successful project. By creating a comprehensive budget that accounts for all expected costs, project managers can avoid budget overruns.
- Monitor Spending: Monitoring spending throughout the project is essential for avoiding budget overruns. Project managers should keep track of all expenses and compare them to the initial budget.
- Re-Evaluate the Budget: Re-evaluating the budget periodically throughout the project is important for avoiding budget overruns. As the project progresses, the initial budget may no longer be accurate. Project managers should adjust the budget accordingly to ensure that it reflects the current needs and costs of the project.
- Communicate with Stakeholders: Communication between the project manager and the stakeholders is key to keeping the budget on track. By keeping stakeholders informed of the project’s progress and any changes to the budget, project managers can ensure that any concerns are addressed before they lead to budget overruns.
- Use Risk Management Strategies: Risk management strategies are essential for keeping the budget under control. By identifying potential risks and implementing strategies to limit their impact, project managers can protect the budget from unexpected costs.
- Track Project Performance: Tracking the performance of the project is important for avoiding budget overruns. Project managers should monitor the progress of the project and compare it to the initial timeline and budget. If the project is off track, project managers should take corrective action to get it back on track and avoid budget overruns.
Types of budget overrun
A budget overrun is an unexpected increase in project cost related to the planned budget. There are several types of budget overruns, which include:
- Miscalculation of costs: This type of overrun occurs when the project team fails to accurately estimate the costs of labor, materials, equipment, and other resources needed for the project.
- Underestimation of project duration: This type of overrun occurs when the project team underestimates the amount of time needed to complete the project.
- Fluctuations in currency values: This type of overrun occurs when the currency value of the project changes, resulting in higher costs than what was initially budgeted.
- Unexpected delays: This type of overrun occurs when project delays cause the project to take longer than expected, resulting in higher costs.
- Sudden changes in scope: This type of overrun occurs when the project’s scope changes suddenly, resulting in higher costs than what was initially budgeted.
Limitations of budget overrun
Budget overrun presents a range of implications for the project at hand, including the following:
- Reduced resources for other projects - Budget overruns can often lead to a decrease in resources allocated for other projects, as funds must be diverted from other areas to cover the overrun.
- Missed deadlines - A budget overrun can result in missed deadlines, as additional costs may cause the project to take longer than expected.
- Loss of investor confidence - If a project is significantly over budget, it may lead to a decrease in investor confidence and can have a negative impact on the company's reputation.
- Increased risk - Budget overruns can increase the risk of a project and may require additional resources to complete the project.
- Lower profitability - If a project goes over budget, it can lead to a decrease in profitability, as additional costs will have to be absorbed by the company.
In order to prevent budget overruns, project managers must take a variety of approaches. These include:
- Creating a realistic budget: Project managers should carefully consider all costs associated with the project and create a budget that is realistic and allows for unexpected expenses.
- Monitoring costs and progress: Project managers should closely monitor costs and progress and adjust the budget accordingly.
- Identifying risks: Project managers should identify any potential risks and anticipate any possible cost overruns.
- Tracking changes to the scope: It is important to track any changes to the scope or timeline and adjust costs accordingly.
- Utilizing effective communication: Effective communication between the project manager and stakeholders is key to managing expectations and preventing cost overruns.
In order to prevent budget overruns, it is important for project managers to create a realistic budget, monitor costs and progress, identify potential risks, track changes to the scope, and utilize effective communication. By taking these steps, project managers can better anticipate and manage costs and keep the project on track.
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- Rahman, I. A., Memon, A. H., & Abd Karim, A. T. (2013). Examining factors affecting budget overrun of construction projects undertaken through management procurement method using Pls-sem approach. Procedia-Social and Behavioral Sciences, 107, 120-128.
- Ullah, K., Nagapan, S., Sohu, S., & Khan, M. S. (2018). Measures to mitigate causative factors of budget overrun in Malaysian building projects. International Journal of Integrated Engineering, 10(9).