- Accurate estimating is key
- Ensure budget transparency
- Expect the unexpected
- Avoid scope creep
5 min read
Cost overruns are every project manager’s nightmare. When it comes to construction projects, exceeding your budget erodes your client’s trust and your company’s profitability.
It’s more common than you think; according to the Harvard Business Review, the average overrun of projects is 27%, with one in six projects having a massive cost overrun of 200% on average.
While forces beyond your control can cause budgets to skyrocket, in most cases, cost overrun is a result of inaccurate estimates, poor budget management and lack of visibility into project costs.
Cost overruns are easier to prevent than to solve. In this article, you’ll learn 5 tools and techniques to keep your project budget on track from the start.
Inaccurate project estimates are one of the most common causes of cost overruns. If you start with inaccurate schedules and budgets, your project is destined for an overrun from day one. Estimating a project can be overwhelming, after all there are many factors that go into it, such as time, cost, materials, and more. Don't be tempted to use a one size fits all approach.
Instead, use a budget template based on similar projects. Check where other projects have run over on costs and use this to guide your future estimates.
Above all, be realistic. Get input from all stakeholders, contractors and other team members who have experience with similar projects. This can go a long way to setting a more realistic and accurate budget from the outset.
One of the biggest causes of cost overruns is also one of the easiest to avoid: no budget transparency. By constantly tracking the progress of various tasks, labour, materials and more, you will have visibility of how the budget is tracking. You will also be able to see early signals of budget overruns, which will give you the chance to fix issues before they get out of control. A 10% cost overrun is much easier to correct than a 50% overrun.
Technology can help you track your budget and manage expenses in real-time, including those of the people working on the project. For example, use an Enterprise Resource Planning (ERP) solution like MYOB Advanced to keep your project accounting on track with project time and expense management features. Employees and contractors can record their time and expenses using the mobile app.
So many things can happen between the time a project is planned and when it is finally executed. You need to be ready for those things outside of your control that can impact the price of materials, labour, financing and product shortages. Then there’s the chance of adverse weather causing project delays.
While you can’t prevent unexpected costs, you can stop them from obliterating your budget. How? By building in reserves and contingencies into your project budget.
Most projects need around 10-15% of the total cost estimate as a contingency. The larger the project, the larger the contingency should be. For example, if weather could delay pouring the foundation by a week, you will need to reschedule contractors, which could incur a cost. This should be included in your contingency.
Scope creep is one of the leading causes of project cost overruns. You plan for one set of deliverables but, over time, the client starts asking for ‘things’ that were not originally planned. Some changes might be called for, but drastic scope creep can put a project budget in jeopardy. Billable hours can quickly mount up and the project budget will be out of control before you realise it.
Fighting scope creep is a constant challenge for project managers. That’s why it’s essential to create a project scope that everyone agrees on from day one. Some changes are inevitable, but by ensuring everyone knows how they will impact the budget and increase costs, you should be able to keep them to a minimum.
Even with a clear scope and no unplanned costs, your project can still experience overruns if project administrators aren’t up to speed with how a project is progressing.
Make sure the lines of communication are open so team members and administrators know how the project is tracking, what needs to be invoiced, or if there are variations to account for. By keeping the team informed of the budget status, they are more likely to watch their expenses.
That’s what the Sunshine Coast Health Institute (SCHI) does using MYOB Advanced. SCHI uses the platform to apportion costs to different cost centres for each joint venture partner so they can see all costs associated with the whole project, as well as their contribution.
As SCHI’s Principal Finance Officer, Anne Merry explains: “I think it’s made collaboration on the project so much easier because there is transparency into all the costs so there is no doubt or reason for mistrusting information.”
Equip your admin team with the right tools to manage the budget. Look for software with expense claim processing and real-time reporting.
Take Adam’s Pest Control. The company uses MYOB ERP with its report writing facility, which helps them keep tabs on the status of jobs. As a result, the company’s debtors are down by around 30%, because in MYOB ERP, project accounting makes it easy to see who owes what.
It’s far easier to prevent cost overruns from the start, than try and correct them afterwards. By setting an accurate and realistic budget from the start, and putting the right technology and processes in place to track it, you will be able to keep cost overruns down for successful projects. That’s the key to keeping your clients happy and your business profitable.