You’re not alone. Project cost overruns are common.
Statistics will tell you that over 85% of projects go over budget. But why? What are the mechanics behind project cost overruns and project schedule delays? Plenty of talented and experienced professionals engage in dialog about this very topic every day, and try to arrive at conclusions about how to stop projects from going over budget. In this article, I’d like to shed some light on the underlying workings as to the root causes of cost overruns and schedule delays. In order to tackle the problem of how to eliminate overruns, it’s important to understand the main reasons why they happen.
Obviously, there’s no one-sentence answer to these questions since every project is unique and the influences that trigger overruns can vary tremendously.
Luckily, however, there’s been quite a bit of research and experimentation around this exact problem — since it is a pervasive issue that so many businesses, large and small, struggle with. As a result, there have emerged some key factors we can point to that are the major contributors to projects going over budget and suffering schedule delays.
A lot of project managers and business owners have their own theories; and after a good deal of listening and reading, many will have you believe that it all comes down to one thing: Project Changes. Technically speaking, project changes are arguably the biggest contributor to projects going over budget and blowing schedule deadlines, but for the purposes of this discussion, let’s leave Change and Change Management out of it. I’m saying that because I don’t believe changes are truly the root cause of cost overruns. I believe that if you approach a project anticipating that things will change throughout the project — and you have good mechanisms and methodology to track and account for change — Project Changes aren’t really the root of the problem and should not result in a project cost overrun. (Click here to read about making the best of Project Change).
Let me repeat that another way:
Project Changes may alter the original budget and schedule, however, if you have appropriate tracking and change-management processes in place, they shouldn’t result in a project cost overrun. They’ll just shift the size and duration of the project.
That’s all fine in theory, of course, and I know that in reality nothing works quite that smoothly; but rarely does anything in a project work as smoothly as originally planned. The changes and addendums that get added and removed to a project should be viewed as merely extensions of the original plan. Therefore, your ability to handle change management is directly related to your ability to plan and negotiate on the fly. So, yes, if you can’t do this very well, it’s going to lead to some serious cost overrun and schedule delays. My take on it is that if you’re ok with looking at it that way, it’s truly the controls, planning and estimating pieces that are the root of the change-management dilemma.
So, leaving Change out of the equation, what then causes project cost overruns and schedule delays?
First, it’s key to understand that cost overruns and delays don’t just suddenly happen: they in fact happen all the time, every day in every phase, mostly in small incremental chunks. They happen in Planning, Execution, Close-out and Reflection phases along with every stage within those. To get to the bottom of why, let’s look at the four major triggers for cost overruns and schedule delays, which I’ll explain in more detail further below:
1. Inaccurate Estimates
2. A lack of real-time visibility and control
3. Poor methods to determine project progress
4. Insufficient historical information
These four items relate directly to the major phases of a typical project: Planning, Execution, Close-out and Reflection.
So, let’s talk about the first one, Accurate Estimating. This is probably the most obvious culprit since if you’re running a $10-million project that was estimated to be a $7-million project, well you’re pretty likely screwed to come in on budget and on schedule. Overly optimistic estimates and those done in a hurry are common. Project estimators that rely a little too much on gut-feel without documenting and qualifying their numbers can also cause estimating snags. I’m a believer in gut-feel, by the way — my only qualifier on that is with the communication and transparency around quantifying where those gut-feel numbers come from. I’ll get to that more when discussing the value of good historical information.
The second item, real-time control, is easily the most insidious of the four. It’s all about having accurate, up-to-date information about what’s going on in the project. Of course, part of this control thing is covered by the old-school methodology of being physically present on the job-site. The even bigger control factor, however, really boils down to project tracking. When you track all your labor, equipment, materials, subcontractors, suppliers, etc., you’re able to view daily reports on everything that’s happening on your project. You’re empowered with a wealth of information, which is the ultimate key to ‘control.’ You don’t have to wait until the end of the month to find out what happened weeks ago and that currency of information becomes the critical element of managing successful projects. Here’s an interesting fact: when something goes wrong on a project, the size of the impact it will have on cost and schedule is exponentially related to how fast you can apply corrective action. In other words, every day that goes by without fixing a problem that’s occurred on a project will accelerate the budget impact.
I hate to say it, but real-time control is also about keeping your suppliers and subcontractors honest. If you don’t have a good tracking and control system in place, getting over-charged and double-invoiced is going to be a huge contributor to project cost overruns.
The third item, determining Project Progress, is also a nasty contributor to cost overruns during the execution phase. If you don’t constantly take the pulse of where you’re at with your project, how can you possibly know if you’re on budget or on schedule? You may have spent 50% of your budget, but if you’re only 30% complete, you might have a pretty big problem. The earlier you can find out that you’re facing a potential cost overrun in your project, the more chance you’re going to have to correct it.
Having agreed-upon project progress milestones and sign-off is absolutely vital to being able to control costs and get paid. This is partly covered early on during the planning and negotiation phases when you’re defining what it means to be finished, but it obviously has to also be viewed as a continuous evaluation during the life of the project. Being able to seamlessly close-out a phase, level, task and the project as a whole enables you to stop spending money and squandering valuable time. You need to do regular forecasts on your project to get a financial and schedule picture of how far along the project is, and whether you’re ready to achieve closure on any piece of the project. Again, I know this all sounds great in theory; but the thing is, if you don’t do it, that’s where the insidious overruns creep gradually and dangerously into your projects.
Looking back on a completed project (or even a partially completed project) to examine where things went well and where things didn’t go so well is an indispensable part of running consistently successful, profitable projects. Otherwise, you’re doomed to repeat the same mistakes over and over. A project retrospective is more than just having a big group-hug with your team and your subcontractors (although, a little love-collateral can help keep the peace and smooth any hiccups). A reflection is also about examining the numbers, and using that information to feed future projects. First, however, you need to actually have those numbers — and the metrics, and the reports — and this means you need to have executed on project tracking and earned value management during the execution phases of your project.
Insufficient historical information plagues many businesses trying to run profitable projects. Sadly, it’s often the case that very little data is collected during a project, so very little is known about what happened. All that’s typically available to many project managers is the summary totals contained in the corporate ERP. This is only marginally helpful, as it’s missing so many crucial details that help planners and estimators get better at their job. Equally tragic is when information is tracked, but it’s stored in a series of spreadsheets. As we all know, the reporting and metrics you can achieve from spreadsheets is terse, vague and time-consuming to obtain.
We’ll talk more about this in upcoming articles. I hope this has been helpful. Please leave a comment and let me know what you think!
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Chris Ronak draws from over 20 years working with project-based businesses in management, project management and consulting positions. He is currently the CEO and founder of 4castplus, a web-based software solution that delivers full project cost management, estimating, forecasting and real-time tracking to keep complex projects on budget and on schedule.