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The Practical Project Manager

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Are All Projects Doomed to Cost Overruns?

All projects have a budget, hopefully. Let me rephrase, all projects should have a budget.

Cost management is a tricky area purely because it is the one assumed to be the easiest to manage. It is also the one where if you get it wrong, the impact is easily felt. Everybody understands the language of money. If we lose money, it is evident. If we make money, it is also evident.

Cost management as a whole is a discipline that a Project Manager must have. Some organizations cap a budget and say US$ 10 million is available for projects. Other organizations use the bottom up approach in that they select a project, based on the work breakdown structure and the cost assigned to each work package, the cost of the project is built up. An approval is sought and then the project begins.

So how do you build a budget for a project?

This varies from organization to organization but some principles apply across board. Historical information on projects, existing procurement or finance processes and even just speaking to people who have worked on projects before in the organization have a lot of information you can learn from.

You can also build a standard template so you do not forget critical components. From my experience, it is better to have the line item and not have any amount keyed in than not have the line item at all. You can borrow heavily from the organizations project costing structure. If they do not have one, see if you can build one.

Where do we go wrong with budgets?

Depending on the stage of the project, there are many opportunities to go wrong on this. I will highlight a few and some ways not to go down the wrong way.

Before Starting a Project

At the beginning, during initiation and planning, there is usually a rough estimate provided especially to be used in the business case or project justification. That amount is typically what the Executive and/or the Board approves. It marks the upper limit of the approved spending of the project. As the Project Manager, it is important to know this number. This figure is a constraint that you will need to work with.

Because the figure is an estimate, the assumptions made at the beginning of the project may turn out to be wrong. Look at the assumptions made in coming up with the figure. Interrogate those assumptions in light of the financials. Adjust the figure appropriately.

During the Project

This provides several opportunities for overruns hence why cost management needs to be embedded throughout the whole process.

Contracting Vendors

During this time, the contract needs to be reviewed meticulously. One clause in the contract can change the whole cost of the project. Key words like ‘excluding’, ‘to be covered by client’, ‘lot price vs unit price’ and the list goes on and on. Review all contracts and understand the financial implications of the decisions you make. A contract is legally binding so remember that as you review.

Recurrent expenditure

This sounds petty but the small amounts that create a huge bill. Good example is the travel costs during the duration of the project, project meals, project stationery, project rooms and even time from project participants (especially true in a time and materials contract arrangement). Keep an eye on the small costs. You would be surprised at how the total cost seems so large. There is an English Proverb that says “Look after the pennies and the pounds will look after themselves”.

Not to say that you shouldn’t spend on these items, just keep an eye on them in light of the project.

Here is an example of how a delay can cause a budget overrun.

 A project that was to take sixty (60) days has had to extend for thirty (30) days because of an unforeseen issue that took some time to resolve. The issue happened on Day 30 of the project. There were three (3) consultants on ground for the project initially. The daily rate for the consultants on site is US$ 500.

Initial project cost was 60 days * 3 consultants * US$ 500 per day = US$ 90,000

For every day that issue is not resolved, it costs the project US$ 1,500 in consultant fees. If that goes to 10 days, it costs US$ 15,000 in consultant fees.

Penalties

Looking at the contract, some penalties may become a reality and there is a cost associated with it. Sometimes the penalty comes from a regulatory body or compliance body for not fulfilling an obligation. The Project Manager needs to be aware of these items and to plan for them accordingly.

After the project

At this point in the project, the project activities should be coming to a close. All through the project, it is important to keep track of all invoices and their status. Ensure all open invoices are resolved, all payment disputes resolved and you can now close the project without any pending items.

Make sure you include budget in the status report so it is not a surprise to the project team and Project Sponsor. It also helps to see what the report looks like so corrective actions can be taken in good time to remedy the situation.

Remember the budget is your responsibility as a Project Manager.

Have you handled a project which went into overrun? How did you manage to get it back on track?

Leave me a comment below or send an email to thepm@thepracticalpm.com.

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