Question

As a Project Manager, what can you do to predict and prevent cost overruns? If overruns do occur, what could/should be done?

Answer 1

Ways to predict and prevent cost overruns in a Project

· One of the best ways to predict and prevent cost overruns is the adoption of a valid risk management system. A comprehensive risk analysis allows the identification of external risks that one is most likely to encounter. Both internal and external risks must be equally addressed to minimize unexpected expenses that might jeopardize its success.

· To avoid cost overruns, it might be a wise decision to improve and enhance the competencies and skills of the organization’s cost estimators. Allocating these responsibilities to specialists ensure that the forecasting results have minimal errors.

· Cost overruns due to performance errors can be addressed by having a well-organized approach to leadership and management. Leaders should systematically control and evaluate every project performance factor. This includes the process of hiring skilled personnel as well as assigning appropriate progress assessment tools.

In the event that overruns occur, an effective way to deal with it is to:

· Understand the real reason of a budget overrun – Usually a problem cannot be solved unless the reason is known. For example, in the event of a construction project, the reasons for budget overruns might be wrong estimation of the budget, scope creep, long-term economic effects, bad cost management, or time overruns.

· Creating an action plan – Once the cause is identified, an action plan can be created to put things back on track. Planning will show the best alternatives available to approach the problem while eliminating the irrelevant options.

· Responding to customers – When things go wrong and lead to cost overruns, it would be a wise decision to communicate with customers. This act of responsiveness will create a greater trust. Being honest with the customers about the situation ensures that everyone is on the same page and this will result in greater coordination that will minimize further cost overruns.

· Communicating with the team – The team members need to be included in the communication process so that it is easier to explain them the priorities and if the team is innovative then they might also find appropriate strategies to mitigate the costs.

· Setting up a cost management system – If a project suffers budget overrun, it is important to set up a cost control system to have better control over the agreements. Project managers should be able to conduct their activities such as controlling key performance indicators. Outdated information can cost crucial time while failing to provide the real scenario. Therefore, a cost management system assists in saving time while also tracking the expenses, thus, providing greater control.