4 Common Causes of Cost Overruns in Mega Projects
Cost overruns are an inherent part of megaprojects. They can be dangerous to your project’s success because they require the parent organisation to spend more than intended. To avoid cost overruns, you must understand what causes them.
Improper risk and uncertainty preparation
It is every project manager’s dream to complete a project without encountering any hurdles along the way. However, it is almost impossible to attain that perfection. Something unexpected will always come up, and you must be prepared for it. Analyse the project, assess the possible risks, and create a proper risk response strategy. Consider both internal and external threats to be on the safe side.
Estimation errors
Underestimation is the major cause of cost overruns in many projects. Estimation errors are caused by naivety, ignorance, and deception. If you believe that everything will go as planned, you are deceiving yourself. A good project manager always leaves some contingency room for error. Also, if you deliberately misrepresent the real cost of a project to make it look viable to investors, expect cost overruns in the future.
Scope changes
“Scope” is a term used to define all deliverables expected at the end of a project. Therefore, any changes made to the scope during execution mean that the initial project plan has to be reviewed. With each scope change, resources and money are diverted to activities that were not initially identified. Ensure that you keep the relevant stakeholders updated on any changes that arise and create a good scope change management plan to avoid any disputes that may result in further cost overruns.
Inappropriate and inadequate procurement
All projects require you to engage contractors to perform specific tasks and to supply materials and equipment. Relationships with these contractors often put your project at risk of cost overruns that are beyond your control. Before entering into an agreement with a contractor, do your due diligence to ensure that their prices are accurate and that they can meet the terms of your contract. Also, set up measures that protect you in case the contractor does not fulfil their end of the agreement.
Project cost overruns
Whether cost overruns are avoidable or not is debatable. However, to avoid them, you need to be realistic when doing your estimations, leave room for change and always prepare for the unexpected.