Protect Your Bottom Line – Effectively Manage Cost OverrunsAssociation of Construction and Development
August 6, 2013 — 1,812 views
A major function of effective cost management is to prioritize project management works and to track costs so that cost overruns can be avoided. When the project management tasks are executed poorly, the cost increases. Effective project management can successfully identify the sources of costs and cost overruns quite early into the project so as to avoid them.
Inaccurate Cost Estimates
When costs are not estimated correctly, cost overruns are a natural outcome. Quite often, it is found that the actual costs or the bids for subcontracts turn out to be higher than what had been originally anticipated. The question is what explains these cost overruns? There are two possible causes for cost overruns. They are possibly due to changed market conditions or alternatively due to incorrect estimates. For effective cost management a thorough review of cost estimates is done prior to placing orders. This helps in the identification of changed market conditions or the occurrence of mistakes. An overall review possibly reveals increases or decreases in some areas are compensated by corresponding decreases and increases in other areas. Requirements may be adjusted in accordance with costs. The suppliers at lower cost may be sought.
Improper planning could also possibly result in cost overruns. Every project moves according to a plan. The plan incorporates a time period for each task with the project. If the planning is improper with very small duration given to the entire project, the possible consequence is that the project will take longer than was anticipated in the plan. In an eventuality as this, it is not surprising that the project is faced with cost overruns. It is important to monitor the project tasks. Every task has a task sequence form start to finish. The monitoring of project tasks involving its critical path is therefore quite critical to the success of the project. If the time taken is sufficiently long, the risk of delays will be considerably reduced. There is however a way to compensate for delays by including slack times within the critical path of the project tasks. This is also known as the free times.
Changes in Design and Scope
Yet another critical factor leading to cost overruns in financial projects is the changes in design and scope of a project. Generally, changes are required whenever new instructions or requests are made in context of the project. However, the new changes and fixes don’t always work as specified. It is the responsibility of the project manager to communicate with the client to make them understand that higher costs are quite likely a possibility with the inclusion of additional responsibility. The additional cost can be classified as improvements so they don’t become cost overruns. Additionally, when the project or one or more of its parts don’t work according to specification, then alternative solutions must be explored and presented to the owners for their approval. It is important to make the changes in design and its implications transparent to the owners, so that cost overruns can be avoided.