The Main Causes of Cost Overrun and How to Fix It

Managing your projects in a cost-effective way is key for all businesses that want to maintain a steady stream of profit  and meet their client expectations.

Unfortunately, many projects fail due to cost run and the bigger the project, the worse the implications.

Inaccurate forecasts  about costs and the time required, poor cost management, and the underutilisation of resources can lead to projects being canceled, going over budget, or even result in a large financial loss that hampers your growth.

In this article, we’ll explore the main causes of causes of cost overrun , strategies to prevent it, and practical solutions to fix it when it occurs.

Project Cost Overrun: Definition and Formula

What is a Cost Overrun?

Cost overruns are usually unexpected costs , with a negative impact on profitability of a project. A cost overrun occurs when the actual cost of a project exceeds its original budget.

It’s a common issue across industries, often caused by mismanagement, unexpected scope changes, or inaccurate forecasting. 

Some studies show that 9 out of 10 large-scale projects are subject to overruns, many of them reaching 50% or more. 

One of the most common cost overrun examples is the Channel Tunnel. Costs for the Channel Tunnel linking the UK and France ran over 80% for construction and 140% for financing.

Because revenues were half of those forecasted, the ROI for the project was negative and led to losses of $17.8 billion for the British economy. 

How To Determine Cost Overruns in Project Management?

To calculate a project’s cost overruns ,  you need to consider the difference between what you planned to spend and whatyou actually spend.

• Cost Overrun Formula

Cost Overrun (%) = {(Actual Cost - Budgeted Cost)} x 100 / Budgeted Cost

• Cost Overrun Example

For example, if the original project budget was £100,000, but the actual cost came to £125,000, the cost overrun calculation​ would be:

{(125 000 - 100 000) / 100 000} x 100 = 25 %

The project overshot its budget by a quarter (25%) of what was originally planned.

In other words, for every €100 in the original budget, an additional €25 was required to complete the project.

This percentage can help stakeholders understand the magnitude of the overspend and take steps to address what went wrong, such as revisiting budget estimates, managing scope creep, or improving cost monitoring processes.

What Is the Difference Between Cost Growth and Cost Overrun?

Although often used interchangeably, cost growth and cost overrun are distinct terms.

• Cost growth : refers to the increase in budgeted costs over the life of a project, often due to deliberate decisions such as scope expansion or unexpected inflation.
• Cost overrun: on the other hand, represents the unplanned overspending that occurs when actual costs exceed the final budget, regardless of growth or adjustments.

If a project starts with a €1M budget, grows to €1.2M due to additional deliverables, but ultimately costs €1.5M, the cost growth is €200,000, and the cost overrun is €300,000.

The good news is that overruns can be avoided (and sometimes, fixed) - provided that project managers and other stakeholders have the right insights to identify the root cause of the problem, whether it’s scope creep, an unrealistic, budget, a lack of resource planning, or simply a matter of insufficient resourcing.

Cause no. 1: Project Scope Creep

According to a PMI report, 52% of projects completed in the past year experienced scope creep , up from 43% five years ago.

Scope creep happens when a project’s deliverables expand beyond the initial agreement. This often occurs due to:

• Clients requesting additional features mid-project.
• Changes in business priorities or emergencies.
• Lack of scheduling or agreement on deliverables upfront.

For example, a client may initially request a building basic website but later ask for advanced features like e-commerce integration without considering the additional costs or timelines.

How to avoid it

The best way to avoid scope creep is to set clear expectations from the start, and to stick to the agreed-upon parameters as firmly as possible.

Define clear deliverables and timelines in the project plan and have the client sign off on them.

Presenting them to the customer for signature is a way of keeping track of this consent and better justifying the necessary accommodations in the event of additional requests, and of facilitate negotiation.

Establish a project steering committee  to oversee scope management and approve changes only if absolutely necessary.

It’s also advisable to conduct a root cause analysis to assess risks associated with potential scope changes.  

Look for  project management tools that will notify the team immediately when costs start to deviate.

How to Fix It

If scope creep  has already occurred, sit down with the relevant stakeholders. Overcommunicate, if necessary, and have transparent discussions with clients to manage their expectations.

Be prepared for possible trade-offs with your budget:  reallocate funds or request an increase to accommodate additional tasks.

Don’t forget that changes impact processes; make sure to gain client approval  for an extended timeline extend lead times  to maintain quality standards.

Cause no. 2: Unrealistic Budget and Cost Tracking

Prevention is better than cure, which is why it’s important to start with a realistic budget.

Lack of experience, or a lack of historic data can easily result in an untenable budget.  

Common mistakes include:

• Not analysing past project data to identify patterns of delays or hidden costs ;
• Overlooking the project costing phase , leading to inaccurate estimates

For example, a time-based project with no real-time cost monitoring might fail to accountfor non-billable hours causing gifted work time to pile up unnoticed.

How to avoid it

To mitigate these risks, implementing robust project accounting  is essential.

Implement project accounting to monitor key metrics like:

• Utilization rate:  The percentage of billable hours versus total hours worked.
• Earned Value Management (EVM) : A forecasting method that helps assess whether a project is on track.
• Variance at Completion (VAC):  Helps predict the cost variance at the end of the project.

You should also use real-time cost monitoring tools to track expenses like outsourcing, purchases and non-billable costs. You can also consult our article on accurate project budgeting for guidance. 

How to Fix It

If you’re already dealing with an unrealistic budget, there are two steps you can take: 

• Reorganize your workload :  Allocate tasks more efficiently to reduce work hours while maintaining quality.

Stafiz allows you to rebalance your employees' workload according to one or more skills and their availability.

• Optimise Resource Usage:  Adjust teams or consider subcontracting to reduce salary costs without compromising output.

 

Internal, external: work without distinctions 

 

Using freelancers on a short-term basis can be a way of reducing the cost of positioning an employee. 

The risk of a lack of fluidity in collaboration should not prevent you from making the right choices in your resource planning.

Integrate your external collaborators with Stafiz

 

Cause no. 3: Lack of Resource Planning

Poor resource planning  can lead to inefficiencies, delays, and higher costs.

This often stems from: 

1. No real-time visibility of resource availability.
2. Assigning tasks to team members who lack the necessary skills, causing delays.

For example, a client may require a specific senior consultant with expertise in a niche market segment, such as healthcare regulatory compliance. 

 If the firm fails to accurately forecast the availability of this specialist, considering their existing commitments and potential for unforeseen client requests,  lead to significant  delays. This may involve scrambling to find a suitable replacement, potentially compromising the quality of service or requiring the firm to charge a premium for expedited service delivery.

If junior consultants are assigned to tasks requiring advanced analytical skills or client-facing responsibilities without proper mentorship and support, it can result in subpar deliverables, erode client confidence, and negatively impact the firm's reputation.

 

How to avoid it

Use tools to create scenario-based resource planning to forecast resource needs  and manage availability.

By understanding the potential impact of different scenarios, you can make more informed decisions about how to allocate resources effectively .This can help you avoid over- or under-staffing, optimise budgets, and ensure that you have the right resources at the right time.

Ensure that project managers are accountable for updating resource schedules regularly and identify and escalate skills shortages to higher management to initiate training or hiring.

How to Fix It

If your project is already under-resourced, take action. 

Reorganize the workload, distributing tasks based on team members’ expertise levels.
by allocating tasks according to team members' levels of expertise.

If necessary, engage freelancers or subcontractors for specialised tasks.

Cause no. 4: Lack of Appropriate Tools

Many organisations rely on popular project management tools that lack the necessary features for their specific workflows. This misalignment can hinder productivity and lead to budget overruns.

For example, a marketing consultancy might use a basic task management tool, overlooking features like expense tracking or workload allocation.

This can easily contribute to inadequate billing  or overruns.

How to avoid it

Listing requirements upfront is the best way to identify the key features needed by your team, such as time tracking, cost monitoring and forecasting.

Start by mapping out your typical project workflows. What are the key stages? What tasks are involved? How do team members collaborate?  

Prioritise features into must-haves that are essential to the team’s success (e.g., time tracking, task assignment, file sharing), and nice-to-haves that would improve efficiency but aren't strictly necessary (e.g., Gantt charts, custom reporting).

Next, benchmark a range of tools. Take advantage of free trials or request demos to test the tools firsthand. Create a spreadsheet to compare features across different tools. This will help you easily identify which tools best meet your requirements.

Download our benchmark template

Obtain a sample evaluation file and an overview of the aspects to be taken into account for benchmarking.

Download our model

When you are ready, choose a small team to pilot the chosen tool and collect their feedback before making a decision. 

How to Fix It

Unfortunately, there isn’t much you can do if you have the wrong tool, except avoiding making the same mistake.  

Test new tools on smaller projects  before scaling them up to larger scopes.

Always measure the effectiveness of the tool after implementation and gather team feedback.  

Look for tools like Stafiz that provide robust tools tailored for project-based industries, project-based  ensuring real-time cost tracking and efficient workload management from the start. 

That way, you can take control and avoid or fix your overruns from the very beginning. 

Budget overruns are a significant challenge, but they can be mitigated with proactive planning, effective communication, and the right tools. By addressing common causes like scope creep, unrealistic budgeting, poor resource planning, and inappropriate tools, businesses can stay on track and meet their financial goals. 

Whether you’re in construction, IT, or professional services, platforms like Stafiz can help you achieve accurate cost tracking and better resource management to avoid pitfalls.