The financial side of a project is arguably the most critical element of any undertaking. Knowing exactly where each cost goes constitutes part of doing a project from inception to completion. That’s why project managers put meticulous detail into financial planning.
But despite the significance of financial planning, why do construction projects often exceed the allocated budget? What is the combination of common factors that prompt projects to exceed their intended cost estimates?
In this post, we examine factors that cause projects to go over budget even after meticulous financial planning.
Here Are Twelve Common Reasons Projects Go Over-Budget:
1. Inaccurate Project Estimates
Small inaccuracies in the project budget can cause large financial misallocations. Small inaccuracies in the budget can add up to huge errors in the overall budget, causing over-budgeting. What’s worse is that project managers often notice these minute budgetary inaccuracies after the project is in full swing, thus causing long-term financial constraints.
2. Scope Creep
The project scope determines the project resource allocation, timelines, and deliverables. The project scope guides the project managers on what needs to be done and the allocated costs in each part of the project. On the other hand, scope creep refers to alterations to the project’s initial plan.
For instance, the client may want additional features or modifications to the existing plan. These alterations lead to massive changes that may affect the budget, leading to budgetary constraints. So, in case of changes to the initial project scope, the client is required to incur additional costs not initially accounted for.
3. Communication Breakdown
Communication with the relevant stakeholders is a critical part of managing the project budget. More so, cohesive communication is needed to manage the project throughout the project lifecycle stages. Successful project management requires that project managers cohesively and constantly keep in touch with key stakeholders to accurately manage and track costs throughout the project.
4. Lack of Contingency Planning
Many people prefer to avoid planning or even imagining what might go wrong during the project execution. However, the reality is that things might go differently than planned. For instance, it may rain during a construction project, and this may require additional funds to drain the accumulated water.
Contingencies affect the project costs because emergencies introduce losses or problems that may require money to overcome. That’s why every project must account for contingency costs to upset any challenges, losses, or damages that may occur in the project.
5. Poor Personnel Management
Poor personnel management ranges from hiring unqualified and inexperienced personnel to misappropriating resources during a project. In addition, poor personnel management can take the form of human errors like ordering the wrong equipment to misallocating funds in the balance sheet. So, successful budgeting involves excellent personnel management to ensure no additional costs are incurred by hiring the wrong people or making costly human errors.
6. Employee Absenteeism
Worker absenteeism can severely affect project execution, leading to costly delays in project execution and overall implementation. All human resources must be accounted for. The project manager must ensure that absent workers are replaced to ensure that the existing staff is not overworked.
7. Loss Through Damage
Key equipment should be replaced if it’s broken on the site, damaged during installation, or fails to function as intended. Equipment and machinery breakdown is a common scenario that may lead to long-term budget overstretches. So, project managers must ensure that broken equipment or damaged machinery does not affect the initially allocated costs.
8. Vendor Relationship Issues
Issues with project contractors and vendors can severely affect your project budgets. Delays in ordered goods and failure to deliver equipment and supplies can affect the project timeline, leading to not only delays but also overstretched costs. When personnel report for work and find missing equipment they need to work with, they may fail to work that day but still, get paid.
9. Time Management and Downtime
Lack of power can cause project downtime since generators, forklifts, escalators, and loaders require power to operate. This means that a lack of power can cause significant downtime that may interfere with the project execution and the overall cost allocations.
10. Unplanned Costs
Unplanned costs may emanate during the project. For instance, strong winds may damage installed structures. In addition, heavy rains may cause system clogs, thus requiring additional monies to offset these damages. This is why a proper contingency plan is required to execute a project from the start to the end successfully.
11. Poor Resource Planning
Resource misallocations including crucial resource inputs such as space, facilities, products, materials, plants, tools, and equipment may cause severe budgetary stretches. Poor resource planning may also affect project execution, thus leading to projects going over budget.
12. Environmental Factors
Project managers can do little about natural disasters and destructive weather. A project can be delayed unexpectedly or indefinitely due to conditions that affect workers arriving on the site. In addition, environmental factors can affect the arrival of equipment and facilities on the construction site. Collectively, environmental factors can stretch the budget or lead to projects going over budget.
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