Here are 4 key reasons why your project will go over budget…and what you can do to manage them
Although there are many reasons why projects go over budget; most of these reasons start with the same common challenge – change happens! Not being prepared for change is the single biggest reason why projects go over budget. Whether ‘not being prepared’ means not having sufficient upfront information going into the project; or it means not properly managing changes while the project is underway – project changes can have a major impact on project budget and schedule. There’s a reason why change management and effective project cost management principals are critical in projects!
So why is it that change has such a big effect on projects? To go over the mechanics behind that, below are 4 key budget and schedule challenges that commonly jeopardize the potential success of projects – all of which are rooted in a common theme: Change. I’ve additionally offered strategies for what you can do to manage the risk.
1. Unplanned Escalating Costs
There are numerous ways in which costs increases can creep into your project. On larger projects for example, there can be a significant amount of time between when a project budget is prepared, when the construction tenders are sent out, and when they are received by your contractors. Supply and demand levels for labor, equipment and materials can change significantly in that time-frame and tag on supplemental costs.
Other escalations that may not necessarily be a direct cost of your project, but still need to be considered as part of maintaining a healthy bottom line, can also creep in un-accounted. For example: legal, financing, administrative and other overhead costs are often overlooked during initial budgeting.
Some ways to ensure you’ve got some protection against increasing costs:
- Consider building in a contingency reserve in your fixed price projects
- Ensure your mark up on billable labor, equipment and materials is sufficient
- Regularly evaluate your supplier and material contracts and buying patterns to leverage preferred rates
- Always, always review your project results –Make sure you understand the details of where and why your variances occur. As noted by Yogi Schulz in Do you Know Where Your IT Projects Are? – Yogi Schulz, “Produce monthly update reports showing cumulative spending variance against budget and projected cost at completion. Successful project managers produce project budget and spending outlook reports.” This wise observation is relevant to any project-based industry, regardless if you are in construction, IT or professional services.
2. Changes in Scope, and Delays in Schedule
Changes and delays happen on all projects. Change itself doesn’t necessarily have to cause issues or unnecessary risk for your project – changes can in fact turn into profit opportunities if you’re prepared for them. Ultimately it’s how you handle project change that becomes the issue. If your project work breakdown structure is not prepared with sufficient detail and understanding of the tasks involved, you will run the risk that changes in project scope are going to occur more frequently – causing unnecessary work and effort to deal with the change. Sometimes, the project site conditions change from what you had thought they would be, resulting in unforeseen costs and delays. Some delays in schedule can’t be avoided – poor weather, financing issues, labor issues are just a few examples. But delays that result from lack of project management, or lack of information, must absolutely be corrected. Here are a few tips for managing the cost impact of changing scope and conditions
- When creating your project work-breakdown structure (WBS), be methodical and detailed. Take it to a level low enough that the project tasks, duration and costs are sufficiently detailed to allow you to really plan thoroughly. The importance of the WBS is discussed by Revay & Associates Limited in Managing Construction Projects: Best Practices in Good Times and Bad – Part 2, “By using the WBS and gathering the data at all levels of the work, the ability to focus on a specific area causing a problem is greatly facilitated, thereby giving management the information to take timely remedial action to correct a problem before it has a negative impact on the overall work performance.”
- Make sure your project contracts identify how change and additional costs will be handled – under what circumstances change orders will be accepted and what the process for change management will be
- Understand what causes delays in your project schedule – and more importantly, which are truly unforeseen delays, and which result from a lack of project management and/or project performance information.
- And above all…..track, review and update. Monitor your project performance regularly – forecast the adjustments resulting from scope changes and schedule delays on a regular basis. Track your change orders to ensure you are billing out all changes. Analyze the occurrence of change orders over time against your original estimate, so that you can understand and better your estimating performance. Update your project work-breakdown structure if your analysis indicates that a change or delay is no longer a one-off occurrence, but should be part of your project estimate going forward.
3. Managing all the Moving Parts
Let’s say you’ve just started creating all the project management documents for a new project: you’ve developed a project WBS that is sufficiently detailed, and you’ve got a good handle on the estimated costs. You’ve got your budget approval – and now you’re tendering. Your original budget estimate assumed two or three sub-contractors for the whole project. But now, when you’ve tendered it out and received bids, you realize that one of your subs is heading into a big contract with another customer, and won’t be available for all the phases you slotted them in for. You’ve now got to split out those phases amongst other subs, some of which are your B-list subs. Now you’re looking at extra costs for mobilization and demobilization, and the additional headache of co-ordinating more contracts and maintaining more sub relationships. You find out that the equipment you had originally slated to be on site isn’t available, and you’ve got to source out other equipment – but have no idea if you’ve got that equipment anywhere else; and you may have to rent or buy. You find out you need different materials than you had originally estimated – but you’ll have to dig to find out what project you last used them on, which supplier you can source them from, and how much you paid last time. And you need all this information yesterday. Your project has changed significantly from what was originally estimated, and you’re struggling to keep up with the changes. Here’s how to get some control back:
- Don’t be caught unaware. Keep in touch with your subs – know what their upcoming commitments are and how that might impact you
- Develop relationships with new subcontractors. Businesses change, and it’s important to keep a stable of key contractors that you can rely on
- Anticipate – build an overall contingency reserve, or specific reserves for phases at which you may be at risk for additional costs due to multiple contracts
- Use project tools that make information easier for you to get. Information such as: supplier rates and histories; equipment availability and usage; equipment cost per hour; labor productivity, etc. Complex projects with many contractors, suppliers, purchase orders, phases, locations, equipment and materials is challenging – make sure you’ve got the right tools in place to get you reliable, accurate and up to date information
4. The Extra Padding
It’s pretty common – the extra padding that we call the “frustration” or “pain in the a**” factor. Face it, doing business with customers and subcontractors that make our lives miserable doesn’t make us keen to cut a deal, or offer a preferred rate. Unfortunately when you’re on the other end – i.e. you’re the guy having to pay for the frustration factor – that can add on additional and unnecessary costs; costs which will appear not just on your current project, but on every project that requires that particular subcontractor. So, here are some ways to save yourself the uptick in cost like this, and preserve a good business relationship with customers, subcontractors and suppliers:
- Know what you’ve been paying for. You can’t make a statement that you’re overpaying if you don’t have the data to back it up.
- Understand why. Some contractors will add an additional cost based on frustration that comes from dealing with not being paid on time, poor direction, lack of process. Make sure you understand what your subcontractors deal with when they deal with your company.
- Get an understanding of your contractor’s business climate. If you are tendering when they are busy, then the price will be higher than when they’re not busy. What you thought was extra padding may just be simple supply and demand.
- Make relationships with your contractors as important and as strong as your relationships with your customers. In the long run, it’s all about the relationships we build. “Obviously, a subcontractor or material supplier must have key relationships with general contractors and other clients. This helps procure work, revenue and hopefully profit to your company. However, just as important a general contractor must have key relationships with key subcontractors and material suppliers. Why you may ask? Great subcontractors can make great general contractors. Project Management and Superintendence are part of what makes the general contractor great, however, a good core of subcontractors helps make the leap to greatness.” Building Strong Business Relationships – DMXY
Thanks for checking out this article, I hope it’s been helpful. Please stay tuned for more top tips for project results in the coming weeks. If you’d like to contact us about this or anything else you see on this website, I’d love to hear from you – please click here to contact us and I promise to get back to you.
Have a good week!
Kim Tremblay, CFO
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Kim Tremblay is a co-founder and Chief Financial Officer of 4castplus – an innovative, web-based project cost management solution for small to mid-sized project based companies. 4castplus combines effective project cost controls with key features needed to run profitable projects. With over 20 years of Finance and Project experience in various sectors, Kim has a strong background in financial leadership and a well-rounded insight into the challenges facing businesses.