A cost overrun occurs when the actual cost of completing a task or project exceeds the budget that was allocated for that work. This can happen at the level of a government, organization, department, team, project, function, or task. There are several primary types of cost overrun:
- Direct cost overrun: This occurs when the direct costs of a project, such as materials and labor, exceed the budgeted amount.
- Indirect cost overrun: This occurs when the indirect costs of a project, such as overhead and administrative expenses, exceed the budgeted amount.
- Contingency cost overrun: This occurs when the contingency reserve allocated for a project is not sufficient to cover unexpected costs that arise.
- Scope creep cost overrun: This occurs when the scope of a project expands beyond the originally agreed upon boundaries, resulting in additional costs.
- Schedule overrun: This occurs when a project takes longer to complete than the originally planned timeline, resulting in additional costs.
- Change order cost overrun: This occurs when changes are made to a project after it has been initiated, resulting in additional costs.
- Cost Escalation: This occurs when an increase in the price of a particular item that occurs over time. For example, the price of materials such as steel can rapidly rise and fall over a short period of time.
When a cost overrun occurs in a business, it can have significant consequences. Some possible impacts of a cost overrun include:
- Reduced profitability: If the cost of a project exceeds the budgeted amount, it can reduce the profitability of the project.
- Reduced cash flow: A cost overrun can impact an organization’s cash flow, as it may need to allocate additional funds to the project.
- Reduced competitiveness: If a cost overrun results in a project being more expensive than expected, it may impact the organization’s competitiveness in the market.
- Reduced customer satisfaction: If a cost overrun results in a project being delivered late or not meeting the customer’s expectations, it can impact customer satisfaction.
- Strained relationships with stakeholders: A cost overrun can strain relationships with stakeholders, such as investors or shareholders, who may be concerned about the impact on the organization’s financial performance.
- Damage to reputation: If a cost overrun becomes public knowledge, it may damage the organization’s reputation and impact its ability to do business.