What is Cost Overrun?

What is Cost Overrun?

What is Cost Overrun? Jonathan Poland

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:

  1. Direct cost overrun: This occurs when the direct costs of a project, such as materials and labor, exceed the budgeted amount.
  2. Indirect cost overrun: This occurs when the indirect costs of a project, such as overhead and administrative expenses, exceed the budgeted amount.
  3. Contingency cost overrun: This occurs when the contingency reserve allocated for a project is not sufficient to cover unexpected costs that arise.
  4. Scope creep cost overrun: This occurs when the scope of a project expands beyond the originally agreed upon boundaries, resulting in additional costs.
  5. Schedule overrun: This occurs when a project takes longer to complete than the originally planned timeline, resulting in additional costs.
  6. Change order cost overrun: This occurs when changes are made to a project after it has been initiated, resulting in additional costs.
  7. 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:

  1. Reduced profitability: If the cost of a project exceeds the budgeted amount, it can reduce the profitability of the project.
  2. Reduced cash flow: A cost overrun can impact an organization’s cash flow, as it may need to allocate additional funds to the project.
  3. 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.
  4. 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.
  5. 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.
  6. Damage to reputation: If a cost overrun becomes public knowledge, it may damage the organization’s reputation and impact its ability to do business.
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Business is the lifeblood of progress and people are the driving force regardless of where they fit in the value chain. People drive profit by bringing products and services to market. Profit drives progress by allowing for new ideas to form with the excess capital. That’s why you join Key Bridge.

Key Bridge

People. Profit. Progress.

Business is the lifeblood of progress and people are the driving force regardless of where they fit in the value chain. People drive profit by bringing products and services to market. Profit drives progress by allowing for new ideas to form with the excess capital. That’s why you join Key Bridge.