Cost overruns

"Underestimated" redirects here. For the Jennifer Paige song, see Underestimated (song).

A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an underestimation of the actual cost during budgeting. Cost overrun should be distinguished from cost escalation, which is used to express an anticipated growth in a budgeted cost due to factors such as inflation.

Cost overrun is common in infrastructure, building, and technology projects. For IT projects, an industry study by the Standish Group found that the average cost overrun was 43 percent; 71 percent of projects were over budget, exceeded time estimates, and had estimated too narrow a scope; and total waste was estimated at $55 billion per year in the US alone.[1]

Many major construction projects have incurred cost overruns. The Suez Canal cost 20 times as much as the earliest estimates; even the cost estimate produced the year before construction began underestimated the project's actual costs by a factor of three. The Sydney Opera House cost 15 times more than was originally projected, and the Concorde supersonic aeroplane cost 12 times more than predicted.

The Channel Tunnel between the UK and France had a construction cost overrun of 80 percent, and a 140-percent financing cost overrun.

Causes

Three types of explanation for cost overrun exist: technical, psychological, and political-economic. Technical explanations account for cost overrun in terms of imperfect forecasting techniques, inadequate data, etc. Psychological explanations account for overrun in terms of optimism bias with forecasters. Scope creep, where the requirements or targets rises during the project, is common. Finally, political-economic explanations see overrun as the result of strategic misrepresentation of scope or budgets.

Prevention and mitigation

In IT projects (essentially meaning software development projects in this context), the traditional approach to try to control costs is the use of project management techniques, such as PRINCE2 - though the use of such techniques has not prevented cost overruns in all cases. In the 21st century, a newer family of approaches, collectively termed agile software development, have grown in popularity for IT projects - although conventional project management is still very widely used, and in some cases has merely been inaccurately "rebranded" as agile.

Agile development does not claim to guarantee perfect on-time and on-budget delivery of the original expectations (which may not be even realistic or suitable to meet user needs). However, in many cases it may be able to:

  • converge faster on a suitable solution
  • meet user needs faster (users may even be able to use a partially-implemented system and therefore obtain economic benefit from it during the project's implementation, depending on the nature of the project)
  • catch bugs faster, maybe even when they only exist in the primordial form of requirements deficiencies, and hence be able to fix them more cheaply on average (because studies have shown bugs are more expensive to fix the later they are found[2])
  • trim away unnecessary or even unwanted "nice to haves" from the list of features planned to be implemented, in order to cut costs (in this setting, the traditional software engineering term "requirements" is clearly seen to be something of a misnomer, as many so-called requirements aren't actually requirements at all)
  • avoid the worst-case scenario: project cancellation, in which all the money is wasted (except possibly that portion of the money spent on reusable code and/or reusable software components, if they are considered to be worth reusing)

It has been claimed that agile development did not prevent cost and time overruns in the UK government's Universal Credit IT project, but there are serious doubts as to whether the Universal Credit software development project was in fact following a proper agile process in the first place.

Describing cost overruns

Cost overrun can be described in multiple ways.

  • As a percentage of the total expenditure
  • As a total percentage including and above the original budget
  • As a percentage of the cost overruns to original budget

For example, consider a bridge with a construction budget of $100 million where the actual cost was $150 million. This scenario could be truthfully represented by the following statements.

  • The cost overruns constituted 33% of the total expense.
  • The budget for the bridge increased to 150%.
  • The cost overruns exceeded the original budget by 50%.

The final example is the most commonly utilized as it specifically describes the cost overruns exclusively whereas the other two describe the overrun as an aspect of the total expense. In any case care should be taken to accurately describe what is meant by the chosen percentage so as to avoid ambiguity.

List of projects with large cost overruns

Australia

Brazil

Canada

Denmark

Egypt

Japan

Malaysia

North Korea

Panama

Sweden

United Kingdom

United States

Multinational

See also

References

Further reading

External links

  • The RISKS digest (focuses on failed and overran IT projects)
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