UBS

Cost Overrun

What is Cost Overrun?

Cost overrun, also known as budget overrun, is a situation in which the cost of a project or business gradually increases above what was estimated for. This can be due to improper budgeting or underestimating of the actual cost owing to unforeseen circumstances that were not considered in the budgeting process.

An unforeseen change in the project budget that results in an increase in the total project cost is known as a cost overrun. Causes of cost overrun are:

  • Economic problems that arise as a result of budget or scope errors in a project
  • Technical errors like erroneous estimates or inaccurate data collection 
  • Psychological Factors like scope creep or a drop-in project commitment levels.

Characteristics of Cost Overrun:

  • Cost overrun is common in infrastructure, building, and IT projects, which encounter numerous unanticipated costs during the project’s completion phase.
  • They are mostly due to three factors: political considerations, psychological considerations, and technical considerations.
  • It is primarily due to a lack of funding, coordination, unanticipated costs, or project delays.
  • It is never predictable, and budgeting for it is impossible. It is thought to occur when the cost of specific phases of a project or business exceeds the actual budgeted cost.
  • Cost overrun is measured differently in different industries or companies.

Also, See: Budgeted Cost of Work Scheduled (BCWS)

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