Projects rarely go over budget in one dramatic moment. They go over a little at a time, through scope that grows, delays that keep people on the payroll longer, and estimates that were hopeful from the start. The real reason projects go over budget is that nobody compares the money to the work early enough. By the time the overrun is obvious, most of the money has been spent.
I have managed programme budgets from the client side, and the good news is that overruns almost always send signals first. This guide explains how often projects overrun, the common causes, the four numbers you need to watch, and the early signals that tell you trouble is coming.
How many projects go over budget?
A lot, and large technology projects are the worst. The research also shows that the average hides a long tail of projects that go very badly wrong.
- 45%average budget overrun on large IT projects
- 27%average cost overrun across 1,471 IT projects
- 200%average overrun in the worst one in six of those projects
Source: McKinsey & University of Oxford, 2012; Flyvbjerg & Budzier, Harvard Business Review, 2011
The first figure is from McKinsey and Oxford's study of more than 5,400 IT projects with budgets above $15 million. The other two come from Bent Flyvbjerg and Alexander Budzier's analysis of 1,471 IT projects, first published in Harvard Business Review. Their warning is worth remembering: the average is not the danger. The danger is the one project in six that runs away.
Why projects go over budget
The causes are familiar to anyone who has run a programme. In my experience they fall into five groups.
- Optimistic estimates. The budget was set to win approval, not to reflect the work. Contingency was the first thing cut.
- Scope growth. Small changes get agreed in workshops and never priced. PMI's 2018 Pulse of the Profession found 52 percent of projects had scope creep or uncontrolled changes.
- Delay. Every extra month keeps the team, contractors and licences running. Time overruns become cost overruns.
- Hidden work. Data clean-up, testing cycles and training are underestimated or left out.
- No forecast. The team reports what has been spent, but not what the whole project will cost.
Illustrative example, not research data. Shares of the total overrun.
Clear change control stops the biggest bar. Every change needs a cost, a time impact and an approver. Our guide on when a change request is required gives a simple rule.
Budget, actual, run rate and forecast in plain words
You only need four numbers to see where the money is going. Here they are, without the jargon.
- Budget: the approved amount for the whole project. It only changes through an approved change.
- Actual: what has really been spent so far, from invoices, timesheets and contracts.
- Run rate: how fast you are spending now, usually per month. It is the trend behind the actual.
- Forecast at completion: what the whole project will cost when it is done. It equals actual to date plus the cost of the remaining work.
Project budget variance is simply the gap between budget and forecast at completion. A negative variance means you are heading over.
Does the project budget include management reserve? Usually not. Contingency covers known risks and sits inside the project budget. Management reserve covers the unknowns and is held by the sponsor, outside the project. Keep the two apart, or contingency quietly becomes spare money for scope.
A worked example
Take an illustrative 12-month project with a budget of $2.0 million. At month six, the plan said $1.0 million would be spent. The actual is $1.2 million, so the run rate is about $200,000 a month.
If that rate continues, the last six months cost another $1.2 million. The forecast at completion is $2.4 million, and the variance is $400,000, or 20 percent over. Nothing has gone over budget yet, but the overrun is already visible. A run rate is a rough guide, so check it against a bottom-up estimate of the remaining work.
Early signals that a budget will overrun
Watch for these
- Forecast at completion is missing, or has not changed in months
- Run rate is rising while milestones slip
- Contractor end dates keep getting extended
- Changes are approved without a cost estimate
- Contingency is being used before the build phase ends
- Actuals arrive weeks late, so nobody knows the real spend
Any one of these is worth a question. Two or more mean the forecast needs to be rebuilt from the remaining work, not rolled forward from last month.
How to see it coming: a monthly routine
- Close the actuals
Get invoices, timesheets and accruals in by the same day each month.
- Check the run rate
Compare this month's spend with the last three. Ask why it moved.
- Re-forecast the remaining work
Ask each workstream lead what is left and what it will cost.
- Price every change
Add approved changes to the budget and pending ones to the forecast.
- Report the variance
Show budget, actual, forecast and variance on the status report, with the reasons.
Who manages the budget? The project manager runs this routine, but the sponsor owns the budget and decides what happens when the forecast goes over. If you report to a sponsor, our guide on how to report project status to executives shows where the budget line belongs.
How ProjectCAPEX helps you see an overrun early
The ProjectCAPEX budget view puts these numbers side by side. It shows budget at completion, actual, estimate at completion, variance and burn rate, with budget against actual over time and by category. Costs go into a cost log, and change request impact is shown by category next to the planned budget, so approved changes show up in the numbers instead of in a separate spreadsheet.
Sponsors see variance for every programme on the portfolio view. You can explore the demo or start a 14-day free trial.