Cost overruns: why costs get out of hand

A cost overrun means exceeding the projected cost to complete a project. Often, cost overruns become apparent only after the budget has already been affected, but their causes build up long before that: optimistic estimates, added tasks, delays, and unanticipated work hours.

For a project manager, the problem isn’t just spending more than expected. Cost overruns can decrease profit margins, require new approvals, and jeopardize the project’s viability.

Understanding why costs spiral out of control means understanding how the budget, project progress, and remaining work relate. Let’s examine how to identify the causes of cost overruns and act before small deviations become financial problems that are difficult to recover from.

How to calculate cost overruns

A cost overrun occurs when a project’s actual cost exceeds the approved budget for the same scope of work. During project execution, however, you can identify an expected overrun by comparing the estimated final cost with the available budget.

The term budget overrun is often used to mean exceeding the established spending limit.

The percentage formula, once the project is complete, is simple:

Cost overrun (%) = [(actual cost − approved budget) / approved budget] × 100

If your budget was 100,000 euros and the project cost 120,000, the overrun is 20,000 euros, or 20%.

However, the comparison must be consistent. If a client approves new activities and a budget increase, you must distinguish between the authorized increase and the variance due to inefficiencies. Keeping the initial budget lets you identify this difference without losing the project’s financial record.

Why project costs grow

Cost overruns are rarely down to a single decision. More often, they arise from a series of interrelated problems that snowball. Let’s take a look at them below:

• Partial early estimates

A cost estimate may only consider the main tasks and overlook coordination, revisions, testing, travel, or deployment support. The projected cost—also known as the budgeted cost—is therefore lower than the resources actually required.

Even historical data, without context, can lead to errors. A similar project may require more work if the available skills, technical integrations, or acceptance criteria change.

A reliable estimate must explicitly state its assumptions: which tasks are included, how many revisions are anticipated, and what information is still missing.

• Changes to the scope without adjusting the budget

An apparently minor request can affect several phases. Adding a feature requires analysis, development, testing, and documentation updates.

When teams accept these changes without assessing their impact, they end up working on a project different from the one originally planned. The budget stays the same, but the workload increases.

This is known as “scope creep” and must be managed through an approval process that makes the costs, schedules, and consequences of each change transparent.

• Delays and resource availability

A delay doesn’t always mean extra costs, but it can extend resource use, increase vendor expenses, or require overtime.

If a key person is working on multiple projects at the same time, tasks may stall. Making up for lost time sometimes requires more expensive resources or rushing the work, which increases the risk of errors.

Financial planning must therefore also consider the team’s actual capacity and the dependencies between tasks.

• Having to redo work and poor quality

Unclear requirements and late reviews can force teams to redo completed work. These costs don’t add value to the deliverable but deplete the available budget.

To minimize these, teams need shared acceptance criteria and interim checks. Identifying a problem during an initial review can prevent the need to correct it once it has already affected many subsequent tasks.

• Underestimated external expenses and risks

Purchased supplies, licenses, consulting services, and other services may cost more than expected. Even a dependency on a supplier or a complex integration can require additional work.

Making provisions consistent with the identified risks helps absorb unforeseen events. An automatically added percentage, without analyzing the project, offers unreliable protection.

Early indicators of cost overruns

Waiting until fiscal year-end means missing the chance to act. Monitoring must begin with operational warning signs.

The first is an increase in the hours needed to complete comparable tasks. If a task estimated to take twenty hours actually takes thirty, you need to determine whether this is an isolated incident or a recurring problem.

Another indicator is a rise in remaining work. Even if you keep expenses in check, the project may be off track financially if many costly tasks remain.  

Unformalized additional requests, stalled approvals, and purchases yet to be recorded round out the picture. To assess the project cost, you must also consider commitments already made: an invoice that hasn’t been received yet doesn’t mean the expense doesn’t exist.

An example of an expected overrun

Suppose we have a project with a project budget of 80,000 euros. Halfway through the planned schedule, the team has incurred costs of 38,000 euros.

At first glance, the scenario appears acceptable: less than half of the budget has been spent. However, the work completed represents only 35% of the planned work, and the new estimate for the remaining work is 50,000 euros.

The projected final cost is therefore:

38,000 + 50,000 = 88,000 euros

The expected cost overrun is 8,000 euros, or 10% of the budget. It has not yet fully materialized, but it is already substantial enough to warrant a decision.

The project manager can investigate the causes, revise the task order, or negotiate the required changes. The deciding factor is the ratio of actual expenses to the cost required to complete the project.

Industries where cost overruns have the greatest impact

This issue impacts everyone, but some industries are particularly affected.

• Production and Manufacturing: Manufacturing projects require a mix of materials, equipment, and workforce. A single increase in raw material costs or a plant shutdown can blow the initial budget. Custom orders are the most exposed: every customization adds hours of design and setup time. If you don’t track them, the margin erodes piece by piece.

• Engineering: In engineering firms, cost overruns often happen during the design phase. Design revisions, technical changes, and approval processes that take longer than expected extend project timelines. And when work is billed by the hour, more time means higher costs. Technical complexity makes it hard to estimate costs accurately from the start, and multi-year projects are also vulnerable to market-price fluctuations.

• Consulting: For a consulting firm, the product is the consultants’ time. A typical risk is a fixed-price project where activities drag on: the client gets more, the firm earns less. Every unplanned extra day is a cost overrun that no one will repay. The problem worsens when senior consultants are involved more than expected: their hourly rate drives up the project cost very quickly.

• Marketing Agencies: Agencies serve many clients at the same time, with continuous revisions and tight deadlines. One extra round of revisions on a campaign may seem like a minor detail. Multiplied across dozens of projects, however, it becomes a structural budget overrun. Without tracking hours per client, it’s difficult to determine which accounts are truly profitable.

• IT and Software Development: In IT, unpredictability is part of the job. Unexpected bugs, complex integrations, and evolving requirements make estimates unreliable. Cost overruns here often tie to priorities: teams add features without revising the project budget. Even agile methods, without per-sprint cost tracking, can mask cost overruns.

Cost overruns: warning signs you shouldn’t ignore

Budget overruns often only become evident in financial statements when their causes are already present in day-to-day work. To spot them early, you need to examine the relationship between resources used, results achieved, and work still to be completed.

Some signs should be given close attention:

• The number of hours worked increases faster than the progress of the activities: the project is consuming resources without producing the expected results.
• Tasks are reopened or redone multiple times: revisions and corrections take up hours that may not have been budgeted for.
• Overtime becomes routine: meeting deadlines requires additional effort that can increase costs and lead to new errors.
• Client requests turn into work without a formal assessment: the scope expands without adjusting the budget or timeline.
• The remaining budget cannot be quantified using up-to-date data: there is no reliable basis for determining whether available resources will be sufficient.

These indicators do not necessarily mean the project will exceed its budget, but they do require prompt review. The most important step is to compare the remaining budget with the estimated cost of the work still to be done. If the latter is higher, the causes must be identified and addressed before the variance increases.

How to prevent cost overruns

Preventing cost overruns requires a repeatable monitoring method, with clear accountability and up-to-date information.

Integrating budgeting and management control into day-to-day operations makes it possible to identify where more resources than expected are being used and to take action before variances jeopardize the project’s margin.

Distribute the budget across activities

A total amount gives little insight into the source of the problems. Breaking down the budget by phases, tasks or work packages makes it possible to identify where the variance originates.

For each element, you should estimate resource requirements, purchases, and additional costs. This level of detail makes it easier to verify the initial assumptions and compare them with what actually happens during execution.

Update final figures and forecasts

Hours worked and expenses must be tracked at appropriate intervals for the project. Data entered weeks later reflects a situation that may be too late to address.

Along with the final reports, it is important to update the estimate of the remaining costs: how much will it cost to complete the remaining work? The sum of costs incurred and projected remaining costs provides a solid basis for assessing whether the budget is on track.

Define thresholds and corrective actions

Every major deviation must have a person responsible and a response. The threshold for concern should be determined based on the project’s scope, margin, and uncertainty.

When this threshold is crossed, the cause must be analyzed, and a decision made on how to respond. Reducing non-essential activities, resolving a bottleneck, or renegotiating the scope may be useful options. Indiscriminately cutting resources, on the other hand, risks increasing delays and rework.

How Twproject helps keep costs under control

Twproject combines planning, resources, and costs all in one place. Each project has its own budget, which can be compared to actual costs incurred. The hours clocked by the team are valued based on the resources’ hourly rate, so the project cost is always up to date, without the need for retroactive adjustments.

The project manager can see which projects are exceeding the budgeted cost and can take immediate action. 

The workload overview helps prevent delays and overtime—two common sources of extra costs. Reports and dashboards make the data accessible to management as well, allowing them to assess the profitability of each project without waiting for the project to close.

This way, cost overruns are no longer a surprise but become a managed risk.

Costs can spiral out of control when the budget loses touch with the actual work. Incomplete estimates, unmanaged changes, and delayed information make it hard to spot problems early.

To stay in control, compare what was planned, what you’ve spent, and what you still need to spend. This insight lets you take sustainable action and protect the project’s margin.

Discover how Twproject can help you link tasks, resources, and costs so you can make decisions before cost overruns jeopardize the project.