What to Do When Experiencing Budget Overruns: Critical Success Factors in Project Management

Professional services project management is all about delivering projects more efficiently and increasing billable utilization. However, even at world-class services organizations, the best project managers and team members will experience problematic project cost management every once in a while resulting in budget overruns. So if somewhere along the way you’re over budget with project management, here is a 5 step guide to avoid cost and budget overruns, with a focus on the critical success factors in project management for delivering on time and on budget.

Table of Contents:

Why Do Projects Go Over Budget Resulting in Budget Overruns?

Step 1: Identify the Problem

Arguably, the hardest part of project management is identifying problems before they become unrepairable. The longer that a problem festers in a project, the harder it becomes to fix.

In order to successfully detect project issues, a project manager needs a commanding grasp of the entire project life cycle. A project manager needs to understand where a project stands today and how much effort is left. Typically, these two factors are referred to as a project’s:

  • Actuals-to-date
  • Estimate-to-complete

budget overruns

Add the two together and you’ll get the project’s estimate-at-completion, or the value that you should be tracking against your budget.

Tracking a project’s estimate-at-completion against its budget acts like an early warning indicator, alerting project managers when a specific aspect of a project may have taken more effort than intended. To be effective, however, project managers need to maintain accurate resource management projections and visibility into the project in real-time.

As an added bonus, when you have the right tools in place, your estimate-to-complete can feed into your organization’s revenue forecasting models. This helps to build a more accurate and holistic revenue forecast for your firm.

If you find yourself with a problematic project, there may still be time to contingency plan and course correct. When a project is over budget and behind schedule, here are a few strategies to ensure successful project delivery for your professional services team.

What to Do When a Project is Over Budget

Step 2: Determine the Project Status

Once you notice something has gone wrong, the next project objective is to determine what happened. A project manager’s initial reaction (or anyone’s for that matter) is often to ask who is responsible for the mistake. Instead of wasting crucial time playing the blame game, ask why a problem occurred in the first place.

And don’t just ask why once; ask it a few times to try and illuminate the root cause of the issue. An effective way to shed light on an issue is to use the 5 Whys technique to peel back each layer of a problem. Not only will this technique help you prevent the same problem from happening again on a future project, but it could also provide a critical path towards ultimately course-correcting the project in trouble.

In addition to identifying the root cause of the problem, it is useful to pay attention to the project’s critical path. A Gantt chart presents a clear representation of your project milestones in relation to your actuals-to-date and estimate-to-complete so you can identify where your project’s critical path falls in terms of other dependencies, priorities, and deadlines.

Once you have identified the project-based glitch, you can now address the root of the issue and improve project performance before it gets worse.

Bonus: Download a FREE guide to learn about more metrics and critical factors that are key to the success of your projects and professional services organization.

How to Deal With Project Cost Overruns and Get a Project Back on Track

Step 3: Adjust Key Result Areas

Hope springs eternal, but it doesn’t fix a failing project. The biggest mistake a project manager can make when something goes wrong is to hope that everything will work out in the end.

It may sound like a no brainer, but it happens all of the time—the idea that a small mistake here or there will “wash out” in the end. More often than not, instead of “washing out”, these mistakes add up. When a task takes a little more effort than expected, it is easy to not think much of it. However, it is the project manager’s responsibility to adjust for these discrepancies as the project plan moves along.

cost overruns and key result areas

One tactical action that project managers can take is to identify the project’s key result areas, also known as critical success factors in project management. These are the big-bucket items that must be completed on time and to a high degree of quality in order to achieve project success. Much like an intricate game of chess, project managers can shift around priorities to accommodate for discrepancies in the project’s plan.

For example, if you know that a client is more budget-conscious than time-sensitive, you may be able to play around with resource utilization in project management. You might trim the team to stick to the budget but at the expense of time to market. If scope or quality are factors that can be adjusted, you may be able to make small reductions that don’t jeopardize the ultimate goal of the project while still achieving your key result areas.

Critical Success Factor in Project Management

Step 4: Client Visibility into Project Performance

If shifting around priorities isn’t enough to save the ship, it’s time to talk with your client. It’s important to start the conversation openly to work towards a mutually beneficial resolution. The last thing you want to do is go straight to the defensive. Bring your root cause analysis and priority adjustments to the table so they know you’re not simply throwing in the towel.

If the goal of the conversation is to renegotiate the scope or budget of the project proposal, help the client see why it’s in everyone’s interest to provide some wiggle room. After all, adhering to a tight or unreasonable budget often results in cutting corners and producing lower quality work. If the client is looking for demonstrable value, then it is in their best interest to be flexible.

client visibility

One approach that is worth exploring is a revisit of the project’s A’s and D’s (assumptions and dependencies) that were agreed upon as the basis for the project’s budget and contract structure. A project’s A’s and D’s are often crafted by a more senior-level team member during the scoping process or as the project proposal template is written.

If the client steers the delivery project manager away from these A’s and D’s during the course of the project, it can quickly lead to problems. If your root cause analysis highlights problems in this area, it can be a good opportunity to renegotiate the project’s budget with your client and get things back on track.

Regardless of which approach you take when chatting with your client, there is one important rule to follow—renegotiate once, and only once. Working with your client to adjust the budget or scope of a project is more than an unpleasant experience. It erodes trust and jeopardizes the long-term relationship. Yes, sometimes it is an essential step that must be taken, but if you think doing it once is bad, try doing it twice on the same project. Make sure you have fully uncovered the reason your project went over budget, understand what will be needed to get it back on track, and negotiate your correction once.

Client communication is typically both a project success and failure example—ensure you are effective, proactive, and transparent throughout the project’s life cycle.

Effective Services Project Management

Step 5: Improve Project Performance to Improve Business Results

To wrap it all up, sooner or later, every project manager will find themselves at the helm of a struggling project. Being able to correct that project is a valuable skill and one of many critical success factors in project management. Regardless of the approach you take to save the project, it’s important to digest what went wrong, what you did to fix it, and what you will do to prevent it from happening again.

Project managers that have strong visibility into their project portfolio are the most successful when it comes to spotting, correcting, and learning from troubled projects. If every project you run feels like a heroic quest, rather than a well-planned journey, it’s probably time to review your processes to see where you can inject more visibility and gain more control. After all, every project manager’s goal is the same—deliver on time and on budget successful projects to ultimately improve business results.

In Summary

To optimize project cost management and avoid budget overruns, 5 steps to follow include:

  1. Identify the Problem
  2. Determine the Project Status
  3. Adjust Key Result Areas
  4. Provide Client Visibility into Project Performance
  5. Improve Project Performance to Improve Business Results

Read on to learn more about conducting a Project Profitability Analysis, or download our Metrics That Matter white paper to dive into other core metrics that affect overall project and service organization success. 

Learn about more critical project success factors and Metrics that matter

Frequently Asked Questions About Budget Overruns and Project Cost Management

Why would a project go over budget?

A project can go over budget when there is poor tracking of a project’s actuals-to-date and estimate-at-completion against its budget. Project managers need to maintain accurate resource management projections and have visibility into the project in real-time.

How do you manage budget overruns?

One tactical action that project managers can take is to identify the project’s key result areas, or critical success factors. Project managers can shift around priorities to accommodate for discrepancies in the project’s plan. If shifting priorities isn’t enough, it’s time to talk with your client.

What are 5 steps to avoiding budget overruns?

To optimize project cost management and avoid budget overruns, 5 steps to follow include:

1. Identify the problem
2. Determine the project status
3. Adjust key result areas
4. Provide client visibility into project performance
5. Improve project performance to improve business results

How can a project manager successfully manage a project budget?

Arguably, the hardest part of project management is identifying the problems before they become unrepairable. In order to successfully detect project issues and budget overruns, there are two factors a project manager needs visibility into to understand the status of a project: actuals-to-date and estimate-to-complete.

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