7/31/2019 57688252 Cost Overrun

1/16

Time over run and Cost over run

7/31/2019 57688252 Cost Overrun

2/16

A cost overrun, also known as a costincrease or budget overrun, is anunexpected cost incurred in excess of a

budgeted amount due to an under-estimation of the actual cost duringbudgeting. Cost overrun should be

distinguished from cost escalation, whichis used to express an anticipatedgrowth ina budgeted cost due to factors such asinflation.

http://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Cost_escalationhttp://en.wikipedia.org/wiki/Cost_escalationhttp://en.wikipedia.org/wiki/Cost

7/31/2019 57688252 Cost Overrun

3/16

Cost overrun is common in infrastructure,

building, and technology projects. A

comprehensive study of cost overrunpublished in the Journal of the American

Planning Association in 2002 found that 9

out of ten construction projects had

underestimated costs

http://en.wikipedia.org/wiki/Infrastructurehttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Projectshttp://en.wikipedia.org/wiki/Projectshttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Buildinghttp://en.wikipedia.org/wiki/Infrastructure

7/31/2019 57688252 Cost Overrun

4/16

Overruns of 50 to one hundred percent

were common.Cost underestimation was

found in each of 20 nations and fivecontinents covered by the study, and cost

underestimation had not decreased in the

70 years for which data were available

7/31/2019 57688252 Cost Overrun

5/16

For IT projects, an industry study by the

Standish Group found that the average cost

overrun was 43 percent; 71 percent ofprojects 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.

http://en.wikipedia.org/wiki/IT_projectshttp://en.wikipedia.org/wiki/Scopehttp://en.wikipedia.org/wiki/Scopehttp://en.wikipedia.org/wiki/IT_projects

7/31/2019 57688252 Cost Overrun

6/16

7/31/2019 57688252 Cost Overrun

7/16

Three types ofexplanation 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 ofoptimism bias

with forecasters. Finally, political-economic

explanations see overrun as the result ofstrategic

misrepresentation of scope or budgets.

http://en.wikipedia.org/wiki/Explanationhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Psychologicalhttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Politicalhttp://en.wikipedia.org/wiki/Psychologicalhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Explanation

7/31/2019 57688252 Cost Overrun

8/16

Cost overrun is typically calculated in oneof two ways: either as a percentage,namely actual cost minus budgeted cost, in

percent of budgeted cost; or as a ratio ofactual cost divided by budgeted cost. Forexample, if the budget for building a new

bridge was $100 million, and the actualcost was $150 million, then the costoverrun may be expressed by the ratio 1.5,or as 50 percent.

http://en.wikipedia.org/wiki/Percentagehttp://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Percentage

7/31/2019 57688252 Cost Overrun

9/16

Cost over run (under run) to date

There is cost over run when the cost

incurred is more than the value of work

done. Similarly, there is cost under run when the

cost incurred is less than the value of work

done.

Cost over run is usually expressed in terms

of %age terms.

7/31/2019 57688252 Cost Overrun

10/16

Formula for cost over run:

Actual Cost Value of work completed

=

*100Value of work completed

7/31/2019 57688252 Cost Overrun

11/16

Value of work done to date

When costs are measured, an estimate

should also be made of the extent of the

work accomplished. The value of the workdone completed can be obtained as

follows:

= Budgeted Costs * %age work

accomplished

7/31/2019 57688252 Cost Overrun

12/16

For Eg.

A certain activity has a budgeted cost of

Rs. 80,000 and at the time of the periodic

process review it is estimated that 60% ofthe work has been accomplished. So, the

value of the work done

= Rs.80,000 * 60%

= Rs. 48,000

7/31/2019 57688252 Cost Overrun

13/16

Time over run (under run) to date

There is time over run if the project is

behind schedule. Likewise, there is time

under run if the project is ahead ofschedule.

Time over run is usually defined in terms

of months behind or months ahead.

7/31/2019 57688252 Cost Overrun

14/16

REASONS OF OVER RUN

Imperfect Forecasting techniques,

inadequate data, etc.

Optimism bias with forecasters Strategic misrepresentation of scope or

budgets

http://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Strategic_misrepresentationhttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Forecasting

7/31/2019 57688252 Cost Overrun

15/16

RECOMMENDATIONS

All three explanations can be considered forms ofrisk. A project's budgeted costs should always include cost

contingency funds to cover risks. Poor risk analysis and contingency estimating

practices account for many project cost overruns. Numerous studies have found that the greatest causeof cost growth was poorly-defined scope at the timethat the budget was established. The cost growth, oroverrun of the budget before cost contingency isadded, can be predicted by rating the extent of scopedefinition, even on complex projects with newtechnology.

http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Risk_analysishttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Risk_analysishttp://en.wikipedia.org/wiki/Risk_analysishttp://en.wikipedia.org/wiki/Risk_analysishttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Cost_contingencyhttp://en.wikipedia.org/wiki/Risk

7/31/2019 57688252 Cost Overrun

16/16