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Cost overrun refers to a situation in which a project incurs expenses in excess of expected costs outlined in the budget for the project. When a cost overrun happens, this means that the team working on a project has spent all money budgeted for the project. A project that has reached cost overrun requires money in excess of the original budget to complete the work. Cost overruns can happen for a variety of reasons, but they are usually avoidable with careful budget design and project expenditure planning.
When a project goes over budget, it can cost an organization more than extra money. Cost overruns in a project can cause delays while the project manager finds more money for the project. At worst, a cost overrun can bring a project to a complete stop if no money is available to make up the difference and fund the completion of the project.
Reasons for a cost overrun can include poor organization, lack of information, or client demands in excess of what was planned for a project. Poor organization can come from poor project planning or a lack of experience planning the type of project at hand. A lack of accurate information about the project can also influence the accuracy of budget projections. If a project manager does not have information she needs to plan a project, budgeting can be determined from incorrect numbers derived from bad information. Unreliable information can cause extra costs that make a budget fall short of what is needed to complete a project.
Often, a cost overrun can happen when a client asks for work that was not originally planned into a project. A good example of this might be a homeowner who makes multiple extra requests of a contractor without adjusting the budget for the building project. Since extra materials and labor cost money, any extra requests add additional costs to the expense of a project. These extra costs can cause a contractor to go over budget if the costs of additional requests are not added to the original projected budget.
Sometimes, cost overruns happen by chance. Traffic, accidents, and natural disasters can create damages and delays that add to the cost of a budgeted project. The best way to avoid work delays as a result of budget overrun is to set aside emergency funds for a project in case unexpected obstacles cause a project to exceed its budget.