Cost Overruns
Delicia Brice
PM3320
Professor Johnson
September 16, 2014 Abstract
Project management is to forecast and track costs to avoid cost overruns. Poor management leads to rising cost. Effective project management identifies such possible sources of cost overruns early and mitigates their effect. This paper explains the underlying causes of project cost overruns and provides some cost estimating methods used to avoid the overruns in the project.
Cost Overruns
Cost can be described as one of the most important issues of a project success. A cost overrun is the amount by which the actual cost exceeds the budgeted, estimated, original, or target cost. Society sees cost overruns as the norm. They are a built-in part of most projects despite the much acquired knowledge in project management. The most common reason for this are listed below. Low initial cost estimates are often the result of underestimating bids for subcontracts or the actual costs come in, they are often higher than anticipated. Such cost overruns are due either to incorrect estimates or to changed conditions in the marketplace. With a budget number in mind, you can start to assess the cost range of the project you have in mind with a Ballpark estimate. An overall review may find that increases in some areas are compensated by decreases in others. You may be able to adjust requirements to reduce costs or seek out lower-cost suppliers. Advising the business owners or managers of possible higher costs at this stage gives them the option of making changes and maintaining their budgets.
Unanticipated technical difficulties are the root of poor design. Sometimes, the designs or drawings that form the basis of the project are not realistic. You may find that a combination of specified features is difficult to achieve or that drawings show an incorrect arrangement. Executing the project as specified will either cost extra or cause problems that must be resolved later at additional cost. Using the feasibility estimate, the project manager has to continuously compare plans with executed work to find such discrepancies early and correct them.
Specifications changes often voids the initial cost estimates. The project progresses according to a plan that assigns durations to project tasks. The Sponsor makes small changes in the plan that necessitates other changes which lead to still more changes ... and so on. Because estimates are predictions of future costs, there is always the potential for error, and cost overruns are more the norm than the exception. Consequently, additional allowances are needed to act as a buffer, so that the funds actually allocated to the project will be sufficient. This allowance is known as contingency
Lack of Scope leads to the creation of projects that have no clear purpose. Changes in the scope of supply within a project frequently cause cost overruns. These changes result from new requirements that the owners introduce and fixes for functions that don't work as specified. As project manager, you must confirm a comprehensive project plan is in place; all activities and their sequence required for project completion have been identified, and all major purchase orders have been submitted based on known prices and availabilities of materials and equipment. Given that definitive estimates are developed further down the project life cycle with more accurate information and fewer project uncertainties, these estimates provide a much more accurate expected cost of the project at completion, with a ±5 percent margin of error.
External factors such as unexpected rising store prices, environmental factors could lead to cost escalation. While building something you required material & labor. When the inflation occur the price of the items & services increase, day to day essential things like food, fuel, consumer goods are become costly, thus this also effect individual & company. Therefore the material price or manufactured things are become costly as the raw material prices goes up and similarly services are also become costlier. As a project manager you want the cost estimates to be as accurate as possible. Bottom-up estimating decomposes the work into more detail which is aggregated into the total project cost. The accuracy depends on the size of the project and the complexity of the work but this method is considered the most accurate technique

Reference
Hotchkiss, L. (2014). Research Methods and Society: Foundations of Social Inquiry Upper Saddle River, New Jersey: Pearson.