The real truth is that many projects are underestimated and under-budgeted. This is especially true the more complex a project get – usually the larger the project, the more the complexity.
Those involved in the planning of projects should be aware of a simple fact: A project is going to cost what a project is going to cost.
The project does not care about your “budget”
It is a different but important perspective.
Why do we under-estimate and under-budget projects?:
- Insufficient planning during the project development phase
- Poor scope definition
- Pressure (political or financial) – we need to hand over by XXX date
- Poor understanding and quantification of real project risks
- Various cognitive and behavioural biases.
- Poor project leadership
- Poor integration and lack of systems thinking
The list above shows that many causes of weak project budgeting outcomes stem from poor project management processes—factors that are entirely within management’s control.
Many project risks are inherent to the project and cannot be easily controlled. It’s important to accept that risk is an unavoidable aspect of any project. However, significant risks should be quantified and incorporated into the budget or cash flow projections. Doing so establishes a budget range that enables more accurate evaluation and effective management of the project. This will also allow for more effective risk structuring.
A standard contingency rate (e.g. 10%) will normally suffice in simple less complex projects.
