Everything to Know about Cost Overrun Risks

What is Cost Overrun?

A cost overrun, also called a budget overrun, happens when a project costs more than planned. This is common in construction and capital projects, where unexpected expenses can come from wrong cost estimates, design changes, scope creep, site issues, or supply problems.

While cost overrun and budget overrun are often used interchangeably, they have different meanings. A cost overrun happens when the actual cost of a specific part of the project exceeds its budgeted amount. A budget overrun means the total project budget exceeds the original plan, which may include multiple cost overruns and additional unexpected expenses.

For example:

Cost overrun: The price of building materials increases, making material costs exceed the budget.
Budget overrun: Due to higher material costs (cost overrun) and other unforeseen expenses, the total project budget exceeds the planned amount.

Cost overruns can delay projects, reduce profits, and cause disputes. To prevent them, project teams need accurate budgeting, risk planning, and strong cost control measures to keep finances under control.

Project Cost Overrun Examples

The best examples of cost overruns in major projects include the Sydney Opera House and Berlin Brandenburg Airport. Both projects faced severe budget overruns due to design changes, technical challenges, and mismanagement, causing their final costs to soar far beyond their original estimates.

1. Sydney Opera House (Sydney, Australia)

The Sydney Opera House is one of the most iconic buildings in the world, but its construction was a financial disaster.

Initial Budget: AU$7 million (1957)
Final Cost: Over AU$102 million (1973)
Overrun: More than 1,400%

Why did costs spiral?

Frequent design changes: The original concept evolved significantly, increasing construction complexity.
Engineering challenges: The roof structure required new construction methods that added time and cost.
Project mismanagement: Political and leadership changes led to funding issues and planning errors.

Despite the massive cost overrun, the Sydney Opera House remains a global landmark and a symbol of architectural achievement.

2. Berlin Brandenburg Airport (Berlin, Germany)

The Berlin Brandenburg Airport (BER) was meant to be Germany’s modern aviation hub, but it became one of Europe’s worst construction failures.

Initial Budget: €2 billion
Final Cost: Over €6 billion (2020)
Overrun: More than 200%

What went wrong?

Technical failures: Fire safety and other system failures led to repeated delays.
Regulatory setbacks: Poor planning led to non-compliance with building codes, forcing costly redesigns.
Leadership turnover: Frequent changes in management disrupted project coordination.

After nearly a decade of delays, Berlin Brandenburg Airport finally opened in 2020—ten years later than planned.

Sydney Opera House under construction, a major project with a 1,400% cost overrun. — The Sydney Opera House faced a 1,400% cost overrun, driven by design changes, engineering challenges, and mismanagement.

The History of Cost Overruns

Cost overruns have long been a challenge in the construction industry, affecting both public and private sector projects. Large-scale infrastructure developments, from bridges and highways to airports and iconic buildings, have often exceeded their original budgets due to unforeseen challenges, inaccurate cost estimates, and poor risk planning.

Historically, major projects have struggled with complexities that were not fully identified during the planning and design phases. Factors such as scope changes, material cost fluctuations, regulatory delays, and engineering challenges have contributed to significant cost overruns worldwide.

Common Causes of Cost Overruns

A cost overrun happens can happen for many reasons, but the most common causes include poor planning, inaccurate estimates, mismanagement, and unexpected problems. Understanding these causes helps project owners, client-side project managers, and capital project teams reduce the risk of going over budget.

Seven key factors that lead to cost overruns in projects include:

1. Scope Creep (Uncontrolled Project Expansion)

When a project’s scope expands without adjusting the budget, costs rise. New requirements, additional features, or unplanned tasks require more resources, time, and labor, leading to budget overruns. Careful scope management and regular budget reviews help keep costs under control.

2. Inaccurate Cost Estimates

If the initial budget is wrong, the project will likely go over budget. Underestimating costs can happen due to missing details, outdated data, or poor forecasting. Overestimating costs can also create inefficiencies. Regular cost audits and expert reviews improve budget accuracy.

3. Poor Risk Management

Unexpected events like supply chain delays, regulatory changes, or unforeseen site conditions can increase costs. Without a risk management plan, teams may struggle to handle these issues, leading to budget overruns. A strong risk assessment strategy helps prepare for and reduce financial surprises.

4. Lack of Experience in Project Planning

If a project team lacks experience, they may fail to accurately estimate costs, allocate resources, or predict risks. Poor decision-making can lead to delays, rework, and inefficiencies. Hiring skilled professionals or conducting thorough research improves project planning and cost control.

5. Low Productivity and Labor Issues

When teams work inefficiently or productivity drops, costs rise. Poor performance, rework due to errors, and mismanagement of labor increase project expenses. Motivating teams, ensuring proper training, and maintaining a skilled workforce help prevent unnecessary costs.

6. Poor Communication and Coordination

A lack of clear communication between project teams, managers, and stakeholders can lead to confusion, mistakes, and wasted resources. If tasks are misunderstood or instructions are unclear, projects may require rework, leading to cost overruns. Effective collaboration tools and regular updates keep everyone aligned.

7. Scheduling Issues and Poor Resource Allocation

If tasks and resources are not scheduled properly, the project can slow down or become inefficient. Underutilized workers waiting for materials or overloaded teams rushing deadlines can increase costs. A well-structured project schedule ensures smooth workflows and cost efficiency.

Likelihood of Cost Overruns

The likelihood of experiencing cost overruns is relatively high in the construction industry, particularly in complex or long-term projects. The reality is that there are so many causes of this risk that make's it hard to fully mitigate or treat the risk. However, effective project management and rigorous budget control are essential to minimize these risks. Project Owners, General Contractors and Project Managers should expect risks to be realised and allow for them.

Consequence / Impact of Cost Overruns

The impact of cost overruns can be substantial, potentially leading to financial losses, the need for additional funding, project scope reduction, or even project abandonment of the entire project. Cost overruns can damage relationships, kill reputations and infuriate clients and other stakeholders due to mistrust or dissatisfaction. Primarily though, the main impact of Cost Overruns is requiring more money to complete the project.

Cost Overruns Clauses in Construction Contracts

Depending on your appetite for cost and risk, there are many types of construction contracts to choose from the address the responsibility of this risk differently. Within the contract's themselves there are generally no call-out clauses specifically for 'Cost Overruns' in standard form construction contracts, but there are mechanisms that control cost, time and changes to scope. They are:

Change Orders / Variations: Detailed processes for managing changes in the project scope, including how changes must be documented, approved, and implemented.
Scope Definition: Clear, detailed descriptions of project scope and deliverables to establish firm boundaries.
Stakeholder Roles and Responsibilities: Defined roles for all stakeholders in decision-making processes related to scope changes.
Limitations and Exclusions: Specific limitations or exclusions that define what is not included in the project scope to prevent unwarranted expansions.

How to Prevent and Manage Cost Overruns Risk

Keeping a project within budget takes planning, good risk management, and smart cost control. Here are some simple ways to avoid cost overruns and stay on track:

Use cost management software: Spreadsheets can lead to mistakes. A good software tool helps track budgets, manage risks, and handle contracts more accurately.
Identify risks early: Find possible cost risks before they become a problem. If you can’t eliminate them, reduce their impact or prepare for extra costs.
Connect risk and cost tracking: Using a system that links cost tracking with risk management makes it easier to see potential problems and adjust the budget in real time.
Plan carefully: A detailed project plan with accurate cost estimates helps avoid surprises. Analyzing possible risks before work starts can prevent budget issues later.
Review the budget often: Check costs regularly as the project moves forward. Catching small problems early makes them easier to fix.
Control project changes: Changes to the project can increase costs. Having a strict process for approving changes helps avoid unnecessary spending.
Set aside extra funds: A contingency budget can cover unexpected costs without throwing the whole project off track.

Risk Management and Reporting of Cost Overrun Risks

As we've seen above, there are a lot of considerations when it comes to Risk Management. Implementing Risk Management and Reporting controls will make managing this risk easy, and ensure success of your Capital Project.

Risk Management Plan: Download a free Risk Management Plan Template and put a Risk Management process in place.
Risk Register: Download a manual Risk Register Template or use an automated Risk Register solution to track all risks, causes, consequences and mitigations.
Reporting: Create automated Risk Reports, Project Status Reports or Dashboards for communicating with stakeholders. If you need a free Report Template, download them from our template library.