Cost risk in project management

Cost Risk in project management (and how to manage it)

The vast majority of project management offices (PMOs) and individual projects will have cost as a KPI. It’s vital to understanding the return on investment in each piece of work. With that, you need to know how you can help your projects manage their cost risks.

A problem in pretty much any area of a project will lead to an increase in costs in some way. Knowing that we’re going to explore:

  • What cost risk is
  • Examples of internal and external cost risks
  • Which costs can increase for your projects
  • Ways your PMO can help mitigate cost risks

To help you keep a lid on your PMO and project spending.

What is project cost risk?

Project cost risk is the risk that a project will spend more money than was originally budgeted. It will either lead to an overspend on the project or a reduction in the deliverables as money is pulled from other areas to compensate for increased costs.

There is a positive side to cost risk – have you ever had a project come in under budget? It can and occasionally does happen. This is a cause for celebration and a chance to decide where to allocate the unspent money, whether it’s on a project team incentive or ploughing into better deliverables on the next one.

Cost risk can derive from internal issues or be generated from outside your PMO and the business as a whole. These are internal and external cost risks.

Internal cost risks in project management

Internal cost risks are generated when something inside the business changes to increase the amount of money needed. Some examples of internal cost risks include:

  • Incorrectly forecasting the budget to complete the project
  • Delivery of work taking longer than expected
  • The need to outsource to contractors or freelancers
  • Unanticipated travelling requirements

External cost risks in project management

Cost changes that are out of your PMO’s hands are called external cost risks. Although there is little that can be done about them on a practical level, they still need to be taken into account. External cost risks on a project could include:

  • Change in price of materials needed
  • Regulatory changes requiring extra work
  • Exchange rate fluctuations
  • Banking fees and charges being amended

Which costs might increase during a project lifecycle?

Nearly everything that could change or go wrong on your project will have a cost associated with it. Those costs can come from one or more of the following areas:

  • Labour – when more work is needed to make changes or do extra tasks that get added on – known as scope creep – your projects will need to pay overtime, for new staff or freelancers to get the job done.
  • Materials – new requirements can require new software or other project inputs. If an area of the project fails, this could also require more materials to be purchased, and this may be at a higher cost than originals.
  • Equipment – hardware needs may expand to fulfil new demands on a project, requiring capital investment. Similarly, a broken-down tool in a factory or a worn-out delivery vehicle increases equipment costs.
  • Administration – as a project expands, morphs, and changes it will take more administration from your project manager and likely within your PMO. New risk assessments need to be done, as well as cost and time projects and keeping stakeholders informed.

How to mitigate cost risks across projects?

You’ll never be able to stop a project from changing its cost profile completely. There needs to be an allowance for change; it’s the very nature of business. How you deal with changes is what’s important.

Included in a project budget should be a contingency. Usually, this is around 5-20% of the project’s main budget and is in the hands of the project sponsor. This means that money doesn’t have to be found within your PMO or elsewhere in the business when the unlikely happens.

Ensuring strong planning and projections are done ahead of time will mean you know better how to budget time and resources for tasks. Having details processes and documentation available through your PMO can help get this correct from the start.

The take-home

Helping your projects manage their cost risks will ensure that your PMO keeps within budget too. You need to be aware of all the potential pitfalls in a project because they will likely cost cash to fix up, whether they’re in your control or not.