Cost overrun, known more colloquially as “going over budget,” is a big problem in the manufacturing industry. Spending lots of money is harmful enough to businesses — spending money that you didn’t plan on spending can be downright disastrous. In this article, we will discuss a few of the most common causes of cost overrun; which will hopefully give you the insight you need to avoid this unfortunate phenomenon in the future.
- Technical. Cost overrun oftentimes occurs due to imperfect techniques in cost prediction. Perhaps the cost estimation technology you are using simply isn’t up to par, for example — or maybe the data that you based your estimations on was erroneous.
- Psychological. People aren’t perfect and one mistake that we are psychologically inclined toward making is that of optimism bias. When looking at a project “on paper,” it is easy to feel confident that everything will go exactly as planned. It is only in real life, once commitments have been made and materials purchased, that we reality sets in. Scope creep, which refers to the gradual “ballooning” of project commitments, is another common psychological cause of cost overrun.
- Political/Economic. This category covers any changes in project expenses that are related to “big picture” factors that lie outside of your control. For example, a manufacturer that frequently uses steel could be affected adversely if a new tax was placed on steel and/or if global demand for steel suddenly skyrocketed, as both factors would lead to increased steel expenses.
Quoting a job correctly from the get-go is a crucial aspect of protecting your profits and keeping customers happy with the services and prices that you offer. That’s why investing in your ability to make accurate cost estimations is a no-brainer. Visit SMe Software online today to learn more about our Manufacturing Estimate Software.