Cost Overrun in Aerospace and Defense: The Main Causes and How to Prevent Them

No project is immune to factors that may result in cost overrun – from a mistake made by a team member that will extend a project’s timeline to force-majeure events like pandemic or war. 

However, most of the causes for cost overrun can be explained by poor project and resource management. And the good news is that they can be taken under control. 

Let’s dive into the causes for budget overrun in aerospace and defense projects, and consider the ways of preventing them.

What causes budget overrun in aerospace and defense projects? 

Unrealistic cost estimates

Estimating costs before a project kicks off is challenging, and here is why:

• Aerospace and defense projects are often long-term, and a great number of factors can be changed throughout its lifecycle; 
• Initial estimates are made under conditions of uncertainty, and there can be some unbudgeted expenses that you cannot know about in advance;
• The so-called “estimation knife-edge”: on the one hand, a project manager has to complete the project with minimum required resources and as fast as possible; on the other hand, they must plan for as may contingencies as they can;
• If it’s a multi-project environment with a shared pool of resources, it can be difficult to forecast the resource demand and corresponding costs beforehand. 

These factors may lead to making unrealistic cost estimates that will inevitably end up as a budget overrun.    

Improper risk management

Aerospace and defense projects are exposed to numerous risks – geopolitical and economic tensions, supply chain and talent challenges, competition with the world’s largest companies, etc. Some of them bring new opportunities, but others can be rather dangerous for the workflow. For example, a great number of initiatives (e.g., building aircrafts) involve continuous improvement with deploying the latest technologies. However, implementing immature technologies is risky: it can take too long for the team to master them, or a technology can turn out to be ineffective, which will result in rework. Both problems will extend a project’s timeline and cause corresponding budget overrun.  

The other factor is Murphy’s law – if anything can go wrong, it will. So, being too optimistic regarding the workflow progress and not planning responses to every potential risk can lead to unpleasant surprises, and cost overrun will be one of them.   

Uncontrolled changes to project scope 

It will be hardly possible to complete a project without making any changes to it. But if there’s a lack of control over these transformations and they are accepted without considering the consequences, сost overrun won’t be long in coming. Uncontrolled alterations extend the project scope, a lot of changing requirements result in rework and delivery delays, and after all you won’t be able to fit in the approved project budget.  

Applying inappropriate project management methodology

It may seem that the choice of a project management methodology has little to do with cost overrun. However, for some projects, a certain project management methodology can become crucial for a project’s success. For example, the aerospace and defense industry mostly relies on the Waterfall methodology. But it can be ineffective and considerably extend the timeline of product development projects. In addition, Waterfall methodology can bring additional risks (including cost overrun) to long-term projects, as it’s very difficult to plan everything in advance when a project is going to last for several years. 

Inefficient resource utilization

Poor resource management in general and inefficient resource utilization in particular can also result in cost overrun. First of all, it refers to managing multiple projects with shared resources. In the aerospace and defense industry, a lack of resources is one of the industry-specific challenges, so maximum efficient utilization of the existing employees gains even more importance. If resources are improperly planned for projects, it may seem that there’s demand for more employees. As a result, a company will have to hire more people (which is costly and time-consuming) or overload the existing team members. Though it may seem the right solution for some managers, overloaded employees do more harm than help for the whole workflow: being overwhelmed and stressed, they can make mistakes, then spend time on rework, which will require additional time and costs.    

These were the most significant causes for cost overrun in aerospace and defense projects. Let’s consider some useful tips that help project managers to run projects without exceeding their budget.  

Tips on Preventing Cost Overrun in Aerospace and Defense Projects 

Try to provide realistic cost estimates

There are several prerequisites for making realistic cost estimates. First, it’s reasonable to add a time and budget buffer: it will keep the project afloat in case of contingencies. Second, you should apply an appropriate estimation technique – they vary in the degree of accuracy and can be used in combination to come up with most realistic estimates. Third, you should analyze historical data and take into account your team’s capabilities – it will eliminate unrealistic expectations of them and contribute to better productivity.    

You can find out more about project cost estimates from our blog post: Project Cost Estimation: Overview of the Process, Main Challenges, and Recommendations

Manage changing requirements

To prevent projects from scope creep, cost overrun, and even complete failure, you should first of all establish a formal change control process – every change request that can impact a project’s baseline should be documented, and every stakeholder and team member should be aware of this procedure. Also, none of the changes can be accepted without analyzing their consequences for a project environment and communicating them to those who request these alterations. 

Learn more about coping with changing requirements: Changing Requirements in Project Management: How to Stay on Track

Utilize resources with maximum efficiency

Efficient resource utilization can not only prevent cost overrun, but also contributes to reducing the costs. There are several important things that facilitate maximum efficient resource utilization:

• Planning resources’ capacity: forecasting resource demand will prevent projects from unplanned resource shortages and the need to hire more employees;
• Assigning tasks that fully correspond to team members’ skills and capacity will contribute to high productivity levels; 
• Making sure that the team members’ workload is balanced will make sure that people work at their full capacity, but aren’t overwhelmed with their tasks. 

Therefore, the right resource management will ensure that the team members are productive and engaged, and projects run seamlessly. In this case, the possibility of cost overrun significantly decreases.     

Use the potential of resource management software

Finally, the right resource management solution can become a perfect assistant in preventing projects from cost overrun, especially when it comes to running multiple projects simultaneously. To understand how they work, we’ll examine corresponding functions of Epicflow, a multi-project resource management solution. Its main focus is on providing maximum efficient utilization of resources and ensuring seamless flow of multiple projects running simultaneously. 

1. Epicflow contributes to efficient resource allocation: it has a resource allocation advisor that analyzes each employee’s skills, capacity, and availability, and suggests a perfectly matching team member for completing a project task. When resources are allocated in such a way, it reduces the risk of making mistakes, delays, and cost overrun.   
2. Epicflow facilitates balanced workload by detecting both overload and idleness: it forecasts workload indicators based on team members’ current tasks, so a project/resource manager can timely prevent any resource bottlenecks.
3. Epicflow provides opportunities for tracking progress, including budget utilization: its graphs show how much work remains to be done and how much costs are left within the approved project budget. Monitoring these data keeps a project manager informed of the state of the project environment as well as allows them to spot potential problems and timely react to them. 
4. Epicflow makes it possible to run simulations and see the consequences of project changes, which is a valuable tool for making decisions under conditions of uncertainty (e.g., estimating project costs or analyzing the consequences of requested changes).  

These were just some examples of Epicflow’s functionality. To learn more, book a consultation with our experts who’ll show you our solution in action.