Procurement and Contract Management

Posted: October 17th, 2013

Procurement and Contract Management

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Procurement and Contract Management

A cost overrun is the amount incurred when the actual cost surpasses the budgeted cost. It is also referred to as budget overrun. The cost growth is the difference between the original budget for a project and the final cost of that project. If extra work is added to the project, there will be an escalation in the total budget and the total cost. If the total budget for the extra work were sufficient, there would be no cost overrun but cost growth. Cost overrun and cost growth is mostly experienced in the construction industry.

Cost overrun occurs when the work has not changed but its cost becomes more than anticipated. A number of factors can cause this including, the size of the project, level of competition, type of construction needed in the project, mismanagement of the project, flawed estimations and poor planning. On the other hand, cost growth occurs when the work is changed because of the buyer’s intentions or marketable technology. This in turn adds to the cost of the project.

Cost overrun is most times caused by the buyer. After the work has commenced and the buyer comes in with ridiculous demands on the specifications of what he wants, the seller has to incur the extra costs. If the demands are not too big, then the seller will not see the difficulty in trying to meet them. However, when they exceed what was in the contract, then a good seller will have to stop the buyer from breaching the terms and conditions of their contract or else the project will not go on as planned. Still, in cases where the buyer has given specifications and they have not been met, then the buyer realizes the risks involved in the project. He or she will know that the quality of the project will not be up to standard. There are sellers who do not like competition from their rivals and so they will do whatever it takes to stay ahead.

Reference

Garrett, G. A., & Commerce Clearing House. (2008). Cost estimating and contract pricing: Tools, techniques and best practices. Riverwoods, Ill: CCH.

Langford, D. A., Retik, A., & CIB W-65. (1996). International symposium for the organization and management of construction: Shaping theory and practice. London: E & FN Spon.