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What is a Cost Increase?

Christine Hudson
Christine Hudson

A cost increase, also known as a cost overrun, is a term used when company or project spending goes over the quoted budget. This is a common occurrence in industries where supply and product costs are constantly changing, such as technology. Cost increase is also different from cost escalation, which is an expected overage or rise in expenses. This can occur with projects like construction, product development or marketing campaigns. Sometimes a cost increase is due to mis-budgeting, and sometimes it can be due to an unexpected increase in the price of supplies and services during the project.

These increases happen for several reasons, which are usually grouped under three categories. These categories are political or economical, technical and psychological. Most political or economical increases are due to budget forecasts which are deliberately set lower than the realistic forecast in order to obtain certain budgeting benefits. Technical increases are due to human error or a simple flaw in the forecasting process. Issues like over-optimism, optimism bias and personal bias on the part of the forecasters are the most common psychological reasons for overruns.

Man climbing a rope
Man climbing a rope

A cost increase is almost always represented as a percent or ratio. For a budget with an estimated cost of $4,000 US Dollars (USD), an actual cost of $8,000 USD would be shown in a ratio of 1:2 or as a 100-percent overrun. Most private companies consider keeping overruns as low as possible to help overall profit and longevity. Large contractors, cities or states, however, may get a higher budget later if there are overruns, so deliberately setting them is common.

The key to prevent a cost increase for most budgets is to clearly define the scope of the project and factor in growth and contingency funds. Funds which are unexpectedly needed or possible additions to the project as it progresses should be accounted for during the time of forecasting. A clear understanding of the intention of the project, as well as expectations of every person or department involved, can help those drawing up the budget forecast to create the most accurate one possible.

In terms of government, cost increases can cost tax payers millions of dollars a year. Private companies must sometimes deal with the issue with pay or staffing cuts. Publicly-owned or traded companies might lose most of all, as too many cost increases will lower public appeal and possibly ruin them. To help a cost increase, many businesses have multiple people and departments in charge of creating, reviewing and approving budgets for a project.

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