Cost Overruns in Public Projects

Today we have an entry from the “no surprise to anyone who’s ever read a newspaper” department. Underestimating Costs in Public Works Projects: Error or Lie? by Flyvbjerg, Skamris Holm & Buhl, originally published in 2002, has just been released as a free arXiv download. The authors examined 258 transportation infrastructure projects in 20 countries on five continents, completed between 1927 and 1998, and worth a combined $90 billion in 1995 prices. This “first statistically significant study of cost escalation in transportation infrastructure projects” led to the following findings:

  • Costs are underestimated in 9 out of 10 transportation infrastructure projects.
  • Actual costs are on average 20–45% above estimates, depending on project type.
  • Cost underestimation is a global phenomenon, though more pronounced in developing nations.
  • Cost underestimation has not decreased over the past 70 years. No learning that would improve cost estimate accuracy seems to take place.
  • Cost underestimation cannot be explained by error and seems to be best explained by strategic misrepresentation, i.e. lying.

The authors do not wish to single out public transportation spending. They had insufficient data on privately financed projects to determine if they fare any better, while other types of large public projects appeared to be just as prone to cost underestimation. Still, regarding the specific case that they did examine:

We conclude that the cost estimates used in public debates, media coverage, and decision making for transportation infrastructure development are highly, systematically, and significantly deceptive. So are the cost-benefit analyses into which cost estimates are routinely fed to calculate the viability and ranking of projects. The misrepresentation of costs is likely to lead to the misallocation of scarce resources, which, in turn, will produce losers among those financing and using infrastructure, be they tax payers or private investors.

To ameliorate this sad state, the authors suggest developing “institutional checks and balances – including financial, professional, or even criminal penalties for consistent or foreseeable estimation errors.” As far as I’m aware, nothing of the sort has happened since 2002, and public projects merrily continue to overrun their cost estimates.

2 thoughts on “Cost Overruns in Public Projects”

  1. Since contracts are usually awarded to the lowest bidder and once a project is underway it is usually more costly to change contractors than to pay an existing contractor more, (particularly when legal fees are involved) the incentive is for a contractor to underestimate costs when placing the initial bid and to count on being able to charge more than the stated bid once work is begun.

    I have seen this a lot, both in the private and the public sector. The only way I see around it is to include a contractor’s past performance as a factor in the bidding process and to exclude those who have a high overrun percentage, or to simply not allow change orders once the bid is awarded and force the contractor to assume any overages. I don’t see the public sector adopting either of those policies, unfortunately.

  2. I just read an amusing USA Today report on the eternally delayed Berlin airport and other large-scale planning failures in Germany. It brought up another good point that’s specific to public projects: politicians may propose them for their own personal prestige. Those politicians are happy to accept unrealistically low bids in order to get the project started, and have no incentive to enforce realistic bids that might kill the project.

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