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.