Why can’t we get the cost of building our infrastructure right?
Posted by David Kassel on April 14, 2008
Is it just everyone’s imagination, or does just about every large public construction project ever undertaken end up costing signficantly more than expected?
A number of researchers say we’re not imagining things. In fact, says one, project promoters consistently lie about what their proposed projects are likely to end up costing.
In a 2002 paper in the Journal of the American Planning Association titled “Underestimating Costs in Public Works Projects: Error or Lie,” Bent Flybvjerg, M.S. Holm, and S. Buhl, reported on the results of a review of 258 public transportation infrastructure projects around the world worth $90 billion. They found that costs had been underestimated prior to completion in 9 out of 10 of those projects, and that actual costs were 28 percent higher on average than estimated costs.
They also found that no learning appears to have occurred over the 70-year period of the projects they examined. Cost underestimation has continued in the same order of magnitude over that time. “Project promoters routinely ignore, hide, or otherwise leave out important project costs in order to make total costs appear low,” they wrote.
In a followup paper in 2005, “Policy and Planning for Large Infrastructure Projects: Problems, Causes, Cures,” Flyvbjerg maintained that these cost understimation problems apply to a wide range of other project types including power plants, dams, water projects, concert halls, museums, sports arenas, convention centers, IT systems, oil and gas extraction projects, aerospace projects, and weapons systems.
The policy implications are clear, Flyvbjerg argued: Lawmakers, investors, and the public can’t trust information about costs, benefits, and risks of large infrastructure projects produced by promoters and planners of those projects. The current way of planning large infrastructure projects is ineffective and leads to bad investments. And there is a strong need for reform in policy and planning for large infrastructure projects.
Among the projects Flyvbjerg cited as having large cost underestimation and overestimations of benefits were Boston‘s Big Dig, in which costs rose from $2.8 billion to $14.6 billion in constant dollars; Denver‘s $5 billion International Airport, in which costs were close to 200 percent higher than estimated; the cost overrun on the San Francisco-Oakland Bay Bridge retrofit of $2.5 billion, or more than 100 percent, even before construction started; the Channel tunnel between the UK and France, which came in 80 percent over budget for construction and 140 percent over for financing; the $4 billion cost overrun for a Pentagon spy satellite program and the over $5 billion overrun on the
International Space Station. He cited many others as well.
Some megaprojects become so large in relation to national economies, he noted, that cost overruns and benefit shortfalls from even a single project may destabilize the finances of a whole country or region. Flyvberg pointed out that technical, psychological, and political reasons have been advanced to explain the cost underestimation problem. The psychological explanation is sometimes referred to as “optimism bias,” a form of self deception. The political explanation is that project planners purposefully underestimate project costs in order to get approval for their projects—in other words they lie about the costs.
Flyvbjerg contended that the explanation that planners purposefully lie is the best explanation for the data. Optimism bias would disappear, he argues, after people estimating costs and benefits became experienced and began drawing on the knowledge and skills of more experienced colleagues.
But Flyvbjerg seems to discount the possibility that many of these people don’t have the opportunity or inclination to draw on the knowledge and skills of others. If those people with knowledge and skills were consistently hired for these projects, then what Flyvbjerg is saying would certainly be true. But it may well be the case that projects are often begun with inexperienced analysts and managers. It’s not that they necessarily are lying about costs and benefits. It’s just that there is no opportunity or inclination to learn from others and that idealism and ideology take over.
Why is it that presidents continue to make unsupported presumptions about the projects and situations they face that lead them into trouble without seeming to learn from the experience of those who came before them? Those presidents may not always be purposely deceiving others in underestimating the risks of political events and undertakings. They may truly be deceiving themselves because they often don’t ask key historical questions and learn from past events.
Flyvbjerg maintained that the profession of forecasters would indeed have to be an optimistic–and non-professional–group to keep their optimism bias throughout the 70-year period his study covered for costs and not learn that they were deceiving themselves and others by underestimating costs and overestimating benefits. It’s not a credible explanation, he concluded. I’m not so sure. I think this may be exactly what often happens.
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