Eli5: why are estimated budgets for big construction projects always wrong and end up spending more than expected? Why can’t we get better at these estimates?
In: Economics
You cant spend time to do a complete design of the project in advance because a huge amount of work need to be done. If it was required all the companies that mad bid would need to do separate complete designed. No one is prepared do it tat detailed in advanced if they do not get paid for the work. So unless you what to pay multiple compaones to do the total design and the just do one it is impossible to know the expected cost in advanced
A major problem is what is unknown. What is below the ground is very had to determine but at the same time very important part of construction. That is even the case if the building is jut above ground because the building need to be supported. It is often during the construction that the true condition can be determined.
For long time projects changes of cost what is needed will also change. It is very had to predict the exact cost of the building material, workses and everything else a couple of year in advanced.
In a large project one delay cause another and if you have people that work the might not be able to do anything at time because of other delays
mostly because of incentives to under-estimate during the planning phase, and later executive meddling.
firstly, with any project that includes bidding, etc, their is a strong incentive for bidders to be very optimistic, or just *lie,* about how cheaply they can do the task, at least until it becomes hard to back out and change contractor. the prime contractor basically has to justify each cost, and especially for public work, its hard to justify a $10 million bid for a new bridge, when one of the other bidders said they can do it for $8 million. That reeks a lot like corruption, so they tend to go for the cheaper bid, even if they think its likely to be an underestimate. then, six months into building, the contractors turn around and say “we need another £3 million to complete this bridge, or else we are going to go under”, and the government is left with either paying $11 million total to get the bridge with the existign contractor, or refusing, loosing several million, and *still having no bridge.* so they bite the bullet and pay up.
Secondly, these budgets are usually planned with a set of assumptions, that often don’t pan out or are shifted because of changing priorities. for example, the original plan was to spend $2 million a year for 5 years on this $10 million road project, but 3 years in, a major storm damages both the road under construction and several other roads, and the government is forced to not spend any money on the new road that year as it fixes the existing problems. Then, in year 4, a new leader comes in, after running a campaign of budget reform, and they are told they can only spend $1 million a year on the project, which slows down the whole build massively, and increases overall costs, and the net effect is the $10 million project costing $12 million by the time the road is open, several years later than planned.
We can get better at the estimates if you wanted a better estimate you could get one. But these projects are nearly always build public money and the way most places award these contracts the cheapest wins. So companies are forced to underestimate and use the cheapest materials and ways to win the contract. They also dont budget for any problems that might occure. So these budgets nearly never work out in the end. If you were to ask these companies for the amount of money they would need to build it the right way and not to worry about winning a contract they would 95% of the time give you a nearly correct estimate.
Now ofcourse unforseable things can always happen that will make projects more expensive. But that is not the norm and this can be seen in that if you have privatly build things they arent nearly as often over budget.
I work in the security industry and for the last 5 years I can count on one hand the number of jobs I’ve bid on that had accurate and concise designs put together by architect and engineering firms. Unfortunately in the time that you get to put these bids together and the usual lack of response or answers to your questions leads to change orders down the road when issues you have been pointing out finally rear their heads. This is just one discipline that in the grand scheme of things is not that expensive. I can only image this extrapolated to the other trades
Because both the public order law in almost any place in the world as well as private investements are more interested about picking lowest number possible on time. Getting good estimate costs money and time, and it is in the end irrelevant to actually win the bid for the job given whole industry is just running on perpetual overspending by default.
1. People are bidding on incomplete information a lot of the time. The design process changes throughout the bid and even during the building phase.
2. Bids are time sensitive. So you can’t realistically invest an infinite amount of time into putting bids together (also the firm has to pay for their estimators time anyways so they aren’t incentivized to invest too much time)
3. Budgets are often roughly estimated before the project is fully designed or whatever. So whoever is in charge of the development says “we have $10M for this project, it’s a $10M building” they may have a loose sketch of the building for pitching investors but haven’t consulted architects about detail complexity, haven’t consulted engineers to see if there’s anything particularly challenging, etc, etc
4. The cost of building materials is fairly volatile over the time span of large construction projects. Steel in particular
People here are blaming the construction companies but budgets are drawn up at stage 1 of the journey and that sits 100% with the client.
The job will cost, what it will cost. If the client made an arse of their budget, didn’t have a contingency or a catastrophe budget, voila, there’s your delta.
What usually happens then, is they go with the cheapest tender but as my above point (and every project I’ve worked on) the job will cost what it costs, unless you VE the fuck out of it and what started as a country long railway ends up only going from Birmingham to not even the capital city (I’m not bitter, honest)
ELI5: You want a Lego set so you tell your mom it’s £20 but you know it’s more.
Once she’s driven to the store, parked the car, realised it’s £30 and tells you you can’t have it, she buys it you just to stop you having a screaming meltdown and just want to get you out the shop.
They underbid in order to win and rely on the sunk cost fallacy to get rest of the money later. Better to ask forgiveness than permission.
It’s not as slimy as it sounds. If it’s a Cost Plus Fixed Fee contract, the risk is all on your customer. So you can lower the costs by not pricing in the risks.
Then there are ignorant customers who don’t understand their own needs and requirements. You can provide a really good estimate, but if your customer doesn’t know any better you can find yourself in a cost overrun by going back and making changes they thought of after contract award.
I’ve written and won a lot of multi-million dollar government proposals and run these programs.
A good analogy is try to estimate how long it will take to walk from Los Angeles to San Francisco and to do it accurately. A quick estimate would be I can walk x miles a day so that would be y days. But this fails because what if on day two there is a construction project, a protest, etc and your path is blocked. Or a road is out and you have to take a detour. What if on day three you got blisters and your feet are tired so you need to take a rest day. On day four one shoe fails so you need to take time to shop. Also breaking in a new pair of shoes may require some time. Your initially planned only called for carrying so much food but now you need to get more since it’s taking longer. Did you even account for the time to eat? Or rest? Can you actually really walk eight hours a day at the same solid pace? Maybe day seven there’s a really bad storm and you have to stop for a day. You also most likely did straight mileage but did you account for hills and rougher terrain? Roads are rarely straight.
So many things can affect the estimate. You can get more accurate if you go in more detail but there are tradeoffs, it costs more, takes longer. And to get really detailed you almost have to do it. So try to make it easier people add a buffer but it’s rarely enough because at the same time you can’t say a year just to be safe because will think you’re over exaggerating. Anything above what people can quickly come up with in their heads generally needs to be justified.
It’s a balance of trying to get a reasonable estimate without incurring the costs of building the thing itself (aka doing the hike). Sometimes you can walk what is expected to be the harder parts but even that could be misleading because maybe the part you walked was hilly and all but you weren’t tired from walking days, the weather was nice versus hot or rainy, and maybe it turns out the next five miles were the actual hard part due to a massive detour.
It’s all an estimate and until you actually do it you’re generally going to use the successful path, that is everything is going well. And the bigger the walk (project) the harder it is to estimate, which is also why they tend to try to get more detailed. But again it’s always a balance of cost to accuracy and when is good enough knowing it’s impossible to be fully accurate without actually doing it. Keeping mind accuracy costs go up disproportionately high. As in think how easy it is to estimate the walk with very little accuracy in seconds. Now try to improve it a bit with some research. Each degree of accuracy involves a lot more time, energy, and money. At some point you have to say close enough because again 100% accuracy is not possible without actually doing it. And even then if you did it before it may not work out the same this time. Maybe there’s no storm on day 7 but maybe you get sick on day 9. You can never be 100% accurate, and it will almost always be less than the actual time as you cannot account for all the random stuff you’ll encounter along the way.
Because our system does not allow it.
Politicians announce that they will build a new…..(school, airport, bridge, whatever) none of them have ever worked a real job and know what things cost. None of them have to actually pay from their pocket the money for the project, all they care about is getting reelected. They make a big announcement that they will build X.
Government puts out a tender, which is them saying they want a Company to build something for an amount of money. Private companies bid on the project fully aware that the government people are incompetent.
The project gets halfway done, and the company starts demanding more money to finish it knowing that the government will cave in to their demands. The government promised, and was reelected on the promise of a new X. The company knows this going in. All the suppliers and trade unions know this and use the situation to make demands of their own.
The individuals in the government are not held personally accountable for the dollars they control. That is why large projects costs spiral out of control.
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