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
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.
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