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?

Question

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

Answer 1

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.