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
So I do this professionally primarily for FAR 15 contracts and some FAR 16.5. The number one reason why they are off is ambiguous requirements. For things like paving a street or roofing a building, we can get with 1-3%. For things like NGAD, we hope to be off by 100M.
There is usually significant pressure to underestimate the costs. Whoever is pushing for a project to happen will inevitably be biased towards making it sound cheaper and more effective than it really is. There will usually be some wrangling over bids and budgets, with the people in charge of the money putting pressure on everyone to make it as cheap as possible.
Additionally, unexpected things will happen during planning and construction, and those things are more likely to add to the costs than reduce them.
People are very aware that costs are often underestimated and they do try and account for it, but it’s difficult, especially for an unusual one-off project. This has actually been cited as a reason for the popularity of offbeat public transport projects like monorails, cable cars, and Elon Musk’s taxis-in-tunnels thing. There is lots of experience in building and operating normal trains and buses, so it’s easier to be realistic about the costs. If you come up with a weird new idea (say, a sideways wooden light rail system that runs on kerosene), then you won’t have any hard data for the construction or running costs, or the typical kinds of problems that will arise, so you just have to do some back-of-the-envelope calculations and will probably come up with a significant underestimate.
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