What is the most common cause of big projects over running on their estimated budget? For example, I recently learned that the HS2 train line in the UK will be nearly £75bn over the estimated budget! How was the estimate so wrong?
In: Engineering
[https://en.wikipedia.org/wiki/Hofstadter%27s_law](https://en.wikipedia.org/wiki/Hofstadter%27s_law)
>” Hofstadter’s Law: It always takes longer than you expect, even when you take into account Hofstadter’s Law. “
Nobody wants to put a big line item in the estimated budget for “stuff we haven’t thought of, or things going wrong we haven’t anticipated”.
https://en.wikipedia.org/wiki/Planning_fallacy
Because when there’s no consequences for going over an estimate, there’s no real incentive to make sure you stick to your estimate or to estimate a number you can stick to.
I’ve had a 25 year career in enterprise software. The kind of solutions that have a 1-2 year procurement process and a multi year implementation process. I’ve seen a LOT of projects run long. By far the biggest cause is change.
The customer changes their minds about what they want, or, there is a clarity gap between what they described in the tender and what they meant. The customer will be adamant that when they said they wanted a chair, it should be obvious that means a chair with arm rests. The supplier, who only has chairs without arms, will be equally adamant that the chair they are supplying will do the job and adding arms is a change – a change that will impact the project timelines (because they need to design and build arms) and needs to be paid for.
There will be literally hundreds of things like this in a major programme.
With HS2 specifically one of the big reasons for the original estimate and current estimate being so different is the Chiltern hills.
The original estimate was based around running the HS2 line at surface level, with some cut throughs and some small tunnels, but during the consultation phase, the local residents and environmental groups got this changed so pretty much the whole thing will run through tunnels. Some of this is pure nimbyism (my idylic views will be disrupted by trains running through them!), some of it is genuine issues (like train tracks creating noise near villages), some if it is environmental (sites of special scientific interest, areas of outstanding natural beauty etc).
tunnels are expensive and when they started actually working on the geological side of it, they found the hills are more difficult to tunnel through than thought, so the costs keep going up.
There’s a good FT article about this here: [https://www.ft.com/content/cf3ff750-d92a-11e9-8f9b-77216ebe1f17](https://www.ft.com/content/cf3ff750-d92a-11e9-8f9b-77216ebe1f17)
It’s not the only reason and the stuff they talk about at the end of the article is going to be an increasing issue as more and more of HS2 gets built. Once Curzon St, Birmingham Interchange and Euston Station are finished, they won’t be giving up on this project no matter how much costs rise, and this gives an incentive for the private companies contracted to do this to push up their costs to make more profits.
Add to that the government’s tendencies to accept the lowest credible bidder, means companies put in bids they know are too low, intending to push the price up afterwards.
Inflation has a part to play, mostly the original estimates (which were in 2010) are quoted at around £30bn and played against £100bn, but with inflation that would be £38bn now. Also original estimates ranged up to abound £37bn, which would be nearly £48bn now.
But there’s also genuine social/engineering issues that have caused the cost of HS2 to rise so far above original estimates.
When a job is bid and an estimate is given, that’s all it is, it is an estimate on material and labor and some wiggle room for profit and mishaps, not much though. The bigger the job the more problems can arise and bigger the problems can be, for example, you can look at a topographical map to plot the train line but maybe the map hasn’t been updated in awhile so you throw a good number at it and turns out someone threw a house right where you want your line, or what is more than likely the case as it happens most often here in the US, they plan on buying the owned property along where they want the line and the owners of said property refuse, so they keep offering more and more until either they sell or the company decides to just go around, both are very expensive as they cost both time and labor.
I’ve had a $20,000 job that tanked to $500,000 job, and the company just had to eat that loss, it’s not often a big loss like that happens but it’s rough when it does.
Bribes are difficult to account for?
There is an [interesting article](http://bit.ly/19QErEn) on this subject called “curse of the megaproject”. The author claims that it’s mostly psychological factors that contribute to the ballooning of costs of big projects.
For example, planners and managers tend to see their megaprojects as “firsts”, which impedes learning from other projects. Proponents of big projects are also more likely to suffer from optimism bias, which can be disastrous for both cost estimates and benefits estimates. And there is what the author calls “inverted Darwinism” (the survival of the unfittest): very often it’s not the best projects that get chosen, but those that look best on paper, i.e. the ones with the largest cost underestimates and benefit overestimates.
The lowest bidder is often the one that didn’t know about all those extra things that would make it more expensive.
In this case the budget overruns have happened *before* construction (they’ve started on construction but that’s not the cause of the overruns).
It looks like it’s coming in at about twice the original budget, which was from a schematic phase, about a decade ago.
The bust appears due to several factors:
1. Inflation. This starts to be impactful over a decade. The original $ amount wouldn’t have been in 2020 money. The project is still over budget but not quite as much as some newspapers might be pushing.
2. Poor ground conditions. During prelim geotechnical world as the project has been finalized they’ve found sections of the ground work are going to be much more expensive than planned.
3. Possibly over specifying the project requirements. The rail speed required is apparently higher than typical HSR, which the initial estimates were prepared for. This is a common cause of budget overruns during initial design – as the owner first decides what they want the go with their “Option A” for everything from tile selections to air conditioners to light switches, and then the project is way over and everyone needs to have meetings to work out what the Owner really needs/wants and what they can afford and where efficiencies can be found. This stage happens on every project ever. It’s possible they’ve just done a poor job of reining in these types of additional costs.
4. Land values are higher, and rising faster, than originally planned for.
Once construction really begins I’d expect more overruns as either late design changes are made which cost $$$, or £££, as they contractor already has the job and doesn’t feel much pressure to give the best price possible. They go high on the add service/change order fees and it’s not easy to negotiate down. There will also undoubtedly be cases where they find additional unforeseen conditions that require costly additional services, again not at competitively bid rates.
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