Why infrastructure projects are chronically over budget

By Daniel Kitts - Published on March 16, 2016
New research shows that cost overruns for mega construction projects around the world are consistent and epidemic.

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Toronto’s York-Spadina subway extension, announced in 2006, was to open to commuters in the fall of 2015 and cost $2.6 billion.

Ten years later, the extension has been delayed until late 2017 and is now projected to cost $3.2 billion.

“I am furious that this happens over and over again,” said Toronto Mayor John Tory in response to the project’s delays and cost overruns.

But as the province and the country make plans to spend tens of billions of dollars on new infrastructure, it’s worth asking: why does it happen over and over again? A recent research paper by the University of Toronto’s Matti Siemiatycki suggests that it’s not just the understandable technical challenges that come with a public megaproject. There’s also a surprising psychological element that one researcher attributes to “fools” and “liars.” Fools tend to be overly optimistic, while liars stretch the truth to move plans forward.

“No one is safe from cost overruns. This is really a global challenge,” Siemiatycki said in a conversation with TVO.org about his paper. “The part that does surprise me is that history seems to repeat itself as many times as it has and we haven’t come up with ways of getting our arms around this issue and trying to address it in a meaningful way.”

Cost overruns are often covered as scandals where incompetence or corruption on the part of one or more individuals working on that particular project are to blame. But a review of the literature by Siemiatycki shows that over budget megaprojects are an epidemic.

One study that looked at 258 major road, tunnel, bridge, transit and rail projects in 20 countries on five continents found that nine out of 10 of them finished in the red. Another survey of 1,471 information and technology megaprojects found an average cost overrun of 27 per cent, with one in six projects having a cost overrun of 200 per cent.  Yet another study concluded 245 large hydro dam projects in 65 countries over a 70-year period went an average of 90 per cent over budget.

Siemiatycki said that he’s sympathetic to the people who have to run these large projects.

“Anyone who has done a home renovation has likely experienced the pressures that lead to projects going over budget,” he said. “There’s a lot of uncertainty. You’re maybe in a rush to get started, you have contractors that you perhaps haven’t worked with before …  and then the complexity and the scale of this gets multiplied many times over when you shift upscale to megaprojects.”

Homeowners can probably most easily relate to technical reasons for cost overruns. Siemiatycki’s paper lists a number of such issues that contribute to busted infrastructure budgets. Sometimes a project’s scope changes in response to a political decision, such as adding more stops along a planned subway line after timeline and budget approvals. Costly mistakes and inefficiencies can also happen when a number of different contractors not used to working in tandem must collaborate to finish a large project.

Technical reasons for cost overruns can also be incredibly mundane. A sustained run of bad weather can cause construction delays and higher costs. And inflation in labour and material costs over the course of a multi-year project can wreak havoc with budgets.

Siemiatycki’s research shows these are the excuses that are usually made when a project costs more than expected. But it concludes that they alone can’t explain why so many ventures end up in the red. If they did, random chance would dictate half the projects would not run into too many unexpected problems and would finish under budget while the other half would go over budget. There would also be evidence that, over time, the people in charge would learn from past experience to better anticipate costs. But that isn’t the case.

“The evidence shows that the issue of overruns in terms of size and frequency is just as large today [as in the past]. And so that then starts to take you down this other path of like ‘how much of this is psychological?’” Siemiatycki said.

Plenty, it seems. The research shows that planning around infrastructure is plagued by what Oxford University professor and megaproject management expert Bent Flyvbjerg calls “fools” and “liars.”

Fools describe those who convince themselves and others that a project can be completed faster and cheaper than is realistic. Siemiatycki cites research showing “optimism bias:” a tendency  to underestimate the time and cost to complete a task. This goes into overdrive around expensive megaprojects since they are difficult to get off the ground. There is a powerful incentive for people to emphasize the positives in a plan they want green-lit, especially when it will take many years to complete and the personal consequences for underestimating a project’s costs are minimal.

“Faced with the prospect of making an optimistic forecast in the short term to get a project started or an accurate long term forecast, the favourable short-term forecast usually prevails,” the paper argues.

While fools simply accentuate the positive, liars strategically misrepresent a project’s costs to get it going.

Siemiatycki’s paper points out that politicians, bureaucrats, construction companies and property owners may be motivated by prestige or financial gain.

“This means strong incentives for proponents to strategically misrepresent initial budgets to get a project approved, funded, and started, knowing that once work begins, few projects are ever halted,” the paper states.

Fools and liars may convince themselves that a little exaggeration doesn’t hurt if it means a new bridge or subway gets built that can make life easier for a lot of people. But according to Siemiatycki, the tendency to underestimate the costs of public projects creates a huge risk, especially at a time when the federal government alone is planning to spend $125 billion over 10 years on infrastructure.

“If these projects start going over budget, we’re not going to be able to deliver as much benefit as we want from that money,” he says. “And I think perhaps even more damaging; the public is going to start losing confidence in the ability of our governments to deliver these projects effectively and might stop supporting investment in infrastructure which is really at a critical moment.”

Read: Five ways to prevent infrastructure projects going over budget

Watch: Matti Siemiatycki: The State of Ontario Infrastructure

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