Cost overrun
Encyclopedia
A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost
incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting. Cost overrun should be distinguished from cost escalation
, which is used to express an anticipated growth in a budgeted cost due to factors such as inflation.
Cost overrun is common in infrastructure
, building
, and technology
projects. A comprehensive study of cost overrun published in the Journal of the American Planning Association in 2002 found that 9 out of ten construction projects had underestimated costs. Overruns of 50 to one hundred percent were common. Cost underestimation was found in each of 20 nations and five continents covered by the study, and cost underestimation had not decreased in the 70 years for which data were available.
For IT projects, an industry study by the Standish Group found that the average cost overrun was 43 percent; 71 percent of projects were over budget, exceeded time estimates, and had estimated too narrow a scope
; and total waste was estimated at $55 billion per year in the US alone.
Many major construction projects have incurred cost overruns. The Suez Canal
cost 20 times as much as the earliest estimates; even the cost estimate produced the year before construction began underestimated the project's actual costs by a factor of three. The Sydney Opera House
cost 15 times more than was originally projected, and the Concorde
supersonic aeroplane cost 12 times more than predicted. When Boston's "Big Dig" tunnel construction project was completed, the project was 275 percent ($11 billion) over budget.
The Channel Tunnel
between the UK and France had a construction cost overrun of 80 percent, and a 140-percent financing cost overrun.
for cost overrun exist: technical
, psychological, and political-economic. Technical explanations account for cost overrun in terms of imperfect forecasting
techniques, inadequate data, etc. Psychological explanations account for overrun in terms of optimism bias
with forecasters. Scope creep
, where the requirements or targets rises during the project, is common. Finally, political-economic explanations see overrun as the result of strategic misrepresentation
of scope or budgets.
All three explanations can be considered forms of risk
. A project's budgeted costs should always include cost contingency
funds to cover risks (other than scope changes imposed on the project). As has been shown in cost engineering
research,
poor risk analysis
and contingency estimating practices account for many project cost overruns. Numerous studies have found that the greatest cause of cost growth was poorly-defined scope at the time that the budget was established. The cost growth, or overrun of the budget before cost contingency
is added, can be predicted by rating the extent of scope definition, even on complex projects with new technology.
Professor Bent Flyvbjerg
of Oxford University and Martin Wachs of University of California, Los Angeles have shown that big public-works projects often have cost overruns due to strategic misrepresentation—"that is, lying", as Flyvbjerg defines the term.
Cost overrun is typically calculated in one of two ways: either as a percentage
, namely actual cost minus budgeted cost, in percent of budgeted cost; or as a ratio
of actual cost divided by budgeted cost. For example, if the budget for building a new bridge was $100 million, and the actual cost was $150 million, then the cost overrun may be expressed by the ratio 1.5, or as 50 percent.
Reference class forecasting
was developed to eliminate or reduce cost overrun.
Sydney Opera House
myki
Montreal Olympic Stadium Rogers Centre (formerly SkyDome)
Millennium Dome
National Programme for IT Scottish Parliament Building
TAURUS (share trading)
Eastern span replacement of the San Francisco–Oakland Bay Bridge F-22 Raptor
Joint Strike Fighter Program
NPOESS
Paw Paw Tunnel
V-22 Osprey
Hubble Space Telescope
Airbus A380
Airbus A400M
Channel Tunnel
Cologne Cathedral
Concorde
Eurofighter
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting. Cost overrun should be distinguished from cost escalation
Cost escalation
Cost escalation is defined as changes in the cost or price of specific goods or services in a given economy over a period of time. This is a similar to the concepts of inflation and deflation except that escalation is specific to an item or class of items , it is often not primarily driven by...
, which is used to express an anticipated growth in a budgeted cost due to factors such as inflation.
Cost overrun is common in infrastructure
Infrastructure
Infrastructure is basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function...
, building
Building
In architecture, construction, engineering, real estate development and technology the word building may refer to one of the following:...
, and technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
projects. A comprehensive study of cost overrun published in the Journal of the American Planning Association in 2002 found that 9 out of ten construction projects had underestimated costs. Overruns of 50 to one hundred percent were common. Cost underestimation was found in each of 20 nations and five continents covered by the study, and cost underestimation had not decreased in the 70 years for which data were available.
For IT projects, an industry study by the Standish Group found that the average cost overrun was 43 percent; 71 percent of projects were over budget, exceeded time estimates, and had estimated too narrow a scope
Scope (project management)
In project management, the term scope has two distinct uses: Project Scope and Product Scope.Project Scope"The work that needs to be accomplished to deliver a product, service, or result with the specified features and functions."Product Scope...
; and total waste was estimated at $55 billion per year in the US alone.
Many major construction projects have incurred cost overruns. The Suez Canal
Suez Canal
The Suez Canal , also known by the nickname "The Highway to India", is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea and the Red Sea. Opened in November 1869 after 10 years of construction work, it allows water transportation between Europe and Asia without navigation...
cost 20 times as much as the earliest estimates; even the cost estimate produced the year before construction began underestimated the project's actual costs by a factor of three. The Sydney Opera House
Sydney Opera House
The Sydney Opera House is a multi-venue performing arts centre in the Australian city of Sydney. It was conceived and largely built by Danish architect Jørn Utzon, finally opening in 1973 after a long gestation starting with his competition-winning design in 1957...
cost 15 times more than was originally projected, and the Concorde
Concorde
Aérospatiale-BAC Concorde was a turbojet-powered supersonic passenger airliner, a supersonic transport . It was a product of an Anglo-French government treaty, combining the manufacturing efforts of Aérospatiale and the British Aircraft Corporation...
supersonic aeroplane cost 12 times more than predicted. When Boston's "Big Dig" tunnel construction project was completed, the project was 275 percent ($11 billion) over budget.
The Channel Tunnel
Channel Tunnel
The Channel Tunnel is a undersea rail tunnel linking Folkestone, Kent in the United Kingdom with Coquelles, Pas-de-Calais near Calais in northern France beneath the English Channel at the Strait of Dover. At its lowest point, it is deep...
between the UK and France had a construction cost overrun of 80 percent, and a 140-percent financing cost overrun.
Causes
Three types of explanationExplanation
An explanation is a set of statements constructed to describe a set of facts which clarifies the causes, context, and consequencesof those facts....
for cost overrun exist: technical
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
, psychological, and political-economic. Technical explanations account for cost overrun in terms of imperfect forecasting
Forecasting
Forecasting is the process of making statements about events whose actual outcomes have not yet been observed. A commonplace example might be estimation for some variable of interest at some specified future date. Prediction is a similar, but more general term...
techniques, inadequate data, etc. Psychological explanations account for overrun in terms of optimism bias
Optimism bias
Optimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...
with forecasters. Scope creep
Scope creep
Scope Creep in project management refers to uncontrolled changes or continuous growth in a project's scope. This phenomenon can occur when the scope of a project is not properly defined, documented, or controlled...
, where the requirements or targets rises during the project, is common. Finally, political-economic explanations see overrun as the result of strategic misrepresentation
Strategic misrepresentation
"Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...
of scope or budgets.
All three explanations can be considered forms of risk
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
. A project's budgeted costs should always include cost contingency
Cost contingency
When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties are risks to the...
funds to cover risks (other than scope changes imposed on the project). As has been shown in cost engineering
Cost engineering
Cost engineering is an area of engineering practice concerned with the "application of scientific principles and techniques to problems of cost estimating, cost control, business planning and management science, profitability analysis, project management, and planning and scheduling."- Overview...
research,
poor risk analysis
Risk analysis (Business)
Risk analysis is a technique to identify and assess factors that may jeopardize the success of a project or achieving a goal.This technique also helps to define preventive measures to reduce the probability of these factors from occurring and identify countermeasures to successfully deal with these...
and contingency estimating practices account for many project cost overruns. Numerous studies have found that the greatest cause of cost growth was poorly-defined scope at the time that the budget was established. The cost growth, or overrun of the budget before cost contingency
Cost contingency
When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties are risks to the...
is added, can be predicted by rating the extent of scope definition, even on complex projects with new technology.
Professor Bent Flyvbjerg
Bent Flyvbjerg
Bent Flyvbjerg is the first Chair and BT Professor of Major Programme Management at Oxford University's Saïd Business School and is Founding Director of the University's BT Centre for Major Programme Management. He was previously Professor of Planning at Aalborg University, Denmark and Chair of...
of Oxford University and Martin Wachs of University of California, Los Angeles have shown that big public-works projects often have cost overruns due to strategic misrepresentation—"that is, lying", as Flyvbjerg defines the term.
Cost overrun is typically calculated in one of two ways: either as a percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
, namely actual cost minus budgeted cost, in percent of budgeted cost; or as a ratio
Ratio
In mathematics, a ratio is a relationship between two numbers of the same kind , usually expressed as "a to b" or a:b, sometimes expressed arithmetically as a dimensionless quotient of the two which explicitly indicates how many times the first number contains the second In mathematics, a ratio is...
of actual cost divided by budgeted cost. For example, if the budget for building a new bridge was $100 million, and the actual cost was $150 million, then the cost overrun may be expressed by the ratio 1.5, or as 50 percent.
Reference class forecasting
Reference class forecasting
Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
was developed to eliminate or reduce cost overrun.
Australia
Sydney Olympic ParkSydney Olympic Park
Sydney Olympic Park is a suburb in western Sydney, in the state of New South Wales, Australia. Sydney Olympic Park is located 16 kilometres west of the Sydney central business district, in the local government area of Auburn Council....
Sydney Opera House
Sydney Opera House
The Sydney Opera House is a multi-venue performing arts centre in the Australian city of Sydney. It was conceived and largely built by Danish architect Jørn Utzon, finally opening in 1973 after a long gestation starting with his competition-winning design in 1957...
myki
Myki
myki is the contactless smartcard ticketing system being introduced on public transport in Victoria, Australia. myki is designed to replace a number of ticket systems in Victoria, primarily the Metcard and V/Line ticketing systems...
Canada
Pickering Nuclear Generating StationPickering Nuclear Generating Station
Pickering Nuclear Generating Station is a Canadian nuclear power station located on the north shore of Lake Ontario in Pickering, Ontario. The facility derives its name from the City of Pickering in which it is located....
Montreal Olympic Stadium Rogers Centre (formerly SkyDome)
United Kingdom
Humber BridgeHumber Bridge
The Humber Bridge, near Kingston upon Hull, England, is a 2,220 m single-span suspension bridge, which opened to traffic on 24 June 1981. It is the fifth-largest of its type in the world...
Millennium Dome
Millennium Dome
The Millennium Dome, colloquially referred to simply as The Dome or even The O2 Arena, is the original name of a large dome-shaped building, originally used to house the Millennium Experience, a major exhibition celebrating the beginning of the third millennium...
National Programme for IT Scottish Parliament Building
Scottish Parliament Building
The Scottish Parliament Building is the home of the Scottish Parliament at Holyrood, within the UNESCO World Heritage Site in central Edinburgh. Construction of the building commenced in June 1999 and the Members of the Scottish Parliament held their first debate in the new building on 7...
TAURUS (share trading)
TAURUS (share trading)
Taurus was a program that set out to transfer the London Stock Exchange from paper communication to an automated system...
United States
Big Dig Denver International AirportDenver International Airport
Denver International Airport , often referred to as DIA, is an airport in Denver, Colorado. By land size, at , it is the largest international airport in the United States, and the third largest international airport in the world after King Fahd International Airport and Montréal-Mirabel...
Eastern span replacement of the San Francisco–Oakland Bay Bridge F-22 Raptor
F-22 Raptor
The Lockheed Martin/Boeing F-22 Raptor is a single-seat, twin-engine fifth-generation supermaneuverable fighter aircraft that uses stealth technology. It was designed primarily as an air superiority fighter, but has additional capabilities that include ground attack, electronic warfare, and signals...
Joint Strike Fighter Program
Joint Strike Fighter Program
Joint Strike Fighter is a development and acquisition program intended to replace a wide range of existing fighter, strike, and ground attack aircraft for the United States, the United Kingdom, Canada, and their allies. After a competition between the Boeing X-32 and the Lockheed Martin X-35, a...
NPOESS
NPOESS
The National Polar-orbiting Operational Environmental Satellite System was to be the United States' next-generation satellite system that would monitor the Earth's weather, atmosphere, oceans, land and near-space environment. NPOESS satellites were to host proven technologies and operational...
Paw Paw Tunnel
Paw Paw Tunnel
The Paw Paw Tunnel is a long canal tunnel on the Chesapeake and Ohio Canal in Allegany County, Maryland. Located near Paw Paw, West Virginia, it was built to bypass the Paw-Paw Bends, a six-mile stretch of the Potomac River containing five horseshoe bends...
V-22 Osprey
V-22 Osprey
The Bell Boeing V-22 Osprey is an American multi-mission, military, tiltrotor aircraft with both a vertical takeoff and landing , and short takeoff and landing capability...
Hubble Space Telescope
Hubble Space Telescope
The Hubble Space Telescope is a space telescope that was carried into orbit by a Space Shuttle in 1990 and remains in operation. A 2.4 meter aperture telescope in low Earth orbit, Hubble's four main instruments observe in the near ultraviolet, visible, and near infrared...
Multinational
Airbus A380Airbus A380
The Airbus A380 is a double-deck, wide-body, four-engine jet airliner manufactured by the European corporation Airbus, a subsidiary of EADS. It is the largest passenger airliner in the world. Due to its size, many airports had to modify and improve facilities to accommodate it...
Airbus A400MAirbus A400M
The Airbus A400M, also known as the Atlas, is a multi-national four-engine turboprop military transport aircraft. It was designed by Airbus Military as a tactical airlifter with strategic capabilities. The aircraft's maiden flight, originally planned for 2008, took place on 11 December 2009 in...
Channel TunnelChannel Tunnel
The Channel Tunnel is a undersea rail tunnel linking Folkestone, Kent in the United Kingdom with Coquelles, Pas-de-Calais near Calais in northern France beneath the English Channel at the Strait of Dover. At its lowest point, it is deep...
Cologne Cathedral
Cologne Cathedral
Cologne Cathedral is a Roman Catholic church in Cologne, Germany. It is the seat of the Archbishop of Cologne and the administration of the Archdiocese of Cologne. It is renowned monument of German Catholicism and Gothic architecture and is a World Heritage Site...
ConcordeConcorde
Aérospatiale-BAC Concorde was a turbojet-powered supersonic passenger airliner, a supersonic transport . It was a product of an Anglo-French government treaty, combining the manufacturing efforts of Aérospatiale and the British Aircraft Corporation...
EurofighterSee also
- Admissible heuristicAdmissible heuristicIn computer science, specifically in algorithms related to Pathfinding, a heuristic function is said to be admissible if it is no more than the lowest-cost path to the goal. In other words, a heuristic is admissible if it never overestimates the cost of reaching the goal...
- Benefit shortfallBenefit shortfallA benefit shortfall results from the actual benefits of a venture being lower than the projected, or estimated, benefits of that venture. If, for instance, a company is launching a new product or service and projected sales are 40 million dollars per year, whereas actual annual sales turn out to be...
- Cost underestimation
- MegaprojectMegaprojectA megaproject is an extremely large-scale investment project. Megaprojects are typically defined as costing more than US$1 billion and attracting a lot of public attention because of substantial impacts on communities, environment, and budgets. Megaprojects can also be defined as "initiatives that...
- Optimism biasOptimism biasOptimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...
- Reference class forecastingReference class forecastingReference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
- Scope creepScope creepScope Creep in project management refers to uncontrolled changes or continuous growth in a project's scope. This phenomenon can occur when the scope of a project is not properly defined, documented, or controlled...
- Strategic misrepresentationStrategic misrepresentation"Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...