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Part 1

Introduction

We have all perceived about the numerous large publicly financed infrastructure projects that

have gone far over budget and as an outcome have drawn large grades of contradictory attention. The

truth is that not only do large public projects proceed over budget but the most of large public, as well as

personal, capital projects are expected to end up over budget.

In public works such as building projects and acquisition contracts, monitored by governments,

cost overruns bare no originality. Taxpayers are mislead by government agents or politicians who provide

deceptively low estimates in order to gain primary expending approval. Subsequently, once the projects

exceed their primary budget and hence, fail to work as pledged, these political leaders and agents locate

the fault on flaws and slips of bureaucracy and contractors’ mismanagement. However, clues show that

cost overruns and project malfunctions run parallel, as they are prevalent and systematic in the

government.

Cost Estimating methods

Estimating costs is a strict and never ending process which carries on during the entire

conceiving development of a project. The estimates should be completed to support the various different

answers that are noted during the earliest stages of design. The final project cost estimate should be put

out only as a variable when the favored alternate is unknown. When the favored conceive does become

known or when funding for a project is established, a reference point “baseline” cost estimate should be

decided upon. This “baseline” estimate can most effectively be described as the estimate that is used to

facilitate changes and reach concept conclusions that alter the cost of the project.

Basically, it is the addition of prominent and experimentally proven costs in adding together an

estimate for the prominent but still unpredicted costs (known as the “risk-premium) and an unforeseen

event for costs which are not yet known. The “baseline” estimate forms the basis for funding and for

evaluating the performance of the given project. Significantly noteworthy is the fact that the “baseline”

puts a project into a certain magnitude and dimension.

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Further alterations in concept or scope that change the real capability of the project by definition altered

the project and require an entirely new baseline.

Even from the designated day when the estimated time to completion was reassessed, the

reference point of the total cost of the project had not been defined. The favoured conceived alternate has

not been absolutely repaired and no negotiations were taking place in order to reach a baseline cost for

the project. In addition, the capital building costs and the risk factors had not been aligned to conclude to

the baseline in question. All the same, through the use of the accessible data and the estimated time a

methodical approximation was accomplished. Within this approximation laid the possibility of alterations,

which are befitting at the given stage. Still, in order to decide upon the final baseline approximation of cost

and agenda, Locks, Pacific Access Channel and the Navigation Channel work’s risks needed to be rated.

Therefore, the estimated time to completion (ETC) suggests that the cost estimations of the project be

broadcast as an array.

Factors of Cost

The concepts of optimism bias and planning fallacy have been adopted by academic researchers

and practitioners outside the field of social psychology. Notably Bent Flyvberg applied the concept to

transport infrastructure planning, measuring the uplift in actual costs compared to the original estimates.

Flyvberg argues that optimism bias has four causes:

• Technical causes, including imperfect information, scope changes and poor management,

leading to inadequacies in business cases;

• Psychological causes arising from the decision making processes of project promoters and

forecasters;

• Economic causes arising from rational incentives to get the project approved to create work; and

• Political-institutional causes, particularly the possibility of project promoters benefiting from cost

predictions, to have projects initially funded and put to progress.

• Flyvberg thus highlights that underestimations in forecasts can be either real technical errors, or

purposeful deceptions. The latter benefit the forecasters or their clients and stakeholders.
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Flyvberg uses Kahneman’s work to argue that planning fallacy stems from actors taking an

“inside view” to a task or project – estimating its costs and time by looking at the constituents of the plan.

He argues that they should instead take an “outside view” – looking at the results of similar projects.

Flyvbjerg recommends that public policy makers rely less on forecasters’ plans and more on comparisons

with other similar projects. He calls such comparisons “reference class forecasting”.

Part 2

Public Sector Cost Overruns

When it comes to spending money of one’s own people are mostly cautious and moderate

compared to times when they are to handle anybody else’s money. Clearly, this generality also applies to

the case of governments, political leaders and agents, where spending public money recklessly inevitably

causes problems. There is sufficient evidence that often projects budgeted around $ 1 billion turn out to

actually cost even more that $ 2 billion. This is a demonstration of the outline of cost overruns in

acquisition contracts and big construction projects managed by governments.

Cost overruns is not a remarkable matter. Nonetheless, governmental agents appear to be

reluctant to take action on this matter. The table at the end of this paper (Appendix 1) provides examples

of such cost overruns occurring in the fields of transportation, energy, defense and technology. In his work

C. Edwards argues that cost overruns are indications of continuous unsuccessful attempts of

governmental bodies to act in such was as to avoid excess of budget and he comes to recommend

downsizing of the government as a way to face such issues.

Transportation

A common area were cost overruns are identified is transportation. Being included in the table in

context, the Virginia Springfield interchange sets a great example to take into consideration. Once the

project was put in action the initial budget was alleged to be $240 million. Instead, by the time the project

was completed the total cost reached $ 676 million (shear, 2002). Political representatives in Virginia then

affirmed that the project had been successfully completed within time and cost limits. However, the press
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revealed that the project reached a final cost of three times the preliminary budget (Weiss, 2007).

The most notorious cost overrun in transportation yet would have to be the “Big Dig” in Boston.

The project was initiated in 1985, with a budget of $ 2.6 billion. The project was expected by the end of

1998. The project’s closing cost swell up to the massive amount of $ 14.6 billion, finally completed 20

years later (Boston Globe's "Easy Pass").

In an effort to place blame, accusation fell entirely on the project’s management failures followed by

accurate research (Boston Globe's "Easy Pass").

The main problem was the absence of adequate government supervision. The work was based

on excessive zeal of participating bodies, based on political views that, at the time, supported

independence of authority. Following a series of ineffective choices of supervision, the state of Virginia

was taken over by a sense of pride that led to the unfortunate decision of granting a small local firm with

this colossal project’s supervision. The state’s political leaders had been given warnings regarding

construction setbacks, but the matter was treated with nothing but arrogance. The state highway official

fired back saying, "I think he's talking about the wrong state". Even after the completion of the

interchange, the project’s reputation kept on wrecking due to fateful incidents such as leaks and ceiling

collapses.

The case of the “Big Dig” may not be of the utmost representation of highway projects, though

setbacks and overruns are commonly found in comparable projects. A study signifies that almost half of

the highway projects overlooked by government have a cost overrun of over 25% (Government

Accountability Office, 2003).

Problems comparable to highway misfortunes involve other areas of transportation. Yet again,

baring in mind the table used, a good example is the case of the Denver airport in 1989. Once the project

was approved the original budget was $ 1.7 billion. The total work of the airport finally opening in 1995

had a total cost of $ 4.8 billion (Altshuler and Luberoff, 2003)

Part 3
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For bosses, managers and their groups to blame for project cost estimation, it is a tough dispute

to make an unquestionable project cost estimate that takes into account the dangers and uncertainties

adept of initating costs overruns. This paper inserts and talks about cost estimation methods founded on

quantitative risk analysis that can advance the estimation of a project’s budget, encompassing

contingency and escalation costs, by taking into account dangers and uncertainties. If directed rightly,

quantitative risk investigation will permit a cost estimation group to not only outlook the variety of likely

costs but furthermore the likelihood of those costs. In supplement, this paper will talk about some of the

concealed pitfalls that should be bypassed when utilising quantitative risk investigation for cost estimation.

Typically, there are a large number of uncertainties engaged in the lifetime of cost estimates for a

large project. One way to take into account, realise and probably manage these uncertainties is through a

method called “Quantitative Risk Analysis”. Quantitative risk investigation is a method that recognises and

quantifies the uncertainties affiliated with a project and then evolves a ‘probabilistic model’ to comprise

the project. The yield of this form then presents a outlook of the risk and doubt affiliated with cost of the

general project as well as the constituent components of the project.

For demonstration, the yield from a quantitative risk investigation form can response numerous

inquiries such as: “What is the likelihood that the total cost of the project will exceed a exact value?” with

the response in the pattern of “There is a 20% likelihood that the total costs will exceed $10 Million.”

Uncertainties and dangers in a quantitative risk investigation form are generally comprised by a

likelihood distribution. For demonstration the costs affiliated with functional iron alloy are no longer

comprised in the cost estimate as a lone issue with an added allowance for escalation as in customary

estimating. Instead, functional iron alloy costs would now be comprised by a variety of likely costs,

encompassing escalation, along with the likelihood of each likely cost for functional steel.

In supplement to modelling the costs for specific line pieces or sub-systems, it is suggested to

form the doubt affiliated with promise dangers that might sway multiple line pieces or sub-systems. These

dangers are often called “Risk Drivers” - demonstrations of such risk drivers might be climate, regulatory

allowing, major contractor dangers, the grade of conceive culmination when the estimate is made, etc.

Risk drivers can furthermore be comprised by likelihood distributions but it significant to furthermore
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recognise which exact cost pieces might be influenced by each risk person going by car and the influence

of the risk driver.

When modelling one-by-one cost pieces as well as risk drivers, it is significant to mindfully

address the influence of systemic connections in the project being modelled. One demonstration might be

that the work cost for establishing functional iron alloy is exactly proportional to the allowance of functional

iron alloy in the project. As the allowance of functional iron alloy rises, so does the allowance of functional

iron alloy labour. It is critical that this connection be encompassed in the form as a correlation. The form

should not be allowed to estimate the functional iron alloy work at the reduced end of its likely variety

while simultaneously estimating the allowance of functional iron alloy at the high end of the range. If this

were to occur, the last outcome of the form would under-estimate the likely variety of the general project

cost.

APPENDIX 1
A Sampling of Federal Cost Overruns
(All figures in nominal dollars, except where noted)
Cost Estimate and Date
Project of Estimate
Original Estimate Recent or Final Estimate
Transportation
Boston Big Dig highway project#52 $2.6b (1985) $14.6b (2005)
Virginia Springfield interchange#53 $241m (1994) $676m (2003)
54
Denver International Airport# $1.7b (1989) $4.8b (1995)
55
Hiring of airport security screeners# $104m (2002) $741m (2006)
Airport security technology upgrade#56 $1b (2002) $3b (2005)
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Energy
Hanford nuclear waste clean-up#57 $4.3b (2000) $12.2b (2008)
58
All nuclear waste sites clean-up# $63b (1996) $105b (2003)
59
National Ignition Facility# $2.1b (1995) $4.2b (2000)
Clinch River Breeder Reactor#60 $400m (1971) $4b (1983)
61
Superconducting Supercollider# $4.4b (1987) $11.8b (1993)
62
FutureGen clean coal project# $1b (2003) $1.8b (2008)

Defense Development Costs

($2008)#63
Global Hawk surveillance plane $989m (2001) $3.7b (2007)
Expeditionary Fighting Vehicle $1.6b (2000) $3.6b (2007)
C-130J Hercules 10.9m (1996) 430.3m (2007)
Extended Range Munitions 86.9m (1997) 500.1m (2007)
DDG 1000 destroyer 2.2b (1998) 9.3b (2006)
V-22 Osprey helicopter 4.0b (1986) 12.5b (2006)
Armed Reconnaissance Helicopter 388.3m (2005) 750.9 (2007)
Space Based Infrared System High 4.2b (1996) 8.5b (2006)
Armed Reconnaissance Helicopter 388.3m (2005) 750.9 (2007)
NPOESS Satellite System 5.0b (2002) 7.9b (2007)

Other Defense
Coastal Patrol Ships#64 $220m (2004) $350m (2007)
65
Joint Strike Fighter# $232b (2001) $337b (2008)
66
Marine One (VH-71) helicopters# $6.1b (2005) $11.2b (2008)
67
Coast Guard, NSC ships, per unit# $250m (2002) $536m (2007)

Technology Projects
Air traffic control modernization#68 $8.9b (1998) $14.6b (2005)
FBI Trilogy computer system#69 $477m (2000) $600m (2004)
70
Pentagon airborne laser system# $1b (1996) $2b (2004)
71
Border radiation detectors# $2.1b (2008) $3.1b (2008)

NASA
International Space Station#72 $17b (1997) $30b (2001)
73
Mars Science Laboratory# $1.6b (2008) $2.3b (2009)
Glory satellite#74 $266m (2008) $348m (2008)
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Washington, D.C.
Capitol Visitor Center#75 $265m (2000) $621m (2008)
76
Kennedy Center opera house# $18.3m (1995) $22.2m (2003)
Kennedy Center concert hall#77 $15.1m (1995) $21.3m (1997)
78
Kennedy Center parking lot# $28m (1998) $88m (2003)

(Chris Edwards, Government Cost Overruns, March 2009)

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References

Shear, M., (2002), Springfield Interchange Project Is Defended, The Washington Post, November 26,

2002

Weiss, E., (2007), In Mixing Bowl, Va. Sees Recipe for Success, The Washington Post, July 19, 2007.

Goldstein, A., (2006), Myriad Reports Pointed to Big Dig's Problems, The Washington Post, July 23, 2006.

Government Accountability Office, (2003), Federal Aid Highways: Cost and Oversight of Major Highway

and Bridge Projects: Issues and Options, GAO-03-764T, May 8, 2003, p. 6.

Altshuler, A., Luberoff, D. (2003). Mega Projects: The Changing Politics of Urban Publpi Investment.

Washington: The Brookings Institution. 123-169.

Flyvbjerg, B., M.S. Holm, S. Buhl, (2002), Underestimating Costs in Public Works Projects: Error or Lie?,

Journal of the American Planning Association 68(3): 279-295.

T.Williams (2008). Quantitative Methods. In Thomas J and Mullaly M (Eds.), Researching the Value of

Project Management. . Newtown Square, PA, US: : Project Management Institute..

Flyvbjerg K. (2008), Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference

Class Forecasting in Practice. European Planning Studies, 16 (1), p 3-21.

Websites:
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Boston Globe's "Easy Pass" series of reports by Raphael Lewis and Sean Murphy,

www.boston.com/globe/metro/packages/bechtel.

http://www.downsizinggovernment.org/government-cost-overruns

http://www.acp.gob.pa/esp/plan/estudios/0294-exec.pdf