"Underestimated" redirects here. For the Jennifer Paige song, see Underestimated (song).
A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known by these terms.
Cost overruns are common in infrastructure, building, and technology projects. For IT projects, a 2004 industry study by the Standish Group found an average cost overrun of 43 percent; 71 percent of projects came in 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.[1]
Many major construction projects have incurred cost overruns; cost estimates used to decide whether important transportation infrastructure should be built can mislead grossly and systematically.[2]
Cost overrun is distinguished from cost escalation, which is an anticipated growth in a budgeted cost due to factors such as inflation.
Recent works by Ahiaga-Dagbui and Smith suggests an alternative to what is traditionally seen as an overrun in the construction field.[3] They attempt to make a distinction between the often conflated causes of construction cost underestimation and eventual cost overruns. Critical to their argument is the point of reference for measuring cost overruns. Whereas some measure the size of cost overruns as the difference between cost at the time of decision to build and final completion costs, others measure the size of overruns as the difference between cost at contract award and final completion cost. This leads to a wide range in the size of overruns reported in different studies.
Four types of explanation for cost overrun exist: technical, psychological, political-economic, value engineering. 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. Historically, political explanations for cost overrun have been seen to be the most dominant.[4] In the USA, the architectural firm Home Architects has attributed this to a human trait they call "Psychology of Construction Cost Denial", regarding the cost inflation of custom homes.[5]
A less explored possible cause of cost overruns on construction project is the escalation of commitment to a course of action. This theory, grounded in social psychology and organisation behaviour, suggests the tendency of people and organisations to become locked-in and entrapped in a particular course of action and thereby 'throw good money after bad' to make the venture succeed. This defies conventional rationality behind subjective expected utility theory. Ahiaga-Dagbui and Smith explore the effects of escalation of commitment on project delivery in construction using the case of the Scottish Parliament project.[6] Also, a recent study has suggested that principles of chaos theory can be employed to understand how cost overruns emerge in megaprojects.[7] This paper seeks to reclassify megaprojects as chaotic systems that are nonlinear and therefore difficult to predict. Using cases of cost overruns in oil and gas megaprojects, this study makes strong argument that chaos theory can indeed be a silver bullet in finding solutions to the recurring problem of cost overruns in megaprojects.
A newly discovered possible cause of cost overruns is value engineering, and an approach to correct value engineering cost overruns known as value-driven-design.
Prevention and mitigationedit
In response to problem of cost overruns on major projects, the UK Government set up a Major Projects Authority to provide project assurance to HM Treasury and other Government departments undertaking major projects.[8] Independent review of the financial effectiveness of project assurance in reducing cost overruns found the project assurance process to be effective in reducing cost overruns and recommended an expansion of the process to cover most of the Government's project portfolio.[9] Project assurance is now also being used by private sector companies undertaking major projects.
As a total percentage including and above the original budget
As a percentage of the cost overruns to original budget
For example, consider a bridge with a construction budget of $100 million where the actual cost was $150 million. This scenario could be truthfully represented by the following statement
The cost overruns constituted 33% of the total expense.
The budget for the bridge increased to 150%.
The cost overruns exceeded the original budget by 50%.
The final example is the most commonly used as it specifically describes the cost overruns exclusively whereas the other two describe the overrun as an aspect of the total expense. In any case care should be taken to accurately describe what is meant by the chosen percentage so as to avoid ambiguity.
List of projects with large cost overrunsedit
This section may contain unverified or indiscriminate information in embedded lists. Please help clean up the lists by removing items or incorporating them into the text of the article.(August 2022)
Sydney Opera House was completed ten years late and more than fourteen times over budget.
Canadaedit
Canadian Firearms Registry, initially projected to cost Canadian taxpayers $CAN 2 million, ended up being 1,000 times over budget at $CAN 2 billion
Trans Mountain pipeline expansion comes in 70 per cent higher than expected. Trans Mountain Corporation announced the projected cost of the pipeline expansion has soared from its earlier estimate of $12.6 billion to $21.4 billion.[10]
United Kingdomedit
The NHS patient records system, implemented as part of the National Programme for IT, was originally estimated to cost £6.4bn and eventually abandoned before completion after £10bn were spent. It was described as "one of the worst and most expensive contracting fiascos in the history of the public sector".[11]
Scottish Parliament Building,[6] originally "expected to take two years and cost £40 million" but "took five years and cost £400 million".[12]
The Big Dig, a multi-billion dollar highway reconstruction in Boston, was delivered nine years late with a cost overrun of 190% adjusted for inflation.
The Boeing Dreamliner programme, announced in 2003, was supposed to cost $6 billion and see the plane take to the air in 2008. The final bill was closer to $32 billion; and the plane arrived three years late.
Scope creep – Continuous or uncontrolled growth in a project's scope, at any point after the project begins
Referencesedit
^ Standish Group (2004). CHAOS Report (Report). West Yarmouth, Massachusetts: Standish Group.
^Flyvbjerg, Bent; Holm, Mette K. Skamris; Buhl, Søren L. (2002). "Underestimating Costs in Public Works Projects: Error or Lie?". Journal of the American Planning Association. 68 (3): 279–295. arXiv:1303.6604. Bibcode:2013arXiv1303.6604F. doi:10.1080/01944360208976273. S2CID 5807225. SSRN 2278415.
^Ahiaga-Dagbui, Dominic D.; Smith, Simon D. (2014). "Dealing with construction cost overruns using data mining". Construction Management and Economics. 32 (7–8): 682. doi:10.1080/01446193.2014.933854. hdl:10059/1307. S2CID 58922802.
^Cantarelli, Chantal C.; Flybjerg, Bent; Molin, Eric J. E.; van Wee, Bert (2010). "Cost Overruns in Large-Scale Transportation Infrastructure Projects: Explanations and Their Theoretical Embeddedness". European Journal of Transport and Infrastructure Research. 10 (1): 5–18. arXiv:1307.2176. Bibcode:2013arXiv1307.2176C. SSRN 2237990.
^"Psychology of Construction Cost Denial - Mountain Home Architects, Timber Frame Architect, Custom Homes".
^ abAhiaga-Dagbui, Dominic; Smith, Simon (2014). "Exploring escalation of commitment in construction project management: Case study of the Scottish parliament project". Proceedings 30th Annual ARCOM Conference. Association of Researchers in Construction Management: 753–762. hdl:10059/1303. ISBN9780955239083.
^Olaniran, O.J.; Love, P.E.D.; Edwards, D.J.; Olatunji, O. (2017). "Chaos Theory: Implications for Cost Overrun Research in Hydrocarbon Megaprojects" (PDF). Journal of Construction Engineering and Management. 143 (2). doi:10.1061/(ASCE)CO.1943-7862.0001227. Retrieved 29 August 2020.
^"Assurance for major projects - National Audit Office (NAO)". 2 May 2012.
^"Feds say no more funding for Trans Mountain expansion as project costs nearly double". 18 February 2022.
^Syal, Rajeev (18 September 2013). "Abandoned NHS IT system has cost £10bn so far". The Guardian.
^Harari, Yuval Noah (2017). Homo Deus: A Brief History of Tomorrow. New York: Harper. p. 305.
External linksedit
The RISKS digest (focuses on failed and overran IT projects)
January 01, 1970
cost, overrun, underestimated, redirects, here, jennifer, paige, song, underestimated, song, cost, overrun, also, known, cost, increase, budget, overrun, involves, unexpected, incurred, costs, when, these, costs, excess, budgeted, amounts, value, engineering, . Underestimated redirects here For the Jennifer Paige song see Underestimated song A cost overrun also known as a cost increase or budget overrun involves unexpected incurred costs When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting they are known by these terms Cost overruns are common in infrastructure building and technology projects For IT projects a 2004 industry study by the Standish Group found an average cost overrun of 43 percent 71 percent of projects came in 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 1 Many major construction projects have incurred cost overruns cost estimates used to decide whether important transportation infrastructure should be built can mislead grossly and systematically 2 Cost overrun is distinguished from cost escalation which is an anticipated growth in a budgeted cost due to factors such as inflation Contents 1 Causes 2 Prevention and mitigation 3 Describing 4 List of projects with large cost overruns 4 1 Australia 4 2 Canada 4 3 United Kingdom 4 4 United States 4 5 Germany 4 6 Finland 4 7 Russia 5 See also 6 References 7 External linksCauses editRecent works by Ahiaga Dagbui and Smith suggests an alternative to what is traditionally seen as an overrun in the construction field 3 They attempt to make a distinction between the often conflated causes of construction cost underestimation and eventual cost overruns Critical to their argument is the point of reference for measuring cost overruns Whereas some measure the size of cost overruns as the difference between cost at the time of decision to build and final completion costs others measure the size of overruns as the difference between cost at contract award and final completion cost This leads to a wide range in the size of overruns reported in different studies Four types of explanation for cost overrun exist technical psychological political economic value engineering 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 Historically political explanations for cost overrun have been seen to be the most dominant 4 In the USA the architectural firm Home Architects has attributed this to a human trait they call Psychology of Construction Cost Denial regarding the cost inflation of custom homes 5 A less explored possible cause of cost overruns on construction project is the escalation of commitment to a course of action This theory grounded in social psychology and organisation behaviour suggests the tendency of people and organisations to become locked in and entrapped in a particular course of action and thereby throw good money after bad to make the venture succeed This defies conventional rationality behind subjective expected utility theory Ahiaga Dagbui and Smith explore the effects of escalation of commitment on project delivery in construction using the case of the Scottish Parliament project 6 Also a recent study has suggested that principles of chaos theory can be employed to understand how cost overruns emerge in megaprojects 7 This paper seeks to reclassify megaprojects as chaotic systems that are nonlinear and therefore difficult to predict Using cases of cost overruns in oil and gas megaprojects this study makes strong argument that chaos theory can indeed be a silver bullet in finding solutions to the recurring problem of cost overruns in megaprojects A newly discovered possible cause of cost overruns is value engineering and an approach to correct value engineering cost overruns known as value driven design Prevention and mitigation editIn response to problem of cost overruns on major projects the UK Government set up a Major Projects Authority to provide project assurance to HM Treasury and other Government departments undertaking major projects 8 Independent review of the financial effectiveness of project assurance in reducing cost overruns found the project assurance process to be effective in reducing cost overruns and recommended an expansion of the process to cover most of the Government s project portfolio 9 Project assurance is now also being used by private sector companies undertaking major projects Describing editThis section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message Cost overrun can be described in multiple ways As a percentage of the total expenditure As a total percentage including and above the original budget As a percentage of the cost overruns to original budget For example consider a bridge with a construction budget of 100 million where the actual cost was 150 million This scenario could be truthfully represented by the following statement The cost overruns constituted 33 of the total expense The budget for the bridge increased to 150 The cost overruns exceeded the original budget by 50 The final example is the most commonly used as it specifically describes the cost overruns exclusively whereas the other two describe the overrun as an aspect of the total expense In any case care should be taken to accurately describe what is meant by the chosen percentage so as to avoid ambiguity List of projects with large cost overruns editThis section may contain unverified or indiscriminate information in embedded lists Please help clean up the lists by removing items or incorporating them into the text of the article August 2022 See also List of failed and overbudget custom software projects Australia edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message Sydney Opera House was completed ten years late and more than fourteen times over budget Canada edit Canadian Firearms Registry initially projected to cost Canadian taxpayers CAN 2 million ended up being 1 000 times over budget at CAN 2 billion Trans Mountain pipeline expansion comes in 70 per cent higher than expected Trans Mountain Corporation announced the projected cost of the pipeline expansion has soared from its earlier estimate of 12 6 billion to 21 4 billion 10 United Kingdom edit The NHS patient records system implemented as part of the National Programme for IT was originally estimated to cost 6 4bn and eventually abandoned before completion after 10bn were spent It was described as one of the worst and most expensive contracting fiascos in the history of the public sector 11 Scottish Parliament Building 6 originally expected to take two years and cost 40 million but took five years and cost 400 million 12 Edinburgh Trams United States edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message The Big Dig a multi billion dollar highway reconstruction in Boston was delivered nine years late with a cost overrun of 190 adjusted for inflation The Boeing Dreamliner programme announced in 2003 was supposed to cost 6 billion and see the plane take to the air in 2008 The final bill was closer to 32 billion and the plane arrived three years late Germany edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message Berlin Brandenburg Airport 1 billion euro 6 billion euro Elbe Philharmonic Hall in Hamburg 77 million euro 789 million euro Landesarchiv Nordrhein Westfalen in Duisburg 30 million euro 195 million euro Staatsoper Unter den Linden 240 million euro 400 million euro Finland edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message Olkiluoto Nuclear Power Plant Unit 3 3 billion euro 8 5 billion euro as of 2017 project still ongoing Helsinki Western Metro Extension 400 million euro 1 19 billion euro September 2017 Russia edit This section does not cite any sources Please help improve this section by adding citations to reliable sources Unsourced material may be challenged and removed June 2023 Learn how and when to remove this template message 2014 Winter Olympics in Sochi US 12 billion US 51 billion Krestovsky Stadium in St Petersburg 548 See also editAdmissible heuristic Computer science pathfinding concept Benefit shortfall Downside risk Risk of the actual return being below the expected return Efficient contract theory Hypothesis that if a contract continues to exist it must be efficient due to survivorship bias Escalation of commitment A human behavior pattern in which the participant takes on increasingly greater risk Hiding hand principle How ignorance intersects with rational choice to undertake a project Megaproject Extremely large scale investment project Optimism bias Type of cognitive bias Planning fallacy Cognitive bias of underestimating time needed Reference class forecasting Method of predicting the future Scope creep Continuous or uncontrolled growth in a project s scope at any point after the project beginsReferences edit Standish Group 2004 CHAOS Report Report West Yarmouth Massachusetts Standish Group Flyvbjerg Bent Holm Mette K Skamris Buhl Soren L 2002 Underestimating Costs in Public Works Projects Error or Lie Journal of the American Planning Association 68 3 279 295 arXiv 1303 6604 Bibcode 2013arXiv1303 6604F doi 10 1080 01944360208976273 S2CID 5807225 SSRN 2278415 Ahiaga Dagbui Dominic D Smith Simon D 2014 Dealing with construction cost overruns using data mining Construction Management and Economics 32 7 8 682 doi 10 1080 01446193 2014 933854 hdl 10059 1307 S2CID 58922802 Cantarelli Chantal C Flybjerg Bent Molin Eric J E van Wee Bert 2010 Cost Overruns in Large Scale Transportation Infrastructure Projects Explanations and Their Theoretical Embeddedness European Journal of Transport and Infrastructure Research 10 1 5 18 arXiv 1307 2176 Bibcode 2013arXiv1307 2176C SSRN 2237990 Psychology of Construction Cost Denial Mountain Home Architects Timber Frame Architect Custom Homes a b Ahiaga Dagbui Dominic Smith Simon 2014 Exploring escalation of commitment in construction project management Case study of the Scottish parliament project Proceedings 30th Annual ARCOM Conference Association of Researchers in Construction Management 753 762 hdl 10059 1303 ISBN 9780955239083 Olaniran O J Love P E D Edwards D J Olatunji O 2017 Chaos Theory Implications for Cost Overrun Research in Hydrocarbon Megaprojects PDF Journal of Construction Engineering and Management 143 2 doi 10 1061 ASCE CO 1943 7862 0001227 Retrieved 29 August 2020 Major Projects Authority GOV UK Assurance for major projects National Audit Office NAO 2 May 2012 Feds say no more funding for Trans Mountain expansion as project costs nearly double 18 February 2022 Syal Rajeev 18 September 2013 Abandoned NHS IT system has cost 10bn so far The Guardian Harari Yuval Noah 2017 Homo Deus A Brief History of Tomorrow New York Harper p 305 External links editThe RISKS digest focuses on failed and overran IT projects Retrieved from https en wikipedia org w index php title Cost overrun amp oldid 1192791634, wikipedia, wiki, book, books, library,
