Tackling Systematic Cost Overruns in Infrastructure Projects

Systematic cost-overruns in major capital infrastructure projects have significant implications for public policy decision makers: Projects that cost more than planned create budget pressures and this can translate into political difficulties. A tendency for projects to cost, on average, more than expected indicates a problem with the estimation method or the decision making process. Researchers have in the past identified ‘optimism bias’ and ‘strategic misrepresentation’ as the main culprits for systemic cost overruns. However, all current explanations do not entirely conform to the existing empirical data from actual projects. Research carried out at the International Transport Forum suggests there are in fact additional drivers of cost-overruns in public investment appraisal.

• The accuracy of future cost estimates also depends on past construction market developments and bidder behaviour. 
• The functional relationship between the past development of prices on the construction market, bidder behaviour and current prices on the construction market is sufficient to explain the persistence of cost-overruns through time even in the absence of other explanations. 
• The usefulness of simple calculatory provision (‘uplift’) for expected cost overrun is questionable. 
• For informing decisions on the choice between direct public procurement and a public-private partnership solution, using the uplift as an input for a cost comparison is also questionable.