Potential Factors Causing Cost Escalation of Projects Planning

Internal
1. Bias
2. Delivery/Procurement Approach
3. Project Schedule Changes
4. Engineering and Construction Complexities
5. Scope Changes
6. Poor Estimating (errors and omissions)
7. Inconsistent Application of Contingencies

External
1. Local Government Concerns and Requirements
2. Effects of Inflation
3. Scope Creep
4. Market Conditions
* Note: these factors are numbered for reference only and do not suggest a level of influence.



Planning-Internal

While numerous internal factors may lead to underestimation of project costs at the planning stages seven primary internal factors have been well documented: bias, delivery/procurement approach, project schedule changes, engineering and construction complexities, scope changes, poor estimating, and inconsistent application of contingencies. Each of these factors separately or in combination with others might cause significant project costs increases.

Bias is the demonstrated systematic tendency to be over-optimistic about key project parameters. It is often viewed as the purposeful underestimation of project costs in order to insure a project remains in the construction program. This underestimation of costs can arise from the State Highway Agencies (SHA) estimators’ or consultant’s identification with the agency’s reflect the related cost in the project’s estimate (Board on Infrastructure and the Constructed Environment 2003, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Callahan 1998, Hufschmidt and Gerin 1970, “Mass Transit…” 1999, Semple et al. 1994, Touran and Bolster 1994 cited KELLY E. 2005).

Engineering and Construction Complexities caused by the project’s location or purpose can make early design work very challenging and lead to internal coordination errors between project components. Internal coordination errors can include conflicts or problems between the various disciplines involved in the planning and design of a project. Constructability problems that need to be addressed may also be encountered as the project develops. If these issues are not adequately addressed when preparing cost estimates, cost increases are likely to occur (Board on Infrastructure and the Constructed Environment 2003, Bechtel/Parsons Brinckerhoff 2003, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Callahan 1998, Hufschmidt and Gerin 1970, “Mass Transit…” 1999, Touran and Bolster 1994, General Accounting Office 2003, General Accounting Office 1997, General Accounting Office 2002 cited KELLY E. 2005).

Scope Changes, Such changes may include modifications in project construction limits, alterations in design and/or dimensions of key project items such as roadways, bridges, or tunnels, adjustments in type, size, or location of intersections, as well as other increases in project elements. When these modifications are made, the new elements typically do not have the same associated costs as the previous elements had. If the new elements are more expensive, then the extra costs have to be incorporated into the project’s cost estimate (Board on Infrastructure and the Constructed Environment 2003, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Callahan 1998, Chang 2002, Harbuck 2004, Hufschmidt and Gerin 1970, Mackie and Preston 1998, “Mass Transit…” 1999, Merrow et al. 1981, Merrow 1986, Merrow 1988, Semple et al. 1994, Touran and Bolster 1994 cited KELLY E. 2005).

Poor Estimating (errors and omissions) can also lead to underestimation, which subsequently translates into increases in project cost as errors and omissions are uncovered. Estimate documentation must be in a form that can be understood, checked, verified, and corrected. The foundation of a good estimate is the formats, procedures, and processes used to arrive at the cost. Poor estimation includes general errors and omissions from plans and quantities as well as general inadequacies and poor performance in planning and estimating procedures and techniques. Errors can be made not only in the volume of material and services needed for project completion but also in the costs of acquiring such resources (Arditi et al. 1985, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Carr 1989, Chang 2002, Harbuck 2004, Hufschmidt and Gerin 1970, Merrow et al. 1981, Merrow 1986, Merrow 1988, Pickrell 1990, Pickrell 1992 cited KELLY E. 2005).

Inconsistent Application of Contingencies causes confusion as to exactly what is included in the line items of an estimate and what is covered by contingency amounts. Contingency funds are typically meant to cover a variety of possible events and problems that are not specifically identified or to account for a lack of project definition during the preparation of early planning estimates. Misuse and failure to define what costs contingency amounts cover can lead to estimate problems. In many cases, it is assumed that contingency amounts can be used to cover added scope and planners seem to forget that the purpose of the contingency amount in the estimate was lack of design definition. The problems occured when the contingency amounts are applied inappropriately



Planning-External

External factors that may lead to underestimation of project costs during the planning portion of project development include local government concerns and requirements, effects of inflation, scope creep, and market conditions. Again, it must be recognized that each of these factors can act separately or in combination with others to cause significant project cost increases.

Local Government Concerns and Requirements typically include mitigation of project effects and negotiated scope changes or additions. Actions by the SHA are often required to alleviate perceived negative impacts of construction on the local societal environment as well as the natural environment. Measures may include but are not limited to introducing changes to project design, alignment, and the conduct of construction operations. These steps are often taken to appease the local residents, business owners, and environmental groups. The required accommodation is often unknown during the early stages of project development and therefore is not included in the cost estimates. Since the additional items were not incorporated in the project’s initial scope, the project’s cost estimate inevitably increases when the items are added (KELLY E. 2005).

Effects of Inflation is a key factor in the underestimation of costs for many projects. The time value of money can adversely affect projects when: 1) project estimates are not communicated in year-of-construction costs; 2) the forecasted project completion is delayed and therefore the cost is subject to inflation over a longer duration than anticipated; and/or 3) the rate of inflation is greater than anticipated in the estimate. The industry has varying views regarding how inflation should be accounted for in the project estimates and in budgets by funding sources. In the case of projects with short development and construction schedules, the effect of inflation is usually minor; however, projects having long development and construction durations can encounter unanticipated inflationary effects. The results of inflation effects are evident in Boston’s Big Dig. The original estimate for this project, which was developed in 1982 and based on the FHWA guidelines in the Interstate Cost Estimate (ICE) manual, excluded inflationary factors. Inflation was a large portion of the cost overruns experienced on the project (Akinci and Fischer 1998, Arditi et al. 1985, Board on Infrastructure and the Constructed Environment 2003, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Hufschmidt and Gerin 1970, Merrow 1988, Pickrell 1990, Pickrell 1992, Touran and Bolster 1994 cited KELLY E. 2005).

Scope Creep is similar to changes in scope; however, these changes are usually the accumulation of minor scope changes. Projects often seem to grow naturally as the project progresses from inception through development to construction. These changes can often be attributed on highway projects to the changing needs or growth of the population in the area to be served. When a project’s scope escalates, the additional elements in the scope have to be accounted for in the cost estimate. As a result, a project’s cost estimate increases when the scope grows (Akinci and Fischer 1998, Board on Infrastructure and the Constructed Environment 2003, Booz•Allen & Hamilton Inc. and DRI/McGraw-Hill 1995, Callahan 1998, Chang 2002, Harbuck 2004, Hufschmidt and Gerin 1970, Mackie and Preston 1998, “Mass Transit…” 1999, Merrow et al. 1981,Merrow 1986, Merrow 1988, Semple et al. 1994, Touran and Bolster 1994 cited KELLY E. 2005).

Market Conditions or changes in the macro environment can affect the costs of a project, particularly large projects. Often only large contractors or groups of contractors can work or even obtain bonding for a large project. Typically, the risks associated with large projects are much greater, for both the owner and contractor, and that affects project costs. Inaccurate assessment of the market conditions can lead to incorrect project cost estimating (Warne and Maryland State Highway Administration 2002 cited KELLY E. 2005).