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Continued cost overruns for UK based infrastructure projects - Will we ever learn?

Louis Redding

Sunday I sat reading the usual crop of the weeks papers and other magazines and journals as I relaxed during the morning and of the articles that I focused on I noticed a common theme emerging, that being the significant cost overruns on HS2 and also Sizewell C.  This led me to fire up the computer and after a couple of hours searching for Capital Cost Infrastructure Projects I was dismayed to have my thoughts confirmed that Project Cost forecasting is seldom accurate in many cases and the margin of error is astounding to the point that it suggests that the initial cost model that was submitted first for the Go/No Go Decision, and then Contract Placement is at best proven to be a fiction in many cases.  

For example, McKinsey reports that large projects typically overrun budgets by 80%, and Cycle Construction suggested nationwide overruns average 15-25%. These issues are not unique to the UK, with global statistics showing similar trends. 

Further examples of Project Failures include:

  • HS2: The high-speed rail project has faced significant cost increases and delays, making it one of the most expensive megaprojects in the UK.  The initial estimate was £56 billion, which has since ballooned to £106 billion, with potential further increases, according to Full Circle Continuous Improvement,. Factors contributing to this include rising land acquisition costs, complex engineering challenges, and environmental protests.  
  • Aberdeen Western Peripheral Route (AWPR): This Scottish road project experienced a significant cost increase from its initial budget. 
  • London Jubilee Line Extension: This project was significantly over budget and behind schedule. 
  • Scottish Parliament Building: Initially estimated at £10-40 million, the final cost reached £414 million due to a complex and frequently changing design, poor project management, and underestimation of the scope,
  • Channel Tunnel:
    While a vital link, the Channel Tunnel project suffered from significant cost overruns, with the final cost exceeding the initial estimate by 80%. The project also took longer to complete than anticipated. 
  • The Wembley Stadium Reconstruction: The project started with an initial budget of £326.5 million provided by Australian construction company Multiplex. However, the project ended up costing over £1 billion, making it one of the most expensive stadiums ever constructed.

I could continue to list many projects that I fear that the such a list would be exhaustive.

I therefore pose the question, do Project Cost Models provide any value at all when many cost overruns exceed 100%.  Are financial risk models adequate or even understood?  As professionals working in Project Cost and Control, how do we address these issues, and how do we truly measure the effectiveness of what we do as any such metric is only as good as the data and assumptions used?

  • Hi,

    Good question. I've worked in the rail industry for over 30 years and I can't remember a project ever delivering to time or to budget. However, for those projects where I've had the most insight into the planning process the reasons have overwhelmingly been political rather than due to issues with the initial project modelling: basically, if the actual expected costs and timescales were proposed then the project would not be permitted to go ahead. So the project plan is trimmed down to remove all contingency and often even to remove known issues, this then gets passed and everyone just waits for the inevitable variations when those issues do arise. Which will now typically be even more expensive in cost and time as they are now late project changes.

    From colleagues I speak to in other industries the rail industry doesn't seem to be at all unique in this.

    I feel very sorry for those who work on Project Cost Models who come up with models that prove, in the long term, to be absolutely accurate, but are forced to change them for political convenience. Particularly when they consequently, and completely unfairly, get roasted for those projects being "late".

    P.S. throughout this note that I'm writing "political" with a small "p", it can be government or company politics.

    The best solution I can think of off-hand is to ensure that MBA courses drum into their students that if a project planning team does not give you the answer that you want then the correct response is to consider whether what you want is actually achievable...and not just to tell them to go away and come back with a different answer.

    I get hugely frustrated at the complacency we have on this issue as an industry - for example when bidding for major infrastructure contracts no bidder wants to to be the one to say "the emperor has no clothes", instead each tries to do the others in bidding the lowest price and shortest timescales even though they are well aware that they are not achievable. But I suspect we're coming up against a big blockage of human nature (from both sides of that negotiation) in tryign to change that.

    I'll be very interested to see the other responses you get, again it's a really good question.

    And let not put off the good project planners by getting too cynical about this - my message to them is always to be honest and be prepared to make the risks clear if you are forced to adjust your model. Good employers will listen to you, they may still decide to take the risks but at least they're dong it with eyes wide open.

    Thanks,

    Andy

  • in reply to Andy Millar

    I have seen projects over run in time and budget.  It always seems to amaze me that a lot of engineering projects seem to lack enough engineering staff at the planning stage.  Some project bring on the bulk of the engineering team after the cost/budget has been already agreed with little to no contingency budget.  There seems to be lots of people coming up with figures based on what the other lot quoted rather than working out the actual cost and then adding the correct amount of labour and profit.  

    Other painful practices are putting bids out to tender.  The concept of tender is fine but some times the end result of the work done by tender is shocking.  Mainly zero labour contracts meaning those workers have no real pride in the work they produce which I think is very sad.  There are many Teir 1 contractors that churn through staff like they are going out of fashion.  Have a look at Hinkley Point C for lots of documented labout issues.  The main crux of this I think is in the fact that they employ on contract rather than permanent employment.  Picture the scene 2 teams carrying out 2 parts of a project and they see an issue.  They bring it to the attention of the main contractor who then needs to work out whose contract that issue belongs to.  If it falls between the 2 then a third contractor comes in to plug the gap at a cost.  The alternative is the cut the budget elsewhere to plug the gap.  

    With permanent employment as posed to temp labour the employer/employee could do a kind of structured CPD and continual training but as a subby/sub-contractor they just become cheap labour.  Other issues with tender is people try and save the cost on the materials which sometimes means they get a lower quality product.  I know people think profit is a dirty word but if a company does not make profit it will not stay is business long.  

    There are many others issues as well but my final thought is planners and project managers that never go to site to check up on the progress of the work.  They seem to do it remotely and rarely is a clerk of works involved.  The culture of Teir 1 contracting needs to change

  • in reply to Sergio Fernandez

    Hello Sergio:

    If your Tier 1 you don't want to bring (Tier 2) additional people and physical resources (heavy equipment or temporary housing) onto a big project, until the money is in the bag!

    Peter Brooks

    Palm Bay FL

  • Nobody involved has any incentive to put in a realistic cost estimate.  When deciding whether or not to go ahead with a big infrastructure project, the politicians will be doing a cost/benefit analysis.  If the benefit is more than the cost, the project goes ahead.

    If the planners submitted a realistic cost estimate, the project would immediately be cancelled.  So instead, they submit a "happy day" estimate where everything goes right first time.  the project gets the go-ahead from the politicians, and everybody involved gets a job for many years to come, managing all the cost overruns.

  • in reply to Simon Barker

    The problem with a 'realistic' estimate is also political in terms of the media fall out from opposition elements. The cost-benefit analysis is more or less the same.

    By the time big projects are commissioned and their lifetime benefits are deprecated, the costs don't matter! (I've heard a similar argument from a senior electrical engineer about nuclear decommissioning cost!)  

  • in reply to Simon Barker

    Hello Simon:

    For government sponsored contracts, terms can be incorporated into the Tier 1 bid requirements (fixed price or cost plus) which can also force them to use  subcontractors (Tiers 2, 3 etc) using the same rules including permanent or temporary employee benefits (wages and retirement funding etc).

    If the UK government changes its contracting requirements the problem could be fixed.

    Peter Brooks

    Palm Bay Florida   

  • in reply to Simon Barker

    Also, wasn't there an article in the E&T magazine a while back about the London Olympic delivery project that did (per article, obviously) deliver on-time. Such are real DEAD-lines.

    Most project milestone just tell you how far you think you've come, and only give a glimpse of how far you've still to go ;-)

  • in reply to Peter Brooks
    Peter Brooks said:
    If the UK government changes its contracting requirements the problem could be fixed.

    Agreed.  I recently heard of a project that had sub-contracted out the work 6 layers deep.  Thus a sub-contractor of a sub-contractor of a sub-contractor of a sub-contractor of a sub-contractor of a sub-contractor.

    They also really need to re-introduce back into the system the CoW (Clerk Of Works)

  • in reply to Philip Oakley
    Philip Oakley said:
    Also, wasn't there an article in the E&T magazine a while back about the London Olympic delivery project that did (per article, obviously) deliver on-time. Such are real DEAD-lines.

    Yes, I know someone well who was very heavily involved in that project. As he puts it: it had to deliver on time as the athletes were arriving then whether it was built or not! However there were (as I understand it) aspects that were scaled back, and don't think about the costs - as my relative put it, towards the delivery date costs became irrelevant, it just had to be completed. It was still a fantastic achievement though. As in a different way was Crossrail / Elizabeth Line, which was the other way around - it was a few years late (compared to the political target, in my experience the project managers knew perfectly well when it would actually be delivered) but it delivered what it intended to deliver. 

    It's always risky to trumpet any project as a "success" or to condemn another as a "failure", in reality they all have lessons we could learn from - both positive and negative.

  • in reply to Andy Millar

    Hello Andy:

    Wasn't some of the funding for the London Olympic project taken (stolen) from National Lottery Heritage Fund?

    Peter  

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