What causes delays and cost overruns on major infrastructure projects?

Blog by Amandeep Bahra, Economist at the CPA

After the successful delivery of the London 2012 Olympics project, Crossrail, Europe’s largest construction project was in line to serve as another rare blueprint for delivering major infrastructure projects to time and to budget. However, a series of announcements on cost overruns and delays over the past 12 months has left Crossrail to feature as yet another example of poor infrastructure project delivery – although one can argue that the project still compares relatively well with other infrastructure projects around the world. Construction on the project (also known as the Elizabeth Line) started in 2009 and the central section of the line was due to open at the end of 2018, however, in August 2018, this was pushed back to Autumn 2019 and more recent evidence from the Public Accounts Committee and the National Audit Office (NAO) indicated that services on this part of the line would not start until March 2021. Moreover, the NAO stated that the opening date of the full line is still unknown and so is the final cost of the project, which currently stands at £17.6 billion, 18.9% higher than the original £14.8 billion budget. All these developments don’t come as a huge surprise, as cost overruns and delays are common amongst major infrastructure projects in the UK.

Examples of delays and cost overruns on other projects in the UK include the London Jubilee Line extension project, which went 80% over budget and opened nearly two years late in 1999, and the Channel Tunnel that opened one year late in 1994 and had a final cost of £9.5 billion, twice the original budget. More recently, the Aberdeen Western Peripheral Route (AWPR) in Scotland opened in February, one year later than initially planned and the overall cost of the project rose from £745 million to more than £1.0 billion. Even smaller projects such as the Sheffield to Rotherham tram-train opened three years late in October 2018 and went 401% over budget.

Indeed, delays and cost overruns on major infrastructure projects is by no means a UK problem, but a global phenomenon. According to Mace, 80% of large infrastructure projects globally experience cost or programme overruns. Similarly, McKinsey estimated that 98% of mega projects experience cost overruns of more than 30% and 77% are at least 40% late. A research paper published by Professor Bent Flyvbjerg also revealed that nine out of ten mega projects experience cost overruns. He added that overruns of up to 50% in real terms are common, and over 50% are not uncommon. The paper also highlighted that overruns have remained high and constant for the past 70 years and provided a list of examples. So why do infrastructure projects persistently go over budget and delivered late?

While there are several explanations for cost overruns and delays, majority of the literature largely groups this into three categories – technical challenges, optimism bias and strategic misinterpretation – which are outlined below.

  • Technical challenges – includes scope changes and change orders, disagreements between clients, contractors and sub-contractors, labour and material cost inflation, inaccurate forecasting, unforeseen events (e.g. heavy rain or severe winter weather, accidents) and poor monitoring.

  • Optimism bias – or the planning fallacy, includes the tendency to underestimate the time, costs and risks of future actions and overestimate the benefit of those actions.

  • Strategic misinterpretation – decisions are often driven by political and organisational pressures. Politicians or project planners underestimate the cost of their projects to ensure go-ahead or funding.

The three reasons mentioned here can largely explain some of the troubles faced by major infrastructure projects in the UK. Optimism bias was clearly evident in the case of Crossrail, as the project had an initial funding envelope of £15.9 billion, which was set in 2007 but was later revised down to £14.8 billion in 2010, before increasing to £17.6 billion in 2018. The cost estimate for Hinkley Point C was also revised up to £19.6 billion, whilst HS2 is also thought to cost double the official figure of £55.7 billion. As well as being subject to underestimations, all these projects have undoubtedly been at the heart of politics – strategic misinterpretation. So what can be done to address these issues?

There are several measures that can be implemented to reduce or prevent major projects from running behind schedule or over budget. In its report published in March, Mace recommended setting out clear outcomes, a sensible procurement, improving forecasting and the creation of an independent scrutiny panel amongst its top ten policy and practical suggestions. Furthermore, in November 2018, Professor Bent Flyvbjerg recommended three top measures to improve the delivery of major projects to a Public Administration and Constitutional Affairs Committee inquiry on the Government’s Management of Major Projects. These include a high quality business case, a team with proven track record of delivering and accountability. The adoption of new methods and technologies such as Building Information Modelling (BIM) is also likely to play a major role in preventing cost overruns and delays, however, the construction industry as a whole is often criticised for being slow to adapt to change. But changes must be embraced and lessons must be learned if major projects and programmes set out in the National Infrastructure and Construction Pipeline are to be delivered more effectively.