A cost overrun, also known as a cost increase, underrated or budget
overrun, involves unexpected costs incurred in excess of budgeted
amounts due to an underestimation of the actual cost during budgeting.
Cost overrun should be distinguished from cost escalation, which is an
anticipated growth in a budgeted cost due to factors such as
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.
Many major construction projects have incurred cost overruns; cost
estimates used to decide whether important transportation
infrastructure should be built can mislead grossly and
2 Prevention and mitigation
4 List of projects with large cost overruns
4.3 United Kingdom
5 See also
7 External links
Recent works by Ahiaga-Dagbui and Smith suggests a rethink of what is
traditionally referred to as overruns in construction. 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
Three types of explanation for cost overrun exist: technical,
psychological, and political-economic. 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. 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.
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. Also, a recent study has suggested that principles of
chaos theory can be employed to understand how cost overruns emerge in
megaprojects. 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.
Prevention and mitigation
IT projects (essentially meaning software development projects in
this context), the traditional approach to try to control costs is the
use of project management techniques, such as
PRINCE2 - though the use
of such techniques has not prevented cost overruns in all cases. In
the 21st century, a newer family of approaches, collectively termed
agile software development, have grown in popularity for
IT projects -
although conventional project management is still very widely used,
and in some cases has merely been inaccurately "rebranded" as agile.
Agile development does not claim to guarantee perfect on-time and
on-budget delivery of the original expectations (which may not be even
realistic or suitable to meet user needs). It claims to be able to:
converge faster on a suitable solution
meet user needs faster (users may even be able to use a partially
implemented system and therefore obtain economic benefit from it
during the project's implementation, depending on the nature of the
catch bugs faster, maybe even when they only exist in the primordial
form of requirements deficiencies, and hence be able to fix them more
cheaply on average (because studies have shown bugs are more expensive
to fix the later they are found)
trim away unnecessary or even unwanted "nice to haves" from the list
of features planned to be implemented, in order to cut costs (in this
setting, the traditional software engineering term "requirements" is
clearly seen to be something of a misnomer, as many so-called
requirements aren't actually requirements at all)
avoid the worst-case scenario: project cancellation, in which all the
money is wasted (except possibly that portion of the money spent on
reusable code and/or reusable software components, if they are
considered to be worth reusing)
It has been claimed that agile development did not prevent cost and
time overruns in the UK government's
Universal Credit IT project, but
there are serious doubts as to whether the
Universal Credit software
development project was in fact following a proper agile process in
the first place.
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. 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.
Project assurance is now also being
used by private sector companies undertaking major projects.
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
This section needs expansion. You can help by adding to it. (October
See also: List of failed and overbudget custom software projects
Sydney Opera House
Sydney Opera House was completed ten years late and more than fourteen
times over budget.
Canadian Firearms Registry, initially projected to cost Canadian
taxpayers $CAN 2 million, ended up being several times over budget
National Programme for IT, described by the British Members of
Parliament (in the Public Accounts Committee) as one of the "worst and
most expensive contracting fiascos" in the history of government
Scottish Parliament Building
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
Berlin Brandenburg Airport: 1 billion Euro → 6 billion Euro = 600%
Elbe Philharmonic Hall
Elbe Philharmonic Hall in Hamburg: 77 million Euro → 789 million
Euro = 1024%
Landesarchiv Nordrhein-Westfalen (de) in Duisburg: 30 million
Euro → 195 million Euro = 650%
Staatsoper Unter den Linden: 240 million Euro → 400 million Euro =
Olkiluoto Nuclear Power Plant Unit 3: 3 billion Euro → 8,5 billion
Euro (as of 2017, project still ongoing) = 287%
Helsinki Western Metro Extension: 400 million Euro → 1,19 billion
Euro (September 2017) = 298%
2014 Winter Olympics
2014 Winter Olympics in Sochi: US$12 billion → US$51 billion = 425%
Krestovsky Stadium in
St Petersburg = 548%
Escalation of commitment
Reference class forecasting
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 . 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.
^ 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 .
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. ISBN 9780955239083.
^ a b Stecklein, Jonette M.; Dabney, Jim; Dick, Brandon; Haskins,
Bill; Lovell, Randy; Moroney, Gregory (2004). Error
Through the Project Life Cycle (Report). JSC-CN-8435.
^ "Major Projects Authority - GOV.UK".
^ "Assurance for major projects - National Audit Office (NAO)".
The RISKS digest (focuses on failed and overran