This article is an excerpt from the 2020 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its July 2019 report entitled Rail Transit: Federal Transit Administration Could Improve Information on Estimating Project Costs, the U.S. Government Accountability Office (GAO) found significant cost-estimating flaws in rail infrastructure projects. After conducting an extensive review of relevant literature, including an assessment of projects across the US, Canada, the UK, and Australia, and conducting interviews with a large number of key stakeholders and subject matter experts, the GAO consolidated a series of observations and recommendations to help control cost overruns in major infrastructure projects. In its report, the GAO summarized a series of factors that affect rail transit construction costs including project design decisions, site characteristics, project execution, market conditions, community and political environment, and legal requirements. The report also identified a series of key project management principles for managing project costs, which included project management capability, informed procurement decisions, managing risk, and managing stakeholder relations.
One of the key observations in the report was that the management of the procurement process will have a key impact on project costs, with factors noted including the level of market competition, the underlying structure of contract incentives, overall design responsibility, and the degree of control given to contractors to manage delivery details. The report also noted that funding sources, and the related conditions imposed on projects by those funding sources, can impact project costs since, for example, “representatives of one industry organization said that by accepting federal funding, sponsors might incur additional costs and potential schedule delays, due to federal scheduling and procurement requirements associated with that funding” but that ultimately “federal involvement generally helps sponsors reduce costs by providing oversight and ensuring timely payments.”
The GAO also noted that construction methods play a significant role in project costs since, for example, tunnelling methods for underground projects may impact costs, as would installing precast tunnel segments rather than relying on the “form-in-place” method for tunnel construction. Another critical factor noted by the GAO was sponsor experience, stating that “rail transit construction projects are often the largest construction projects ever pursued by a specific locality, and agencies’ inexperience with such projects may cause them to make mistakes”. Market conditions were also identified as impacting project costs, as labour and material costs tend to increase in booming economies.
Furthermore, the community and political environment were also found to play a role in contributing to project costs since these factors may “cause delays or lead to changes in the project that could affect its costs”. For example, “concerns about environmental or noise impacts—may lead sponsors to change the project’s scope, design, or schedule”. The GAO also noted that “political involvement in a project can also affect a project’s costs” citing an example where external political influence caused a transportation agency in Canada to recommend construction of two additional stations with an estimated C$121 million (US$91 million in 2016) in construction costs, even though the stations’ initial business cases indicated that the costs and disadvantages significantly outweighed the benefits.”
The report also identified design modification as a leading contributor to increased projects costs, noting that “changes a sponsor makes to a project’s scope or design after it has estimated costs can result in higher than expected project costs”. For example, in the Norfolk, Virginia The Tide light rail project, the report noted that “scope additions, including signaling, control, communications, and station design changes, contributed to the project’s exceeding its $232 million estimate (at grant agreement) by $83 million.”
The GAO also found that weak cost estimating processes also contributed to cost overruns since “cost estimates may not anticipate all factors that may affect project costs” As an example, the GAO cited a report of a public-private partnership light rail project in Sydney, Australia, which “attributed 94 percent of an estimated AUD$549 million increase ($495 million U.S. in 2014) in the cost of building the project to incorrect estimates in the initial business case for the project.” The GAO also noted bias in cost estimation practices, stating that “some academic experts have contended that in the early stages of gaining support for the project, estimators may underestimate costs to influence the project’s approval process.”
The GAO then recommended four cost containment mechanisms that can be employed to help mitigate the risk of project cost overruns: (i) ensuring project management capability; (ii) making informed procurement decisions; (iii) managing risk; and (iv) managing stakeholder relations. With respect to ensuring management capability, the report noted that “the United Kingdom’s National Audit Office guidance states that without experienced project managers, organizations have limited control over project progress.”
With respect to making informed procurement decisions, the report stated that these decisions “include the selection of a project delivery method and the process by which proposals will be selected”. As the GAO observed regarding project delivery, “different project delivery methods may better contribute to the achievement of objectives such as lowest constructed cost, speed of construction, or the degree of control over design retained by the sponsor”. As for the proposal selection process, the GAO noted that “when selecting among contractors’ proposals, some sponsors use a “best value” selection process in which the sponsor compares both cost and non-cost factors to select the most advantageous proposal overall.”
The GAO identified managing risk as its third cost containment strategy. As the report stated, “according to key standards, guidelines, and leading practices, sponsors should manage risk to address the potential for negative events that could contribute to schedule delays and increase costs” and should then “take steps to mitigate risk relative to the cost of implementing that approach.” For example, the report noted that “Los Angeles Metro mitigated risk by contracting for the relocation of underground utilities, the exact locations of which were unknown, prior to construction of the Purple Line Extension” so that the “construction contractor was able to begin work more quickly than if the location of utilities had remained unknown.” The GAO also noted that the responsibility for addressing an identified risk should be assigned to the party that is in the best position to manage that risk.
Finally, the GAO identified managing stakeholder relationships as its fourth and final factor for controlling project cost overruns, noting that “according to key standards, guidelines, and leading practices, to manage project costs effectively, sponsors should manage stakeholder relationships to avoid costs associated with schedule delays or unexpected cost increases incurred as a result of stakeholder decisions or input.” The report noted that the “Project Management Institute’s Guide to the Project Management Body of Knowledge, PMBOK® Guide states that stakeholders can impact any project in a positive or negative way and describes key concepts and processes for project stakeholder management”. The report noted that the approaches that project sponsors can take to manage those risks include establishing lines of communication with third parties, engaging the local community to understand needs and manage expectations, and collaborating with contractors to manage risks through “partnering” workshops during the planning phase.
The GAO also recommended that the Federal Transit Administration improve its distribution of cost estimating information to project sponsors since “it is critical for project sponsors to develop high-quality, reliable cost estimates that account for the variety of interrelated factors that affect the cost to build these projects”. To that end, the GAO recommended that the “FTA Administrator should provide a central, easily accessible source with all of FTA’s cost estimating information to help project sponsors improve the reliability of their cost estimates.”
As this report illustrates, while public institutions face significant challenges in establishing accurate cost estimates for their major projects, those institutions can leverage a series of proven cost control strategies to help them increase the odds of project success.
