This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In his 2012 Journal of Construction Management and Economics article entitled “Why Costs Over-Run: risk, optimism and uncertainty in budgeting for the London 2012 Olympic Games”, Will Jennings analyzed the causes behind the recurring cost overruns impacting multiple Olympic Games and, in particular, the 2012 London Olympic Games. The article provided the following background summary of the endemic cost overruns in this field of procurement, noting that the London example fits a pattern of cost overruns found in all Olympic Games since 1976:
In one of the initial studies into the feasibility of a bid for the 2012 Olympics, the total cost to London of hosting the Games was estimated at a modest £1.8 billion (for details of that budget forecast, derived on the basis of a range of assumptions about a ‘specimen bid’, see Arup 2002a; 2002b). This figure later increased to £4.2 billion in the bid dossier that was submitted to the International Olympic Committee (IOC) and again revised upwards to £9.325 billion in a formal government review of the budget in 2007. Since that review, cost increases have been absorbed into the sizeable construction and programme contingencies for the project. Far from the London 2012 experience being exceptional for the problem of spiralling costs, the under-estimation of project costs is the norm in organisation of the Olympic Games (see Jennings 2012a), with the average cost over-run from the estimates presented in the bid dossiers of applicant cities being equal to more than 200% in all Games since 1976. This is also consistent with extensive evidence on the systematic bias of mega-projects towards cost inflation (Merrow 1988; Flyvbjerg et al. 2002; 2003; Jennings 2012b). This research note uses the case of London 2012 to test a number of explanations of cost over-runs in major projects in general and in organisation of the Olympics in particular.
Jennings noted that the concept of “optimism bias” is often used as an explanation for cost overruns, since public institutions are overly optimistic about how much they can achieve in their major projects and tend to underestimate the associated time and cost of those projects. In the study, Jennings identified three principle factors as the key contributing causes to optimism bias in major projects and to the resulting gaps between initial cost estimates and final project costs: (i) government inattention to risk; (ii) biased decision-making; and (iii) uncertainty in project administration:
The systematic under-estimation of costs in budgeting for large scale projects raises the vexing question of why there are such incongruities between the projections made at initial stages and the eventual outturn cost. As a first step to understanding the sources of such budgeting over-runs in the context of the Olympics, this research note outlines how the costs of the London 2012 Olympic Games were under-estimated in a series of budget forecasts, identifying sources of error and categorising these according to the effects on budgeting of: 1) inattention to risk inside government, 2) biases in decision-making in the evaluation and use of information, and 3) uncertainty in project management and administration.
With respect to the 2012 London Olympic Games, Jennings found that the government’s inadequate attention to risk, which was well-documented in multiple reports cited in the study, had an adverse impact on the accuracy of the budget estimate:
It is possible to argue that under-estimation of the cost of London 2012 was due, in part, to inattention to risk inside government: in the failure of British government to recognise the uncertainties surrounding key assumptions and forecasts. For example, over-estimation of the level of private sector investment in development of the Olympic Village required a subsequent increase in the size of the public sector funding package. This was because in preparation of the London bid budget “… £738 million of funding from the private sector was included, despite not being supported by robust analysis” (Public Accounts Committee 2008a, p. 5). More widely, the bid budget did not follow the government’s own guidance on budgeting procedures for major projects, and the risk of optimism bias, “…despite HM Treasury having been consulted and the bid agreed across Government” (Public Accounts Committee 2008a, p. 9). Indeed, there was sizeable error (in the statistical meaning of the term) attached to the estimates of costs put forward in the assessments undertaken by external consultants, such as Arup (2002a; 2002b) and PricewaterhouseCoopers (2003), as “… [a]ll made clear in their advice … that significant uncertainties existed and that further work was required to develop robust budget figures, and this work was based on plans that have subsequently changed significantly” (National Audit Office 2007, p. 7). It is unsurprising, then, that these initial projections had little resemblance to the amended budget later signed off by government in 2007: “…before the bid, the size, scale and complexity of what was to be delivered, as well as the need for this scale of programme contingency, had not been fully appreciated” (Public Accounts Committee 2008a, p. 9). There is reason to argue, then, that inattention of decision-makers inside government to the risks and uncertainties inherent to certain budget items, and the implicit confidence intervals attached to forecasts, was a source of the under-estimation of the cost of London 2012.
Jennings also cited multiple reports to support the conclusion that biased decision-making, particularly in the selection of comparator games for developing cost estimates, contributed to the overly optimistic estimates for the 2012 London Olympics:
There is some evidence that biases in decision-making were an important factor in growth in the costs of London 2012 above initial predictions. In hindsight the over-optimism of the initial forecasts is self-evident, in as much as the estimated headline cost alone increased almost 300% from the candidature file submitted to the IOC in 2004 to the government’s revised budget in 2007. More significantly, inspection of the feasibility studies into the development of a London bid reveals that these were geared around a review of the documents of successful bids of the past and acknowledged the need for “… escaping from the world of realism” (Luckes 1998, p. 2). It is also arguable that other decision-making biases were at work in formulation of the initial versions of the budget. Specifically, there is some evidence of the anchoring of cost estimates with reference to information from past Olympic Games or previous budget estimates, without reflection upon the underlying uncertainties attached to them or the degree to which estimates of Games costs were comparable across different contexts. The exploration of costs for a ‘specimen bid’ (Arup 2002) was, for example, considered to be “a good baseline” (Select Committee on Culture, Media and Sport 2003, p. 16) for the projection of future costs, even though these estimates had been compiled in the absence of information about “…agreed project objectives and outputs” (Arup 2002a, p. 4). Further, both the specimen bid (Arup 2002a; 2002b) and the benchmarking exercise undertaken for government (PricewaterhouseCoopers 2003) included figures that were taken from the budgets of other major sporting events (i.e. the Olympic Games held in Atlanta in 1996 and in Sydney in 2000 and the Commonwealth Games in Manchester in 2002), without critical examination of the degree to which the cases were comparable. These were problematic cases for comparison because of their operational and construction characteristics. For example, the Atlanta Olympics involved a lower ratio of investment in the facilities and infrastructure than was planned for London, while Manchester’s Commonwealth Games had much fewer security threats to contend with than a London Olympics in the period after 9/11.
Jennings found that these biased cost estimates failed to take the unique challenges and objectives specific to the London games into account, and that the wrong comparators were used to formulate those estimates:
While the functional characteristics of an Olympic Games staged in London has similarities with those held in Atlanta and Sydney, the costs associated with procurement and security, for example, are subject to place- and time-specific parameters. Security provisions in Atlanta in 1996 and Sydney in 2000 are not comparable to London in 2012, because of the changed planning context after September 11, while the global financial crisis that hit in 2008 constrained opportunities for procurement from construction firms and the securing of private finance for projects such as the Olympic Village. The representativeness of figures across events also varies according to the extent to which public spending on regeneration and infrastructure is incorporated within the Olympic budget subject to the particular planning ‘vision’ of the Games organizers and their political principals. For example, the London bid was geared more around the theme of regeneration and investment to a greater extent than Atlanta, whereas Barcelona or Athens were drawn from a more comparable class of case.
Furthermore, Jennings found that uncertainties relating to the economic and technical aspects of the project, often referred to more simply as “scope creep”, also contributed to the unrealistically low-cost estimates for the London 2012 Olympic Games:
While inattention of government to risk and the presence of biases in decision-making are significant factors in the under-estimation of costs for the London 2012 Olympics, there is compelling evidence concerning the effects of scope creep in technical designs and structural requirements of the venues and infrastructure, as well as in the classification of costs through accounting. Specifically, growth in costs of construction of venues and infrastructure between the specimen bid, the probabilistic cost assessment, the candidature file submitted to the IOC and the government-amended budget (shown in Table 1) are not just attributable to cost inflation for existing designs, but also reflect the increased size and complexity of the plans for the main Olympic site and associated infrastructure. The total cost of infrastructure and event facilities were put at just £403 million in the Arup (2002a, p. 5) report and £751 million for a mid-range scenario in the PricewaterhouseCoopers (2003, p. 10) probabilistic cost assessment. At the time of the bid the cost of venues and infrastructure was estimated to be £2,670 (London 2012 Ltd 2004, p. 105), although this figure also included around £810 million of investment on ‘non-Olympic’ infrastructure from government and the £650 million Olympic Village to be financed through a public-private partnership (National Audit Office 2007, p. 33). After the revised budget introduced large contingencies to absorb any future cost increases (National Audit Office 2007, p. 16), there was further pressure on the projected cost of the venues, with the rising cost of the main stadium attributed to insufficient competitive tension in procurement and cost pressure due to ‘additional scope requirements’ in changes to the design of the stadium roof (see Department for Culture, Media and Sport 2009, p. 47).
As Jennings noted, many of the facilities were significantly expanded from their original design, which contributed to the cost overruns:
Both the aquatics centre and velodrome were subject to increased costs due to changes in design specification, with cost pressure of £25 million for the velodrome being attributed to “complex foundations and ground conditions” (ibid, p. 47). While the escalating costs of the London Olympics can be linked to changes in the scope and structural requirements of construction, the main factor behind the increased headline figures was scope creep in budgeting classification itself during the government’s consolidation of the budget in March 2007. In this, much of the increased cost — from £4.2 billion at the time of the bid to £9.325 billion in the revised budget — was a result of reclassification of certain items as core Olympic costs and due to inclusion of items that had been omitted from the bid due to uncertainty. Specifically, £1,044 million of expenditure on infrastructure for the Olympic Park was re-integrated into the official budget while the cost of tax liabilities on capital spending (£840 million) and security provision (£600 million), which had been omitted from previous estimates, were also consolidated into the budget. These budgeting omissions — of infrastructure, tax, security and a programme contingency to manage the interconnectedness of risk at the programme level — amounted to more than £4 billion, far greater than the increases in costs due to changes in technical scope (for example, the cost of the aquatics centre increased from an estimate of £75 million at the time of the bid to £313 million, while the cost of the main stadium increased from £280 million to £547 million over the same time period). These changes in accounting classification are also consistent with drift in the purpose of the Olympic budget over time, evolving from a speculative planning and bidding document (based on high levels of uncertainty and limited knowledge) to a tool for public accounting and programme management.
As the Jennings study concluded, while “it is well established that major projects tend to have poor track records in terms of their completion times and cost over-runs”, there is “less consensus as to the determinants of over-optimism in planning and budgeting.” Although the debate over the underlying causes and motivations behind the optimism bias may remain unresolved, the endemic nature of this risk to proper project planning and execution is well-documented.
Interestingly, in 2018, when Calgary City Council put the future of its Olympic bid for the 2026 Winter Olympics to a public plebiscite, 56.4 percent of Calgarians voted against the bid, and only 43.6 percent voted for it even though the Canadian federal government and the Alberta provincial government were offering to match the funding contribution of the City. Apparently, the Calgary taxpayers were not convinced that the allocated funds would cover the ultimate costs. In fact, they had significant data in support of their “NO” votes.
