Cost Overrun Control

Introduction

The extra cost, extra cost or extra cost[1] refers to an additional expense that is not initially planned or established in the budget of a project or work. This unexpected cost is incurred over a budgeted amount due to an underestimation of the actual cost during the budgeting process. Cost overrun should be distinguished from cost escalation, which is used to express “anticipated” growth in budgeted cost due to factors such as inflation.

Cost overruns are common in infrastructure, building construction and technology projects. A study on this topic published in the Journal of the American Planning Association (in Spanish: Jornal de la Asociación de Planning Americana) in 2002 found that 9 out of 10 construction projects had underestimated the cost. Cost overruns of 50 to 100% of the initial budget were very common. Cost underestimation was found in each of the 20 nations and 5 continents covered by the study, and cost underestimation has not decreased in the 70 years for which data were available.[2]

For IT projects, cost overruns are typically quantified at around 30%, and missed deadlines at around 60%.[3] And an industry study by the Standish Group found that the average cost overrun was 43%; 71% of projects exceeded their budget, their time estimates or estimated a scope "Scope (project management)") that was too narrow, an estimated waste of $55 billion per year was calculated in the United States alone.[4] However, acceptable expected values hide large cost overruns incurred by out-of-control projects in the tails of the risk distribution, where projects with 200% cost overruns are typical.[5].

Many large construction projects have incurred extra costs. The Suez Canal cost 20 times more than early estimates; Even the cost estimate calculated the year before construction began underestimated the final amount of the project by a factor of three. The Sydney Opera House building cost 15 times more than originally projected, and the Concorde supersonic airplane cost 15 times more than originally planned. (Boston, Massachusetts) (not yet drafted)")* of Boston was completed, the project was 275% over budget ($11 billion).[6]

The Eurotunnel between the United Kingdom and France had a construction cost overrun of 80%, and exceeded the cost of financing by 140%.[6].

Causes

There are three types of explanations that apply to the extra cost: technical, psychological and political-economic. Technical explanations account for cost overruns in terms of imperfect forecasting techniques, inadequate data, etc. Psychological explanations account for the excess cost in terms of forecasters' optimistic bias and black swan blindness. Scope drift, when requirements or objectives grow during the project, is also common. Finally, political-economic explanations have to do with cost overruns as a result of poor strategic evaluations of scope or budgets.

Cost Overrun Control

Introduction

The Eurotunnel between the United Kingdom and France had a construction cost overrun of 80%, and exceeded the cost of financing by 140%.[6].

References

[1] ↑ «sobrecoste o sobrecosto, en una sola palabra». Fundéu.: https://www.fundeu.es/recomendacion/sobrecoste-o-sobrecosto-en-una-sola-palabra/

[2] ↑ a b c d e Flyvbjerg, Bent; Holm, Mette Skamris; Buhl, Søren (Summer 2002). «Underestimating Costs in Public Works Projects: Error or lie?». Journal of the American Planning Association (Chicago: American Planning Association) 68 (3): 279-295. ISSN 0194-4363. Archivado desde el original el 25 de mayo de 2012. Consultado el 16 de octubre de 2010.: https://web.archive.org/web/20120525184840/http://flyvbjerg.plan.aau.dk/JAPAASPUBLISHED.pdf

[3] ↑ Flyvbjerg, Bent; Budzier, Alexander (2011). «[http://hbr.org/2011/09/why-your-it-project-may-be-riskier-than-you-think/ar/1 Why Your IT Project Might Be Riskier Than You Think]». Harvard Business Review 89 (9): 23-25.: https://archive.org/details/sim_harvard-business-review_2011-09_89_9/page/23

[4] ↑ Standish Group (2004), CHAOS Report, West Yarmouth, Massachusetts: Standish Group .

[5] ↑ Budzier, Alexander & Flyvbjerg, Bent. Double Whammy - How IT Projects are Fooled by Randomness and Screwed by Political Intent. Archivado el 6 de marzo de 2016 en Wayback Machine. Saïd Business School working paper, August 2011.: http://eureka.sbs.ox.ac.uk/898/

[6] ↑ a b c d e Flybjerg, Bent (1 de diciembre de 2005), Policy and Planning for Large Infrastructure Projects: Problems, causes, cures, Policy Research Working Papers 3781, World Bank Publications, pp. 4-5 .: http://go.worldbank.org/6G2FJ40OG0

[7] ↑ Hackney, John W. (1991). Humphreys, Kenneth K., ed. Control and Management of Capital Projects. American Association of Cost Engineers (2nd edición). New York: McGraw-Hill. ISBN 9780070012592. OCLC 123212738.: https://es.wikipedia.org//www.worldcat.org/oclc/123212738

[8] ↑ Merrow, Edward W.; Phillips, Kenneth E.; Myers, Christopher W. (September 1981). Understanding Cost Growth and Performance Shortfalls in Pioneer Process Plants. Rand. ISBN 0-8330-0352-6. RAND Document R-2569-DOE.: http://health.rand.org/pubs/reports/2006/R2569.pdf

[9] ↑ Westneat, Danny (26 de abril de 2009). «Tunnel's cost may fool us all». Seattle Times (Seattle: Seattle Times). Consultado el 16 de octubre de 2010.: http://seattletimes.nwsource.com/html/dannywestneat/2009123442_danny26.html

[10] ↑ Flyvbjerg, Bent (1 de enero de 2008). «Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference class forecasting in practice». European Planning Studies (PDF) (Routledge) 16 (1): 3-21. ISSN 0965-4313. doi:10.1080/09654310701747936. Archivado desde el original el 5 de julio de 2012.: https://web.archive.org/web/20120705155725/http://www.sbs.ox.ac.uk/centres/bt/Documents/Curbing%20Optimism%20Bias%20and%20Strategic%20Misrepresentation.pdf

Causes

These three forms of explanation can be considered forms of risk. The budgeted amount of a project should always include funds for "cost contingencies" to cover risks other than those imposed by changes to the project scope. As has been demonstrated in cost engineering research,[7]

poor risk analysis") and practices for estimating contingencies explain many of the extra costs of the projects. Numerous studies have found that the biggest cause of cost growth was a poorly defined scope at the time the budget was made. Cost growth, or exceeding budget before adding cost contingencies, can be predicted by evaluating the extent of scope definition, even in complex projects with new technology.[8].

Professor Bent Flyvbjerg of the University of Oxford and Martin Wachs of the University of California, Los Angeles have shown that large public works projects often cost extra due to strategic falsehoods—"that is, lying," as Flyvbjerg defines the terms.[9].

Normally the cost overrun is calculated in one of two ways: either as a percentage, that is the actual cost less the budgeted cost, as a percentage of the budgeted cost; or as a ratio "Ratio (mathematics)") of the actual cost divided by the budgeted cost. For example, if the budget to build a bridge was 100 million dollars, and the actual cost was 150 million, then the extra cost can be expressed by the ratio of 1.5, or as 50 percent.

Reference class forecasting was developed to eliminate or reduce cost overruns[10].

References

[1] ↑ «sobrecoste o sobrecosto, en una sola palabra». Fundéu.: https://www.fundeu.es/recomendacion/sobrecoste-o-sobrecosto-en-una-sola-palabra/

[4] ↑ Standish Group (2004), CHAOS Report, West Yarmouth, Massachusetts: Standish Group .

Navegación

Cost Overrun Control

Introduction

Causes

Cost Overrun Control

Introduction

References

Causes

References