Major cost overruns common among megaprojects

By Chris McCahill

Megaprojects, which have been in the news lately—see Bloomberg and the New Yorker—due to issues with Seattle’s Alaskan Way Viaduct replacement project, frequently experience significant delays and cost overruns, according to researchers at Oxford University. But this outcome it is largely avoidable, they say.

Professor Bent Flyvbjerg of Oxford’s Saïd Business School has studied hundreds of billion-dollar megaprojects from around the world. Ninety percent of these projects experience major cost overruns and significant budget shortfalls. Overruns often exceed 50 percent and shortfalls are often between 40 to 50 percent. For ten U.S. projects—most of them transportation infrastructure projects—Flyvbjerg documents cost overruns ranging from 100 to 900 percent.
These are disconcerting findings, but megaprojects are not always doomed to underperform. One of the most important indicators that a project is in trouble, according to Flyvbjerg, is delay—often even before construction begins. “Sluggishness quite simply may be extremely expensive,” he says, adding that each additional year during the project implementation phase adds roughly 4.6 percent to costs. Careful preparation, planning, organization, and management, therefore, are extremely valuable.
Flyvbjerg and his colleagues also recommend four “basic instruments” to improve accountability and outcomes in megaprojects:

  1. Transparency: Early public process, independent expert reviews, and all documents and information made public and transparent.
  2. Performance specifications: Performance goals based on policy objectives and public interests that are set before any decisions are made or any major project evaluation has begun.
  3. Regulatory regimes: Clear economic rules governing construction, operations, and pricing of projects, which allow governments to carefully review issues, identify costs, and understand risks.
  4. Risk capital: A willingness of private financiers to participate and take on risks before the decision to move forward is made.

This isn’t to say that all large projects should move forward, nor that they should do so hastily. Forecasts and cost-benefit analyses used to justify these projects are often flawed or fraudulent, according to the research. At the same time, however, they tend to be technologically, politically, economically, and aesthetically appealing (Flyvbjerg calls these the “four sublimes” of megaprojects). The instruments and recommendations described by Flyvbjerg provide a road map for careful, informed decision-making, which can help minimize risks and potentially avoid major losses on proposed megaprojects.
Studies referenced in this article:
Bent Flyvbjerg, “What You Should Know About Megaprojects and Why: An Overview,” Project Management Journal 45, no. 2 (2014): 6–19.
Nils Bruzelius, Bent Flyvbjerg, and Werner Rothengatter, “Big Decisions, Big Risks. Improving Accountability in Mega Projects,” Transport Policy 9, no. 2 (2002): 143–54.
Chris McCahill is a Senior Associate at SSTI.