Everything about Cost Overrun totally explained
Cost overrun is defined as excess of actual
cost over
budget. Cost overrun is also sometimes called "
cost escalation," "cost increase," or "budget overrun." However, cost escalation and increases don't necessarily result in cost overruns if
cost escalation is included in the budget.
Cost overrun is common in
infrastructure,
building, and
technology projects. One of the most comprehensive studies
(External Link
) of cost overrun that exists found that 9 out of 10
projects had overrun, overruns of 50 to 100 percent were common, overrun was found in each of 20 nations and five continents covered by the study, and overrun had been constant for the 70 years for which data were available. For
IT projects, an industry study by the Standish Group (2004) found that average cost overrun was 43 percent, 71 percent of projects were over budget, over time, and under
scope, and total waste was estimated at US$55 billion per year in the US alone.
Spectacular examples of cost overrun are the
Sydney Opera House with 1,400 percent, and the
Concorde supersonic aeroplane with 1,100 percent. The cost overrun of Boston's
Big Dig was 275 percent, or US$11 billion. The cost overrun for the
Channel tunnel between the UK and France was 80 percent for
construction costs and 140 percent for
financing costs.
Three types of
explanation of 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. Finally, political-economic explanations see overrun as the result of
strategic misrepresentation of scope and/or budgets.
All of the explanations above can be considered a form of risk. A project's budgeted costs should always include
cost contingency funds to cover risks (other than scope changes imposed on the project). As has been shown in
cost engineering research, poor
risk analysis and contingency estimating practices account for many project cost overruns. Numerous studies have found that the greatest cause of cost growth was poorly defined scope at the time that the budget was established. The cost growth (overrun of budget before
cost contingency is added) can be predicted by rating the extent of scope definition, even on complex projects with new technology.
Cost overrun is typically calculated in one of two ways. Either as a
percentage, namely actual cost minus budgeted cost, in percent of budgeted cost. Or as a
ratio, viz. actual cost divided by budgeted cost. For example, if the budget for building a new bridge was $100 million and the actual cost was $150 million then the cost overrun may be expressed as 50 percent or by the ratio 1.5.
List of projects with large cost overruns
Further Information
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