Cost overrun

A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an underestimation of the actual cost during budgeting. Cost overrun should be distinguished from cost escalation, which is used to express an anticipated growth in a budgeted cost due to factors such as inflation.

Cost overrun is common in infrastructure, building, and technology projects. For IT projects, an industry study by the Standish Group found that the average cost overrun was 43 percent; 71 percent of projects were over budget, exceeded time estimates, and had estimated too narrow a scope; and total waste was estimated at $55 billion per year in the US alone.^[1]

Many major construction projects have incurred cost overruns. The Suez Canal cost 20 times as much as the earliest estimates; even the cost estimate produced the year before construction began underestimated the project's actual costs by a factor of three. The Sydney Opera House cost 15 times more than was originally projected, and the Concorde supersonic aeroplane cost 12 times more than predicted.

The Channel Tunnel between the UK and France had a construction cost overrun of 80 percent, and a 140-percent financing cost overrun.

Causes [edit]

Three types of explanation for 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. Scope creep, where the requirements or targets rises during the project, is common. Finally, political-economic explanations see overrun as the result of strategic misrepresentation of scope or budgets.

Describing cost overruns [edit]

Cost overrun can be described in multiple ways.

As a percentage of the total expenditure
As a total percentage including and above the original budget
As a percentage of the cost overruns to original budget

For example, consider a bridge with a construction budget of $100 million where the actual cost was $150 million. This scenario could be truthfully represented by the following statements.

The cost overruns constituted 33% of the total expense.
The budget for the bridge increased to 150%.
The cost overruns exceeded the original budget by 50%.

The final example is the most commonly utilized as it specifically describes the cost overruns exclusively whereas the other two describe the overrun as an aspect of the total expense. In any case care should be taken to accurately describe what is meant by the chosen percentage so as to avoid ambiguity.