Likelihood of Occurrence, Magnitude, and Rate of Cost Discrepancies in Highway Contracts

This paper assesses the likelihood of occurrence, magnitude and rate of cost overruns of a state highway agency’s construction projects. The paper also explores relationships between cost overruns and characteristics of the bidding process, project, and environment. The analysis included graphical statistics, statistical tests, and econometric techniques. The results showed that project size (surrogated by bid amount) and contract duration are highly significant factors affecting cost overruns – larger projects and longer-duration projects are more likely to incur cost overruns. For contracts that incur cost overruns, the cost overrun amount was also found to be a non-linear function of the bid amount and contract duration. The developed function for cost overrun rate (ratio of cost overrun amount to bid amount) showed that a non-linear decrease with increasing project size up to a certain point after which the cost overrun rate increases with increasing project size. On the average, Indiana DOT can expect to incur 7.59% cost overrun on 49.2 % of its projects, and 1.29% cost underrun on 42.6 % of its projects. The study methodology offers a consistent and rational approach by which agencies can develop functions for cost overrun rates, use such functions to estimate expected cost overrun amounts, and thereby improve on the estimation of contract contingency sums. Investigation of cost overruns is vital for reliable cost estimation and consequently, improved highway financial planning, highway needs assessment, and budgeting.