Uploads from Practical Engineering

Boston, Massachusetts is one of the oldest cities  in America, founded in 1630, more than a few years before the advent of modern motor vehicles.  In the 1980s, traffic in downtown Boston was nearly unbearable from the tangled streets laid  out centuries ago, so city planners and state transportation officials came up with what they  considered a grand plan. They would reroute the elevated highway and so-called “central artery”  of Interstate 93 into a tunnel below downtown and extend Interstate 90 across the inner harbor  to the airport in another tunnel. Construction started in 1991, and the project was given the  nickname Big Dig because of the sheer volume of excavation required for the two tunnels. In  terms of cost and complexity, the Big Dig was on the scale of the Panama Canal or Hoover Dam. It  featured some of the most innovative construction methods of the time, and after 16 years of work,  the project was finished on time and under budget… Actually, no. You might know  this story already. Of course, the Big Dig did make a big dent  in the traffic problem in Boston, but that came at a staggering price. The project  was plagued with problems, design flaws, fraud, delays, and of course, cost overruns. When  construction finished in 2007, the final price tag was around fifteen-billion dollars,  about twice the original cost that was expected. It’s a tale as old as civil engineering: A  megaproject is sold to the public as a grand solution to a serious problem. Planning  and design get underway, permits issued, budgets allocated (that took a lot longer  than we expect), construction starts, and then there are more problems! Work is delayed,  expenses balloon, and when all the dust settles, it’s a lot less clear whether the project’s  benefits were really worth the costs. Not many jobs go quite as awry as the Big Dig,  but it’s not just megaprojects that suffer from our inability to accurately anticipate  the expense and complexity of construction. From tiny home renovations to the largest  infrastructure projects in the world, it seems like we almost always underestimate  the costs. And the consequences of missing the mark can be enormous. Well, I’ve been  one of those engineers trying to come up with cost estimates for major infrastructure  projects, and I’ve been one of those engineers who underestimated. So I have a few ideas about  why we so consistently get this wrong. I’m Grady, and this is Practical Engineering.  In today’s episode, we’re trying to answer the question of why construction  projects always seem to go over budget. Major projects are often paid for with public  funds, so it’s important (it’s vital) that the benefits we derive from them are worth  the costs. And the only way we can judge if any project is worth starting is to have an  accurate estimate of the costs first. And, of course, this is not just a problem with  civil infrastructure but with all types of large projects paid for with public funds like  space programs and defense projects. They have to be justified. Most projects have benefits,  and you do get those benefits at the end, no matter the cost, but if they aren’t worth  the costs, you’d rather not go through with the project at all. This is especially true  for projects like streets and highways where not only costs get underestimated but the  benefits are often overestimated too. Check out my friend Jason’s videos on the Not Just  Bikes channel for more information about that. One of the biggest issues we face with  large projects is a chicken-and-egg problem: you don’t know how much they’ll cost until you  go through the design, but you don’t want to go through a lengthy and expensive design phase  and end up with a project you can’t afford. Budgeting and securing funds are usually slow  processes, plus you need to know if the job is even worth doing in the first place, so you  can’t just wait until the bids come in to find out how much a project is going to cost. You need  to know sooner than that, which usually means you need your design professional to estimate  the cost. For an infrastructure project, that’s the engineer, and engineers are  notoriously not good at estimating costs. We don’t know which contractors are busy and which  ones aren’t, what machinery they have, or whether or not they’ll bid on your project. We don’t know  the sales reps at the concrete and asphalt plants or keep track of the prices of steel, aggregates,  pumps, and piping. We don’t have a professional network full of subcontractors, material  suppliers, and equipment rental companies. We didn’t study construction cost estimating  in college, and most of us have never built anything in the field. And the people who have,  those who are most qualified to do this job (the contractors that will actually bid on the  project), usually aren’t allowed to participate in the cost estimating during design because it  would spoil the fair and transparent procurement process. It would give one or more contractors  a leg up on their competition. Because, (here’s a little secret), they aren’t always so good at  estimating costs either. When those bids come in, there’s often a huge spread between them, meaning  one of the most significant uncertainties of an entire project is sometimes simply which  contractors will decide to bid the job. Of course, there are some alternatives  to the normal bidding process that many infrastructure projects use, but even those  often require early cost estimates from people who are necessarily limited in their  ability to develop cost estimates. In fact, the industry term for the cost estimate that  comes from an engineer is the Opinion of Probable Construction Cost or OPCC. Take a look at that  mouthful. Two qualifiers: opinion of probable construction cost. And still, agencies and  municipalities and DOTs will write down that number on a folded piece of paper, slide it  surreptitiously to their governing board, and whisper, “This is how much we need.” And the  next day, the journalists who were at the meeting will publish that number in the news. And now,  every future prediction of the project’s cost will be compared to that OPCC, no matter how early  in the process it was developed. All this to say: estimating the cost of a construction project is  hard work (especially early on in the project’s life cycle), it takes highly skilled  and knowledgeable people to do well, and even then, it is a process absolutely  chock full of uncertainties and risks that are really hard to distill down to a single  dollar value. But construction cost estimates aren’t just imprecise. If that were true, you  would expect us to overestimate as frequently as we come under. And we know that’s not  the case. Why is it always an underestimate? One hint is in the fact that you often just  hear a single number for a project’s cost. What’s included in that 15 billion dollars for  the Big Dig or the cost estimate you see for a major project in the news? The truth is that it’s  different for every job, to the point where it’s almost a meaningless number without further  context. Large infrastructure projects are essentially huge collaborations between public  and private organizations that span years, and sometimes decades, between planning, design,  permitting, and construction. Land acquisition, surveying, environmental permitting,  legal services, engineering and design, and the administration to oversee that whole  process all cost money (sometimes a lot of money), and that’s before construction even starts.  So if you think that bid from a contractor is the project’s cost, you’re missing out  on a lot. And if those pre-construction costs get included in one estimate (for  example, the final tally of a project’s cost) when they weren’t included in an earlier  estimate (like the engineer’s OPCC), of course it’s going to look like the project came in over  budget. You’re not comparing apples to apples. Another reason for underestimation is inflation.  The main method we use to estimate how much something will cost is to look back at similar  examples. We consult the Ghost of Construction Past to try and predict the future. It’s not  unusual to look at the costs of projects 5 or 10 years old to try and guess the cost of a  different project 5 or 10 years into the future. The problem with that is dollars or euros or  yen or pounds sterling don’t buy the same amount of stuff in the future that they did in the  past. The cost of anything is a moving target, and it’s usually moving up. That’s okay, you  might think, just adjust the costs. There are even inflation calculators online, but they  normally use the consumer price index. That’s a figure that tracks the cost of a basket of  goods and services that a typical individual might buy. Prices vary widely across locations  and types of goods, so the idea is that, if you monitor the dollar price of groceries,  electricity, clothing, gasoline, et cetera, it can give you a broad measure of how the value of  money changes over time for a normal consumer. But there’s not much concrete and earthwork in  that basket of goods, which means the consumer price index is generally not a good measure  of how construction costs change over time. There are a few price indices that track baskets  full of labor hours, structural steel, lumber, and cement and even separate those baskets by  major city. You have to pay to get access to the data, and they can help a wayward engineer adjust  past construction costs to the present day. But they can’t help them predict how those prices will  change in the future. And that’s important because large infrastructure projects take a long time to  design, permit, and fund. So if there are 2 or 5 or 10 years between when an estimate was prepared  and when it’s being used or even discussed, there’s a good chance that it’s an underestimate  simply because the value of money itself slid out from underneath it. Cost estimates have an  expiration date, a concept that gets overlooked, sometimes even by owners, and often  by the media who report these numbers. That slow time scale for construction projects  creates another way that costs go up. Designing a big project is just like navigating a big ship.  If things start moving in the wrong direction, the time to fix it is already past. So, we don’t  do it all in one fell swoop. You have to have a bunch of milestones where you stop and check  the progress because going back to the drawing board is time-consuming and expensive. The issue  with this process is that, the further a project matures, the more people get involved. Once  you’ve established feasibility, the bosses and boss’ bosses start to weigh in with their advice.  Once you have a preliminary design, it gets sent out to regulators and permitting agencies. Once  you have some nice renderings, you hold public meetings and get citizens involved. And with  all those cooks in the kitchen participating in the design process, does the project get  simpler and more straightforward? Almost never. There is no perfect project that makes everyone  happy. So, you end up making compromises and adding features to allay all the new stakeholders.  This may seem like a bunch of added red tape, but it really is a good thing in a lot of ways.  There was a time when major infrastructure projects didn’t consider all the stakeholders or  the environmental impacts, and, sure, the projects probably got done more quickly, efficiently,  and at a lower cost (on the surface). But the reality is that those costs just got externalized  to populations of people who had little say in the process and to the environment. I’m not saying  we’re perfect now, but we’re definitely more thoughtful about the impacts projects have, and  we pay the cost for those impacts more directly than we used to. But, often, those costs weren’t  anticipated during the planning phase. They show up later in design when more people get involved,  and that drives the total project cost upward. And the thing about project maturity is  that, even when you get to the end of design, the project still only exists as a set of drawings  on pieces of paper. There are still so many unanswered questions, the biggest one being, “How  do we build this?” Large projects are complex, putting them at the mercy of all kinds of  problems that can crop up during construction: material shortages, shipping delays, workforce  issues, bad weather, and more. Then there are the unexpected site conditions. An engineer can  only reasonably foresee so much while coming up with a design on paper or in computer software.  A good example is the soil or rock conditions at the site. During design, we drill boreholes, take  samples, and do tests on those samples. That lets you characterize the soil or rock in one tiny  spot. Of course, you can drill lots of holes, but those holes and those tests are expensive,  so it’s a guessing game trying to balance the cost of site investigations with the consequences  of mischaracterizing the underlying materials. If the engineer guesses wrong, it can mean that  excavation is more time-consuming because the contractor expected soil and got rock, or that  backfill material has to be brought in from somewhere else because the stuff on site isn’t  any good. In the worst cases, projects have to be redesigned when the conditions at the site  turn out to be different from what was assumed in the design phase. And that’s just the dirt.  While it might be great for science or history, imagine the cost of your project if you find  historical artifacts or endangered species that you didn’t know were there. It’s a simple  reality that there is a lot of uncertainty moving from design into construction, and there  just aren’t that many unexpected conditions that make a construction project simpler and cheaper.  Of course, opportunities for cost savings do crop up from time to time, but usually those  savings get pocketed by the contractor, not passed along to the owner. That’s  intentional that the contractor takes on a lot of risk both good and bad. But  you can’t saddle a contractor with all the risk that something unexpected won’t  show up, and nearly all large contracts have change orders during construction  that drive up the cost of the project. Of course, you can’t ignore the more nefarious  ways that costs go up. Any industry that has a lot of money moving around has to contend with  fraud, and you don’t have to look too hard through the news to find examples of greed. And there  are also plenty of examples where politicians or officials misrepresented the expected cost  of a project to avoid public scrutiny. But, in most cases, the reasons for going over budget  are much less villainous and far more human: we are just too darned optimistic and  short-sighted. But that’s not a good excuse, and I think there’s a lot of room  for improvement here. So what do we do? How can we get the actual  project cost closer to the budget? Of course, we can bring construction costs  down, but that’s a whole discussion in and of itself. Maybe we’ll table that topic for a future  video. I can hear people screaming at the monitor to just add contingency to the budget. Anyone  who’s ever guesstimated the cost of anything knows to tack on an extra 15% for caution. Of  course, contingency is a tool in the toolbox, but even that has to be justified. We know that  the final cost of a project can be more than twice the preliminary estimates, but if you tell a  client you added 100% to your estimate for safety, most likely, you’re going to get fired. No one  wants to believe there’s that much uncertainty, and also it might not be true. You can’t  set aside a billion dollars for a project that costs a hundred thousand, give or take  a few K. Sure, you’ll come in under budget, but you just tied up a huge pile of  public resources for no good reason. It turns out a lot of the research suggests  spending more money during the planning and design phases. Of course the paper-pushing  engineer is saying to spend more money on engineering. But really, construction is where the  majority of project costs are, so the theory is that if you can reduce the risks and uncertainty  going into construction by spending a little more time in the preconstruction phases, you’ll  often earn more than that cost back in the long run. Take three to five percent of those  dollars you would have spent on construction, and spend them on risk assessment and contingency  planning, and see if it doesn’t pay off. Honestly, even most contractors would prefer this.  I know their insurance carriers would. But, all that considered, I think the biggest  place for improvement in budgeting for large construction projects is simply how we  communicate those budgets. A single dollar number is easy to understand and easy to compare  to some future single dollar number, but really it’s meaningless without more context about when  it was developed and what it includes. Because, what is a budget anyway? It’s a way to manage  expectations. And if you’re early on in the planning or design phase of a big project, you  should expect the unexpected. There’s uncertainty in big projects, and it should be okay to admit  that to the public. It should be okay to say, we think it’s going to cost X, but there are  still a lot of unknowns. And we think the project will still be worth doing, even if the  cost climbs up to Y. And if it goes beyond that, we’re not just going to keep pressing on.  We’re going to regroup and find a way to make the benefits worth the costs. There is  a ton of room to improve how we develop cost estimates for projects, but there’s tons of room  to improve how we communicate about them too. Let me show you another example of how costs  aren’t always as simple as they seem. Seventy dollars sounds pretty steep for a new razor,  but if you do the math for the costs over time, at least for my situation, it’s actually cheaper  than using my old standby, the multi-blade cartridge. This video’s sponsor, Henson Shaving,  reached out to me last year and asked to sponsor a video. I said, let me try the razor first, and  then I’ll decide. That was six months ago, and I truly and honestly have not used my old razor once  since then. Hey, is a new razor going to change your life? Probably not. But, shaving’s a chore.  And using a precision tool, at least to me, makes it feel less like a chore, and, instead a  part of my day that I actually look forward to. I had never used a safety razor and figured they  were old school. Not true - these are made in an aerospace machine shop that pivoted during the  pandemic slowdown. I also figured it would have a learning curve. Also not true. In fact, I don’t  think I could ever go back to a cartridge razor with their flexible blades and difficulty in  rinsing out. If you’ve ever been on the market for a tool and splurged on the nicest brand, this  is that, except, it's not really a splurge. The blades for the Henson razor are so cheap you could  probably put a new one on for every shave and still save money. And in fact, if you buy a razor,  put the 100-pack of blades in your cart, and use my code PRACTICALENGINEERING at checkout, those  blades are on me. 100 blades is going to last you a long time. There’s no subscription service or a  monthly fee, it’s just a cool razor that I really like and I think you will too. Again, use my code  PRACTICALENGINEERING at checkout to support the channel and get 100-blades on me. Thank you  for watching and let me know what you think.