First of all, most of the companies in the US are not publicly traded and are not audited by the SEC. In fact, many of them are never audited by any impartial body at all.

Secondly, I find it utterly incredible to imagine that even the tiniest fraction of American business would announce their plan and proposed budget, even to shareholders, in a way that could be meaningfully interpreted after the project is done.

It is even more incredible that any employee of MS would be so unaware of their own corporate history as to unaware of times we have waited for delayed rollouts.

When a product like the Boeing light-rail is delayed in delivery for years, and one purchaser, the City of Philadelphia, in a short time disposes of their purchase as scrap metal, how in some sense is that not a cost overrun?

You appear to be unaware that in the first decade of the 20th century the money that had been paid to construct many railroads had forced them into receivership, from which they emerged after shareholders had lost 50-90% of the value of their shares as the road was ‘recapitalized’- and that that happened again in the 30s and the 50s. Building the station may have come in on budget, but if it was no part of a realistic business plan for the railroad, it must surely be a cost overrun, just as charging your employer for a $400 dinner, for a meal the restaurant provided at the advertised cost, would be considered by any auditor to be a cost overrun for your business trip if you didn’t even have a client with you- the exact position the railroads were in when they built elaborate passenger facilities in the same year that Tex Johnston barrel-rolled a 707 over Seafair.

Naturally, it would be interesting and enjoyable to discuss at depth every industry you think is run transparently and efficiently, but I’m not sure you have the background to use any shortcuts here. Corn, or more commonly maize, for example, is grown with irrigation waters. The Bureau of Reclamation justified building these reservoirs and waterways using ‘cost-benefit’ analyses that, even at the time, were visibly fraudulent. Over the past winter we have seen the flooding that accompanies the raising of the flood plain by siltation in such reclamation systems. This was an ignored, although widely predicted, cost of building the system- ignored, because the people building the system knew the cost would lay in the future. Farmers who profoundly support the system have quite literally experienced a cost overrun.

But wait! you say- this is a public screwup- all across the nation, form the tenements of Roxbury to the swirling fogs of San Francisco, American pondered farm policy and instructed their elected representatives to build this system. Surely no company like Cargill, which controls over 90% of the largest crop in the world and can break a farmer or co-op like a matchstick, would have built this system. Or if they did- good on them- they didn’t have any cost overrun. They’re among the lucky few who can buy a legislator a $400 dinner and make money doing it.

Although there are a few other costs of maize, such as world domination to sell the stuff and buy the oil for fertilizers and factory agriculture to grow it, and the sugar tariffs to keep all the costs high enough to produce large profits, let’s go on to some local stuff. When University did a concrete pour for new radiology equipment, and the shuttering broke, and they had to keep pouring while fixing the break and cleaning up tons of concrete flooding the hospital, do you think the contractor had an overrun? When Virginia Mason spent years planning to add floors to their main building, and some amount of time debating whether there would be a ’13th Floor’, and eventually decided to do nothing- weren’t the costs there an overrun on the proper costs of doing nothing?

When Group Health built an entire hospital on the East Side that wasn’t needed, wasn’t that a bit of an overrun on the proper cost of what should have been done? When Swedish illegally builds surplus beds and then has to hold buildings empty for years while they lobby for exemptions to the law- are those costs they announced publicly to their shareholders as part of the big plan, and we can see later it really did come in on budget?

And this is before we get to the day-to-day operations costs and accounting. They prescribe unnecessary treatment, drugs, and procedures, and then give the big insurance companies a discount, presenting a bill for the full cost or more to the poorest patients- who can often afford to pay only a fraction before going bankrupt.

Or how about the operating room? Do you think surgeries end on time, like having your teeth cleaned? Or if they do end on time, and then the patient needs a second surgery because the first was botched, is it only an overrun if your facility has to eat the bill?

I will admit Andrew is probably right about one thing. Under the current rules of American business, when the Boeing company builds a product that is a total failure for the purchaser, it may put the taxpayer, and the agency that purchased the product, and the worker who thought they would be employed to pay their mortgage but was laid off to cut Boeing costs- all of these people have created their own cost overrun situation. But the Boeing company is in fine shape! No sirree bob! No cost overruns there! Every screw they bought, every pound of epoxy, was delivered on-time for exactly the price advertised. Or if there was a little overrun, why, that would have to be a might sharp-eyed accountant with super-subpoena accountancy powers, who could ferret it out of the mountains of quadruple entry bookkeeping that go with a big jetliner.

Years ago a family friend who was a contractor for a while unveiled a secret. When a contractor takes out a loan, and then decides to go to Brazil instead of building the project, the bank usually does not call the police or put a ‘wanted’ poster on the wall. They usually figure they would lose more public trust than they would recover in money. They don’t tell you and me.

And, back when a million was real money, Henry Kaiser remarked that it cost him $50 million to learn that he was too poor to get into the automobile business.

http://www.psrc.org/boards/tpb/Presentations/2009/040909_t2040_status_report_&_issues_briefing.pdf

In 2003 you will see an interesting change in the trend. Normal cost estimating assumes that past trends will continue into the future, but you can see that all of those projections would be wrong based on actual cost experience.

It would be interesting to know what happened in 2003 to cause construction costs to head out of sight. I would guess that at least part of the reason was the overvaluation of assets that has led to the current economic crisis. During that period both the private sector and public were building like crazy using funds borrowed and leveraged against nonexistent assets. Yes, steel and other materials costs were heading skyward, but we also stretched the engineering and construction capacity of this country past its limit, making talent very expensive.

Since then we’ve tried to reform by adding risk to estimates, as with the CVEP process, but risk has always been part of estimates in the form of contingencies. A new process to add risk can’t compensate for cost escalation that’s changed from past experience and is out of control.

On the plus side, I think it’s safe to assume that there will be a correction to construction costs, as we’re already seeing with lower than expected bids today. What’s the lesson to this? I think it’s not to believe the bubbles, and not to spend more that you know you can sustain over the long run. I don’t think changing cost estimating processes is the issue at all.

Let’s see, we’re how far along in the design/bid process for the deep bore tunnel viaduct replacement? Anybody that says they can guarantee no cost overruns is either nuts or lying (or both). How is it that our legislature wants to only commit to funding studies and design work on something that’s essentially a re-striping project but will sign off on a couple of Billion on a tunnel idea that wasn’t even considered worthy of consideration when the “final” two options, after years of study and debate, were presented to the voters?

Public projects, on the other hand, are forbidden from this approach, due to fears of nepotism and corruption, and all must be open to a public bid. Designing a project without having a contractor on board means designing to a generic construction methodology. As each contractor that bids on the project will have a different “means and method” in approaching the construction, their costs will vary. Also, coming to bid on a massive project while not being at the table during the design phase, means you don’t have as complete an understanding of all the components. Contractors are very averse to risk – once they sign their bid, they’re on the hook to provide everything in the drawings at that price, even those things they might have missed and were unaware of (provided they are properly documented). The higher the risk, the higher the bids go to cover that.

On the other end of the spectrum are some in the contracting world that take advantage of this situation. There are some contractors who will look through a set of drawings noting vagueries and unknowns in the documents. They will then use this information to lower their bid in order to win a project that may have higher bids in general due to the risk factor. How does this type of contractor expect to make ends meet? By contesting each and every vague or unknown item as a change order to the project, thus raising the price of the project by more than it would have been had the information been known. This contractor already has a good idea of how much additional money they can get for a project due to change orders, before they even start construction. This difference between final price and the bid price is a cost overrun.

State law used to require public agencies to take the lowest bid (thus encouraging this practice) but in recent years have changed that to “lowest qualified bid.” The qualified portion allows the agency the ability to contest a low bid if they suspect purposeful underbidding may be taking place among other things. This has helped some, but is by no means a guarantee that the winning bidder isn’t practicing some form of “buying the project.”

I like the tunnel, because I like the idea of reclaiming our waterfront back. We deserve a long well-maintained park like expanse. Chicago has one fronting Lake Michigan and Portland has one of sorts alongside the Williamette.

As for cost overuns, I think we have to look more into the psyhology of these projects and how they have to be marketed to an increasingly doubtful and argumentative audience that demands endless accountability from its politicians. The result is a cat-and-mouse game of fear of failure so you become overly optimistic and a game of out maneouvering one another. Take for example, East Link. No one thinks for a moment that Kemper and his well-healed supporters in Bellevue are going to sit by and watch East Link get built through Bellevue. They are going to want to direct this thing and turn it their way and if they don’t succeed, they’ll try and stop the project regardless of the wishes of the electorate last November. That’s another problem with endless elections – so many to keep track of that inevitably they blurr together and there will come and time when those outside of this Blog will forget that they voted yes for East Link. It is that forgetfulness and the constant electing for things that becomes so exploitable an opportunity for mischief by opponents of anything. They did it with the Seattle Monorail Project and some of them will do it with East Link if they can. Eyman I’m sure will come up with something because elections only matter on the day itself and future elections seem scarcely bound by their predecessors. This is why we have to always be vigilant. Even one of the Issaquah papers has already started to complain about last November’s East Link vote (nothing for Issaquah in it) whilst acting as if the vote never happened anyway – a denial worthy of the Bush administration but one that allows the fight to continue.

Meanwhile, politicians and high ranking officials are salesmen as much as anything else and the democractic framework they live and work in, partly makes them such. If we didn’t have elections every five seconds, and just let most of them be, sure they would be less accountable, but maybe they would be more focused on the job at hand instead of always having to have one eye on public opinion. At present, politicians are in the business of winning elections, but if we spaced out the elections more and asked them to run for office with well thought ideas and manifestos, we could judge them upfront more and then let them go for it on being voted in. I don’t think they lie to us over these projects or misrepresent them, but realistically whether these guys say there will be or not be cost overuns,they risk being held to the flame or worse. Optimism is what starts these projects whatever mood will ultimately finish them because they know that we won’t like to see a tunnel getting bored under First Avenue. This isn’t misrepresentation or lying, but psychology and unfortunately, in the political game, they don’t have a lot of other options.

Lastly, as for private business – look at all the construction holes and failed commercial real estate projects in downtown Seattle. Seems like some people overeached in the private sector too – thought they had enough cash in hand or demand and then they didn’t. Look at that gaping hole by Macy’s Garage in Seattle and you’ll see what vaulting ambition gets up to.

Tim

Look at Downtown Bellevue, of all those skyscrapers, how many were 30% over budget? Not one, certainly not 90%

And the argiculture, hospitals and financial sector don’t go over budget 90% of the time. How does corn go over budget? I’m not sure that makes the slightest bit of sense. How does a credit default swap go over budget? Both of these can lose money, but not because they went over budget. If a computer system for BofA went over budget, that’s one thing, but if they lose money, that’s not over budget.

The fact the our war-machine goes over budget shows the same thing as these transportation projects: the people holding the rotten bananas at the end of the day (the taxpayers) can’t hold accountable the ones making the bananas rotten (the contractors). The politicians are trying to give the taxpayers what they want and have to deal with the contractors.

In fact, the whole war industry is nothing but cost-overrun. And what else does this country build other than war machines?

Hospitals? Don’t even go there. Our heavily subsidized agriculture? The financial sector?

Really, I’m curious- where is the ‘private sector’ where 90% of the projects don’t go over budget? And how would you know? The rigorous inspection by the bond-rating agencies? Government regulation by agencies who routinely let salmonella sweep across the nation? The keen eye of the executive who gets paid a $10 billion performance bonus as his company loses $100 billion in a quarter?

The funny thing is, I know from reading business history that there were cost-overruns in the past. So how did we get in this pickle today if the overruns aren’t happening anymore?

Searching for the Sound Move original proposal I came across a case study from the Harvard University John F. Kennedy School of Government. I can only access the abstract but I’d love to know the position the paper takes. Inquiring minds want to know.

I did find it interesting that the Funding Source was the US Department of Transportation.

And now, back to you’re usually scheduled blogument.