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1. Background
Projects often experience escalating costs throughout their various phases. Cost increases during implementation receive the most attention; these increases represent the difference between the final cost and the agreed budget. The most dramatic increases, however, appear when comparing the initial cost estimate proposed by its initial promoter with the approved budget. This study focusses on increases in cost estimates in major public projects during the project’s initial phase – from when the first initiative is taken and until the project is approved for implementation (in our sample of cases, by Parliament). The significance of this period in a project’s life cycle can hardly be underestimated; this is when a project is either rejected or advanced toward approval. Projects that survive this early phase are dramatically more likely to receive funding, but if their survival is based on false premises, with an unrealistically low-cost estimate being a very tangible factor in this regard, this corrupts the decision process. Suboptimal projects are promoted and better ones rejected, thereby wasting the society’s resources.
Our study allows for a comparison between the degree of underestimation up front and what is commonly termed the project’s cost overrun/savings, i.e., the difference between the budget and the project’s final cost. The purpose is to highlight an issue that has scarcely been discussed in the literature on project management – i.e., the gap between the initial estimate and the approved budget, and that low initial cost estimates of projects can be decisive in determining whether a project is subsequently approved.
The planning and development of public investment projects, such as roads, rail, buildings, defense, etc., is a complex process that encompasses the clarification of legal, administrative, technical, and financial issues. To support and fund the right types of projects, decision makers rely on an extensive dossier of documentation that provides broad information on the benefits and costs that the investment entails.
Of all the issues that need to be considered during such processes, costs are of particular interest and typically the parameter that is most heavily discussed in the public debate. Cost is so well suited as a control parameter because it is expressed quantitatively, with some precision, and updated continuously. As such, it allows holding the actors involved accountable, the...