Quick Note: Do Costs Ever Go Down?

Bad agencies have a ratchet process in costs: they can go up, but not down. If there’s a cost saving, it does not reduce the budget, but only cancels out with unspecified cost increases. Agency heads and politicians trumpet their value engineering while costs never go down, leading to premium-cost, substandard quality projects.

Case in point: the Baltimore and Potomac Tunnel replacement project. The project used to be $750 million, in the 2000s, as a two-track passenger rail tunnel. Over the next decade, this turned into a four-track system with mechanical ventilation for diesel freight trains and enough clearance for double-stacked freight; costs ran over to $4 billion. Well, two months ago Amtrak announced a scope reduction back to two tracks, which it claims would save a billion dollars, cutting cost to… $4 billion.

This is not the first time this happens. Value engineering in California has had the same effect: every attempt to reduce scope – the blended plan for Northern California, plus various design compromises in both the Bay Area and the Central Valley – has failed to reduce costs. At most, they’ve prevented further cost overruns.

And in New York, the removal of the cavern underneath Penn Station in the planning process between the canceled ARC tunnel and the Gateway tunnel did not reduce costs at all. The cost estimate was $10 billion, much of which was the cavern; the cost estimate now is $10 billion for the bare tunnel with less scope than before. ARC was canceled on the grounds of potential cost overruns, and yet as soon as it took over the project, even while descoping the cavern, Amtrak presided over further increases in costs due to extras (Penn South, etc.).

It’s as if once there’s a number circulating out there, it will be spent, no matter what. If there’s a surplus, it will be blown on unspecified extras or on sheer inefficiency. Why spend $3 billion when the political system has already indicated that $4 billion is okay? Thus, 4-1 = 4, and, no doubt, if further value engineering is identified, the cost will stay $4 billion.

At no point does anyone say, okay, if there’s a cost saving, here’s the next slate of projects that the money can be spent on. Nor is there any proactive value engineering. Costs are only a problem insofar as they prevent the political system from saying yes, but even then, if there’s a number out there, even an outlandish one that nobody will say yes to (such as $117 billion for medium-speed rail on the Northeast Corridor), then it is the number. Any cuts from that are against inherently moral workers, communities, etc., in the service of inherently immoral outsiders and experts.

23 comments

  1. red dog

    Re Amtrak, 2 points: 4-1=6 and they can’t bend over to pick up a 5 dollar bill without spending $10 in studies and consultants.

  2. Matthew Hutton

    You probably need to hire multi-disciplinary professionals if you want to get costs down. And those people are expensive and/or expect a modern working culture neither of which the public sector provides.

    • Matthew Hutton

      But even $10k/day for elite professionals is chicken feed compared to a $4 billion project.

  3. Tunnelvision

    Well ARC was cancelled as the cost with the cavern had grown to $17bn. Ignoring inflation for a moment the Gateway project is hampered by the fixed point that is the box structure built as part of the Hudson Yards project. This raises the vertical alignment under the Hudson meaning the tunnels now have to go through the bulkhead at the river rather than beneath it as in the final ARC scheme. This introduces a very difficult, risky and hence costly element of work. The other thing with the huger vertical alignment is that buoyancy issues during construction and operation of the new tunnels will be an issue. When you build an air filled tunnel it wants to float, the less the ground cover the more difficult it is to stop. So you either need heavier/thicker precast segments or you need to dump material on the riverbed to
    Increase the confinement. Either option is expensive, heavier segments less to more expensive TBM etc.

    But hey the agency is incompetent right…..

    • Eric2

      Yes, according to your account, whichever agency planned and installed the box structure is incompetent.

    • Nilo

      Didn’t you just tell us that the Box Structure was built incompetently compared to the original ARC plan?

  4. Robert Fizek

    -Absolutely true and tragic.
    There is so no independent accounting for the construction cost estimates -nor for climate cost impacts- of these huge projects.
    And I believe the Engineering design compensation contracts are often based directly or indirectly on a percentage of the construction cost.

  5. qedestrian

    Yeah, it bothered me that MTA shifted a bunch of projects out of its 15-19 capital program into 20-24. I felt like it should get more attention that 15-19 still has basically the same budget but is now doing less. While 20-24 is HiStOrIcAlLy BiG.

  6. Richard Mlynarik

    I think that the key thing to start with is that US “public transportation” capital projects are purely exercises in earmarking.
    Lobbying for a budget and fully expending that budget — ideally and nearly always spending far more than the initial fraudulent get-the-project-approved budget — is the entire and sole point.

    Everything else follows from this.

    Project scope is only ever reduced or individual project expenses reduced when every possible mechanism for scoring additional funding for “unexpected” over-spending, “changed conditions”, “it rains sometime”, “unforseen utility relocation” etc has been exhausted.

    Project budget is never reduced, because project budget is all there is and all that anybody involved at any level — cheaply-purchased local elected officials, agency staff who feed on “oversight” and “agency overhead” skim-offs, the consultancies involved in “design”, the contractors involved in construction. There’s literally no reward for over-delivering, and no punishment for massive and repeated failure.

    The project is the budget.

    • df1982

      It’s notable that bureaucrats often brag (in their CVs, etc.) about the size of the budget of projects that they’ve overseen. So in fact they have a motivation to make the budgets bigger than they have to be because then they look more important. Never mind that if it was done competently the project could have been completed for half the cost, it LOOKS better when you say you were in charge of a $1b project rather than a $500m project. It’s a perverse incentive structure.

      Of course the construction companies are OK with this as they can inflate their contracts, and unions have no incentive to turn down the extra jobs that can flow from pointless scope creep. So everyone wins, except the public, who miss out on useful projects because all the cash has been blown already.

      • Matthew Hutton

        Yeah but they could build two $500 million projects and get more credit than one $1 billion project.

        • Henry Miller

          A $1billion project harder to run than two 500 million ones. Even if you run them side by side, separate projects are easy to keep separate so that the politics of one don’t ruin the other.

          • Matthew Hutton

            If that’s true then you agree with me as what people judge is total project value managed (indirectly) by an individual.

  7. KRISTOFER G BARTELLE

    Even when an agency reduces scope, the specifications and processes they put on a contractor are so ridiculous, the contractor and the contracting community know that the only way to make a profit is to escalate their prices on the next project to recoup on the one they are doing. An agency will never admit to errors, omissions, and unidentified scope on their plans which are rampant. The contractor is left without a partner to try and move the project forward delaying the project even more. Agencies issue unilateral change orders forcing the contractor to do the work and the contractor has to file claims later to try and recoup their money. Agencies frequently walk away from procurements for projects when the prices come in high or unexpected. The contractor and engineering firms bidding on these projects waster millions of dollars competing for projects that never get built, then do it again the following year for a hopefully different result. Agencies take years to go through the procurement processes and delay awards. Even if you win one of these you can’t rely on the cashflow it brings in. Grant funding from the feds and the state never review the track record of the agency and disqualify them for their bad behavior in the future, they know if they did that, there would be nobody left to give the grant money too. Working for capricious agencies is risky, the contracting and engineering firms that do, know they have to hedge with higher prices always in hopes their higher prices is slightly lower than their competitors.

  8. Gok (@Gok)

    TEXRail was in $90m under budget [1], and that money is in the process of being spent towards extending the line 2 more stations.

    Salt Lake City’s LRT was finished $300m under budget and 2 years ahead of schedule [2]

    So, costs do seem to do down sometimes, though conspicuously only in red states 😦

    [1] https://www.dfwi.org/item/texrail-was-90-million-under-budget-should-fort-worths-transit-agency-keep-the-money
    [2] https://www.deseret.com/2013/8/16/20524163/draper-trax-extension-embarks-this-weekend#a-trax-train-is-marked-for-its-destination-at-the-draper-town-center-trax-station-for-the-grand-opening-of-the-draper-trax-extension-in-draper-on-friday-aug-16-2013

    • Luke

      This might dovetail a bit with one of Alon’s older posts about the focus on U.S. transit activists on funding over all else. People predisposed to think solely that the problem is that transit is underfunded are less likely to question how well spent are the funds that there are; people who think transit is “unAmerican” are, by contrast, going to (at a bare minimum) make sure there are no extraneous dollars hanging around and being wasted. Problem is, you give that latter group too much power and eventually the problem does, in fact, become that there’s not enough money given to transit projects. It’s about finding a balance, and I don’t think I need to say that balance is a problem here sui generis.

  9. Alex B.

    This is something where I would really love to see more research about what is driving costs specifically, enabling a comparison that considers both the changes in scope (something an agency can control) vs. general inflation in material costs and labor costs.

    I’d also be curious about methods – when the $750 m cost estimate was created, what inflation assumptions were they using? I recall a big hubbub about CA HSR costs increasing when the change was almost entirely about schedule and forecasting the year of expenditure…

    Anything to get an apples to apples comparison, and a sense of what the drivers are.

    • Alex B.

      Just to follow on – I’m not sure specifically where the $750m cost came from, but the FRA’s initial report on the Baltimore and Potomac tunnels called out the Great Circle passenger option (two tracks) of $546 million in 2003 dollars:

      Click to access brn2.pdf

      The report is dated from Nov. 2005.

      This also appears to be just a planning level estimate; it’s unclear if it includes any design costs or any contingencies; I suspect it’s just a simple estimate of the construction costs.

      I’d also note that just eyeballing the CPI from 2003 to today, and consumer prices have increased by ~50%. The Turner construction index has increased ~100% over that time. I’m not sure what year of expenditure the current cost estimate is from.

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