Why Construction Projects Always Go Over Budget

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When a contractor bids a realistic number, they're almost guaranteed to NOT win the project.

There's an important aspect of this problem that was missed by this video: If you come in with a realistic, expensive bid, you simply will not win the project, if every other firm is coming in with a lower price. The entire industry is financially incentivized to under-estimate. When I was going through engineering school, we had a series of lectures specifically about the problem of cost overruns in the engineering and construction industry. The simple truth was that, for projects of the same type and scale, firms that came in with higher, more conservative bids, simply did not not win the RFP (request for proposal) bid. They lost the project to the companies that came back with lower prices, EVEN THOUGH all of those companies then went on to experience cost overruns that were GREATER than the original high bid. The data was so tightly correlated, it almost looked fake: the higher the original estimate, the lower the cost of the project in the end, while the lower the estimate, the higher the cost in the end. Like you said, Underestimating ends up costing more than the cost it takes to develop a more accurate estimate.... But all the companies who do, lose out to those with a lower bid. The whole RFP and bidding process that defines the industry is to blame. It incentivizes a race to the bottom in terms of estimate pricing.

As someone that does construction estimating for a living I loved this video. Everyday is a constant battle to ride the fine line of expensive enough to make money but not too expensive to not get the job. When is really scary is when you intentionally price something too high so you won't get it but you end up getting it, you get really nervous that you missed something big!

I have a short story. At my last job we had to estimate the cost of a project and give our plans. My plan cost 3.5 million dollars up front with no annual costs and would take 18 months to implement. The other project had 1 million up front, half a million annual, and would take 3 months to set up. They opted against my plan. The plan they opted for ended up costing 7 million up front, took 48 months to implement, and has annual fees of 2.5 million. Yikes!

My favorite engineering estimation joke goes something like this. There's a project manager who's projects are always on time and under budget. When someone asks him what his secret is he tells them that he goes to the best three engineers and gets an estimate from each one. The person asking the question then says, "and then you average them?" And the project manager says, "no, I add them up." I'm pretty sure I've never estimated a project correctly.

"The first 90% of the project takes 90% of the budget. The last 10% of the project takes the other 90% of the budget." That was the advice we gave clients when I worked as a Project/Program Manager for KPMG.

As a deaf engineer I appreciate the time taken to get your videos subtitled accurately.

Civil Design Engineer here. I think it would do a world of good if civil design/project engineers actually had experience working at a construction site. There have been times during a design review where my manager asked me “How are they going to build this particular piece of the alignment?” I kinda shrug my shoulders and point out the reasons why I made that particular design choice and he usually agrees, but we always come back to how a contractor will build it. It really is my weakest part of my engineering knowledge. To all the future civil engineers, please do an internship with a contractor and learn from them. It will save you time in the future and imho, will be well worth it.

The other thing worth mentioning is that there's almost always some kind of competitive bidding going on that provides an incentive for parties to underestimate costs. A bidder who bases their estimate on everything going perfectly is obviously going to have a lower bid than one that realistically considers the risks...

I’m a retired construction superintendent who managed commercial building projects up to about $12 million (todays dollars about $20 million). The thing that drove me crazy was low bid was the deciding factor. My grandfather and father were also supers and in their day low bid and high bid were dismissed and the middle bidders were then analyzed for ability to perform. Near the end of my time general contractors I worked for would rush out to sign the lowest bidder before they had time to find their mistakes

Practical Engineering has been turning my entire college curriculum in civil engineering into short video form. I’m so proud of the dedication over the years. 😊😊😊

I've worked on projects that had to be rerouted multiple times because we kept finding things during the environmental survey, but it's better than not doing the survey and finding human remains in a front loader. There's so many old, abandoned, and unrecorded cemeteries in the US that sometimes we were the first people to see them in a hundred years.

This is the most painfully relevant video Grady has put out. I found myself laughing and crying and pausing to shout “YES Somebody Said It!” I’m also an engineer who has wildly underestimated costs based on only conceptual designs and a site walk through…The secret is to write everything down and document every decision.

There's always something a little ridiculous about budgets. Let's say you have a project in mind, and there's a 35% chance it costs $100k, 30% chance it costs $150k, 20% chance it costs $200k, and 15% chance it costs $300k, due to various possible contingencies during the project. If you wanted to provide a single number to the decision makers, you could give them the 'expected' cost of the project by multiplying and adding those together to get an Expected Cost of $165k, but if you've budgeted your contingencies properly, there's 0% chance it will cost $165k! And as Grady said, you can factor in inflation, but since the 2008 crash a lot of countries have implemented good governance regulations that outlaw back-of-the-napkin guesses since they can be used to nefarious effect. Speaking of nefarious, history has had more than a few cases of the underhanded Robert Moses tactic of "Tell them it'll cost 1/3 of what it will actually cost; then once a politician's staked their career on this project, you tell that politician they need to find the rest of the money or else the public will blame the failure of the project on them."

I am also an Engineer, who has emphasized Public Works Construction, form most of my career. I spent 9-years working for a water district in the rapidly developing southwest of the 90s, and pre-crash 2000s. The construction division had a very low change order rate of 2%. I had a 0.02% rate. This is because the management, had made a decision to do project planning and design by teams of engineers. The Construction Engineers, were involved from the planning phase forward, with the assignment of making sure things were constructible, and the plans and specs clearly described the nature and scope of the work. Figured out on my first project that it was far easier to devote the time, required to have a very clear set of contract documents. Because it is far easier to devote the time during the planning and design, than to go before the commissioners and request a Change Order. I had one Contractor tell me that, when they bid my projects, they reduced their bid by five percent, because my projects were easy to build, and if there were issues, I worked hard to minimize delays.

I’d be interested in a series where you detail every step of the construction project from planning to execution. What actually is going on when engineers plan a design? How are those plans executed by contractors? Etc…

Speaking of miliary costs. True story. My buddy in the army told me about how everytime they go out for training that the squad uses all the ammo regardless if it's for the actual training. The paperwork to put back ammo is longer form than to take it out. One time they blew up a whole box of grenades because it was easier than to return it. This happens every single time for everyone. Probably half the military budget is just wasted because the paperwork is a pain.

I worked on designing temporary support structures for the Big Dig. They deliberately under estimated the project so that they could get it through the legislature. Previously, as a town engineer, I designed and ran my own small bridge replacements. I did them for less than 1/3 of what the DOT estimated and only took 3 months to replace the bridges. I started construction the day after the last school bus went over in June and had it open again before school started. Consultants complained that I was denying them work so the DOT banned me from doing bridges. All of a sudden, large bridge projects that I estimated at $500,000, became $3,000,000. I'm now glad that happened because it was just before chinesium started taking over and causing problems. A very good and thorough video. Yeah, the idiots don't understand that construction escalates at a much higher rate than the government estimates inflation. When I was a combat engineer bridge builder we were taught to add 25% for losses, on our estimates. I carried that over into my civilian estimating. I hope that young engineers are watching your videos. Good Luck, Rick

Wow this was so cathartic for me. I’m a software engineer and we have a huge problem with project estimates. The funny thing is, we tend to say this isn’t construction and therefore it’s much difficult to estimate something that’s never been done before. But it’s reassuring to know that even construction has a similar problem