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Last Updated: Friday, 16 March 2007, 14:10 GMT
Why do costs over-run?
By Brian Wheeler
Political reporter, BBC News

The 2012 Olympics is the latest big government project whose budget has soared higher than originally forecast.

Millennium Dome
The Dome became a test of political virility

So why do ministers appear to keep getting their sums wrong?

Are they trying to pull the wool over taxpayers' eyes with unrealistically low estimates, as their opponents claim?

Or is there something in the DNA of big infrastructure projects which means costs inevitably spiral upwards?

And if so, is there anything the politicians can do about it?

Final figure

Recent months have seen a string of examples of large projects going way over-budget, from the new NHS computer system to the Eurofighter.

It seems the bigger the scheme, the harder it is to predict the final cost.

If you project costs beyond 10 years you are in the realms of fantasy
Prof Mike Power, London School of Economics

With something like the Olympics, which combines huge construction projects with complex event management, there are a large number of variables - from future interest rates to the cost of security - to take into account.

So many in fact, that it may be impossible to put a final figure on how much the games as a whole will cost, says Professor Mike Power, an expert in risk management at the London School of Economics.

But it would be a brave politician who stood up and admitted that.

'Optimism bias'

Politicians are always under pressure to come up with a single headline figure - and the lower the better.

This pressure feeds through to the accountants and planners in charge of working out the costs, leading to what Prof Power calls "optimism bias" - the tendency for the initial estimates to be unrealistically small.

"These projects have a political momentum and the costs follow afterwards, the accountants are left trailing behind," he says.

2003: Consultants Arup put total cost of building and staging the Games at 1.796bn
2003: Tessa Jowell launches bid in May telling MPs it will cost 2.375bn - including a 50% contingency
2005: Bid succeeds in July with "prudent" estimate of preparing for games of 2.4bn
2006: Tessa Jowell says Olympic Park costs up to 3.3bn
2007: Olympic Park budget now at 5.3bn - including regeneration and infrastructure
2007: Total budget, including contingency, security and tax, reaches 9.35bn

Perhaps the textbook example of this is the Millennium Dome - which, as well as a large-scale visitor attraction, became a test of political virility for the fledgling Blair government, with predictably disastrous results.

"If we can't do this, we can't do anything," Deputy Prime Minister John Prescott famously commented, as he urged the Cabinet not to ditch project.

But the factor that really sends costs spiralling, argues Prof Power, is a fixed delivery date, which can be used by contractors to hold the politicians to ransom.

One of the factors that increased the budget of the 2012 Olympics, now 9.35bn, was a 2.7bn contingency fund in case the project starts to fall behind schedule.

It is thought the Treasury was worried that government projects are often late and over budget, and the Olympics cannot be late.

But having no fixed delivery date - or one so far in the future that it becomes almost meaningless - can have an equally ruinous effect on cost control.

"If you project costs beyond 10 years you are in the realms of fantasy," warns Prof Power.

'Big button' solution

Among the biggest drains on the public purse in recent years have been big IT projects, such as the NHS national computer system.

The sheer scale and complexity of this project, thought to be the world's largest civilian IT project, means it is already years behind schedule and 6bn over budget, according to the National Audit Office.

Politicians have long had a weakness for "new technology". The lure of a single, "big button" solution to any number of problems is hard to resist - but there are signs this could be changing.

The Eurofighter could be as much as 13bn over budget

The Home Office's decision last year to scrap plans for a giant new computer system to manage the national identity card scheme was, perhaps, the first sign that the government is losing faith in big IT projects.

Home Secretary John Reid, or his successors, must now hope that by deciding to use existing databases they will not be castigated for trying to bring in ID cards on the cheap.

Another possible solution to cost over-runs is to remove politicians from the decision-making process - another idea which appears to be gaining ground at Westminster.

This is one of the key proposals of Sir Rod Eddington's review of future transport policy.

Proper scrutiny

He wants a new independent body, similar to the Bank of England's monetary policy committee, to have the final say on airport expansions, major road construction and new rail links. The power currently rests with politicians.

The NHS could also see its management taken out of direct political control, under proposals being considered by both Gordon Brown and David Cameron.

The danger here is that the cost of a project may never be held up to proper scrutiny.

I had expected problems to surface in 2008
Dr Will Jennings

The close relationship between officials and contractors, which auditors have sometimes blamed for MoD cost over-runs, might also be allowed to flourish in such circumstances.

Dr Will Jennings, who wrote a PhD thesis on the Millennium Dome, believes transparency in the early stages of a big project is vital.

He says he was not surprised to see headlines about the 2012 Olympics going over budget - the real shock was that they came so soon after the original estimates were published.

"I had expected problems to surface in 2008," he says.

He believes the public need to be more "mature" in their attitude, accepting a certain amount of cost-over run as a price worth paying for something, such as the 2012 Olympics, that will bring social and economic benefits.

But he is also concerned about what he believes to be a lack of transparency in the original 2012 bid documents, something that could well come under the spotlight again before the games finally begin.

Five forecasts that went wrong
16 Mar 07 |  UK Politics
Olympics budget rises to 9.3bn
15 Mar 07 |  UK Politics
Defence deals 'to be years late'
24 Nov 06 |  UK Politics
Giant ID computer plan scrapped
19 Dec 06 |  UK Politics
MoD 'letting down armed forces'
13 Oct 05 |  UK Politics

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