Home MTA Construction Solving the problem of skyrocketing costs

Solving the problem of skyrocketing costs

by Benjamin Kabak

Costs for the Second Ave. Subway could skyrocket before Phase 1 is completed.

Over the last four years, I’ve burned a lot of pixels writing about the MTA’s capital budget woes. One of the major problems with which the authority has grappled, seemingly unsuccessfully, involves cost overruns. Nearly every capital project — from the station rehab at 59th St./Columbus Circle to the Fulton St. complex to the Second Ave. subway — have suffered cost overrun ranging in dollars from the tens of millions to the billions. As the MTA struggles to convince Albany that it deserves more money for the next five years of capital investment, keeping costs on par with initial estimates has become a priority.

Yet, there’s a missing piece to this puzzle. Although the authority has pledged to keep spending under control, it hasn’t yet been able to explain why costs soar. Why does the Second Ave. Subway cost nearly $1.5 billino more today than it did when first proposed seven years ago? Why has the price tag for the Fulton St. complex doubled in five years?

In the Wall Street Journal today, Numbers Guy Carl Bialik tackles that question. Why, he asks, has budget-busting become “the norm for infrastructure work”? According to a 2002 study, planners understated construction costs in nine of ten projects, and Bialik offers up a few explanations:

Economists and behavioral scientists say the pattern of budget excess echoes findings in other areas where people allow their best hopes to dominate the planning process. Irrational optimism afflicts even individuals who have experience with a given situation, and should know better. Researchers have linked it to business analysts’ earnings forecasts and to students predicting when they will finish assignments. Irrational optimism, for example, is at work when a commuter is consistently late for work because she estimates her travel time based on the assumption that traffic and transit always will run smoothly…

Prof. Flyvbjerg, who now heads the University of Oxford’s BT Centre for Major Programme Management, sees another factor in problems with cost estimates—the political process for project approval. “Government agencies like to justify what they do [with] numbers,” he says. And sometimes officials engage in what he calls “strategic misrepresentation” when producing those numbers.

Other researchers have identified similar levels of inadequate monetary estimates but disagree with Prof. Flyvbjerg’s explanation. Dr. Merrow has compiled a database of thousands of projects, and finds a similar pattern of cost overruns. This extends to the private sector, he says, even though corporate employees who botch a budget might suffer more as a consequence. Among large private-sector projects with some tricky building element, the average cost overrun was 32%. Dr. Merrow’s firm advises clients to increase their forecasts by a factor roughly equal to the typical historical cost overrun of similar projects.

Other experts say that the public demand for more amenities as projects are built can also lead to increased costs. Yet, that’s not really the problem in New York City because we see our projects’ budgets balloon before the first shovel breaks ground.

While speaking with Bialik, Neysa Pranger of the Regional Plan Association called for a third-party auditor, and that appears to be the path New York politicians will take. “An independent validator should be established,” she said. “But they’ll need to establish a track record.” Anything has to be better than the track record of skyrocketing costs and delayed timelines we’ve seen lately.

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Al D October 18, 2010 - 3:25 pm

Finally, a REAL reason for an audit.

Christopher October 18, 2010 - 3:51 pm

And what are they going to find? That people don’t like to hear how much things cost? Don’t want to pay the actual price for things? Don’t understand how much our privatized system of insurance costs a fortune in extra costs up and down the supply chain? We need an audit to figure that out? (I’d gladly take 7 figures, though, to tell you all what we already know. And what has been repeatedly stated in one form or another for years.)

Alon Levy October 18, 2010 - 7:42 pm

In France, the employer is required to fund health care and pensions, to the tune of 50 cents in benefits per Euro in wages. Somehow, France doesn’t have the costs that plague American cities.

JoshKarpoff October 18, 2010 - 4:09 pm

Don’t forget that on multi-Billion dollar construction projects, the cost of any delay due to unforeseen circumstances can multiply exponentially. So if for example, a building adjacent to the work site begins to shift and become structurally unsound, you’re now holding up everyone else, which then ripples through the schedule.

Also, you have to remember that the MTA launched these projects at the height of the NYC construction boom, a time when material and skilled labor were scarce. With these contracts having been bid at that time, that price is locked in for that entire contract. You also have to remember the organized crime element that have historically driven up the costs of business in NYC through their racketeering.

I do however agree that there is indeed some serious over optimism, and that an outside auditor isn’t a bad thing. However, the MTA already has an outside auditing engineering firm on board with these projects, so we’re not talking about anything new. What the MTA needs to do is involve the auditors earlier in the process and require their sign-off on the project, not just their opinion.

J B October 18, 2010 - 10:13 pm

I’m surprised NY’s legal and political system hasn’t been mentioned as a factor. Isn’t the MTA required to accept the lowest bid? Couldn’t that cause contractors to provide overoptimistic cost estimates?
This reminds me a bit of Robert Moses’ strategy for pushing expensive projects- tell the legislature a ridiculously low cost, and then go back a few months later and tell them you need a few million more or the project won’t be finished. This still doesn’t explain the discrepancy between the US and Europe that Alon mentioned, though.

Alon Levy October 19, 2010 - 1:18 am

It partly does: in Madrid, which sets the standard for lowest construction costs, the transit operator chooses contractors for both cost and a track record of quality, to hedge against future cost escalations.

Anon October 18, 2010 - 11:14 pm Reply

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