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Construction Project Cost Escalation Factors

Article  in  Journal of Management in Engineering · October 2009

DOI: 10.1061/(ASCE)0742-597X(2009)25:4(221)

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 Construction Project Cost Escalation Factors
Jennifer S. Shane, A.M.ASCE1; Keith R. Molenaar, M.ASCE2; Stuart Anderson, M.ASCE3; and
Cliff Schexnayder, Dist.M.ASCE4

Abstract: Construction projects, private and public alike, have a long history of cost escalation. Transportation projects, which typically
have long lead times between planning and construction, are historically underestimated, as shown through a review of the cost growth
experienced with the Holland Tunnel. Approximately 50% of the active large transportation projects in the United States have overrun
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their initial budgets. A large number of studies and research projects have identified individual factors that lead to increased project cost.
Although the factors identified can influence privately funded projects the effects are particularly detrimental to publicly funded projects.
The public funds available for a pool of projects are limited and there is a backlog of critical infrastructure needs. Therefore, if any project
exceeds its budget other projects are dropped from the program or the scope is reduced to provide the funds necessary to cover the cost
growth. Such actions exacerbate the deterioration of a state’s transportation infrastructure. This study is an anthology and categorization
of individual cost increase factors that were identified through an in-depth literature review. This categorization of 18 primary factors
which impact the cost of all types of construction projects was verified by interviews with over 20 state highway agencies. These factors
represent documented causes behind cost escalation problems. Engineers who address these escalation factors when assessing future
project cost and who seek to mitigate the influence of these factors can improve the accuracy of their cost estimates and program budgets.
DOI: 10.1061/共ASCE兲0742-597X共2009兲25:4共221兲
CE Database subject headings: Construction costs; Estimation; Construction management; Planning.

Introduction
Historically large construction projects have been plagued by
cost and schedule overruns 共Flyvbjerg et al. 2002兲. In too many
cases, the final project cost has been higher than the cost esti-
mates prepared and released during initial planning, preliminary
engineering, final design, or even at the start of construction
共“Megaprojects need more study up front to avoid cost overruns.”
2002兲. The ramifications of differences between early project cost
estimates and bid prices or the final cost of a project can be
significant. Over the time span between project initiation 共concept
development兲 and the completion of construction many factors
may influence the final project costs. This time span is normally
several years in duration but for the highly complex and techno-
logically challenging projects it can easily exceed 10 years.
Organizations face a major challenge in controlling project
1
Assistant Professor, Dept. of Civil, Construction, and Environmental
Engineering, Iowa State Univ., 498 Town Engineering, Ames, IA 50011
共corresponding author兲. E-mail: jsshane@iastate.edu
2
Associate Professor, Dept. of Civil, Environmental, and Architectural
Engineering, Univ. of Colorado, UCB 428, Boulder, CO 80302. E-mail:
Keith.Molenaar@colorado.edu
3
Professor, Dept. of Civil Engineering, Civil Engineering Lab Build-
ing Room 115, Texas A&M Univ., College Station, TX 77843-3136.
E-mail: s-anderson5@tamu.edu
4
Eminent Scholar Emeritus, Del E. Webb School of Construction,
Arizona State Univ., P.O. Box 6700, Chandler, AZ 85246. E-mail:
cliff.s@asu.edu
Note. This manuscript was submitted on February 27, 2008; approved
on February 9, 2009; published online on September 15, 2009. Discus-
sion period open until March 1, 2010; separate discussions must be sub-
mitted for individual papers. This paper is part of the Journal of
Management in Engineering, Vol. 25, No. 4, October 1, 2009. ©ASCE,
ISSN 0742-597X/2009/4-221–229/$25.00.
budgets over the time span between project initiation and the
completion of construction. The development of cost estimates
that accurately reflect project scope, economic conditions, and are
attuned to community interest and the macroeconomic conditions
provide a baseline cost that management can use to impart disci-
pline into the design process. Projects can be delivered on budget
but that requires a good starting estimate, an awareness of factors
that can cause cost escalation, and project management discipline.
When discipline is lacking, significant cost growth on one project
can raze the larger program of projects because funds will not be
available for future projects that are programmed for construction.
History—Holland Tunnel Case Study
A history of past project experiences can serve one well in under-
standing the challenges of delivering a quality project on budget.
Repeatedly, the same problems cause project cost escalation and
much wisdom can be gained by studying the past. The Holland
Tunnel was, when it opened in 1927, the longest underwater tun-
nel ever constructed and it was also the first mechanically venti-
lated underwater tunnel. Its initial cost estimate was made by the
renowned civil engineer George Washington Goethals.
A review of the Holland Tunnel project serves to highlight the
critical issues associated with estimating the costs of large com-
plex projects and the fact that even the most distinguished engi-
neers have trouble assessing cost drivers beyond the physical
characteristics of a project. Many times there is no recognition of
the cost drivers operating outside the project’s physical configu-
ration.
A joint New York and New Jersey commission in 1918 rec-
ommended a transportation tunnel under the river 共“Urges new
tunnel under the Hudson.” 1918; “Ask nation to share in tunnel to
Jersey.” 1918兲. The automobile was emerging as the predominate
means of transportation and it was decided that this tunnel should

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J. Manage. Eng., 2009, 25(4): 221-229

 be for vehicular traffic. As a result the tunnel would employ new
ventilation technologies to purge the exhaust gases produced by
the internal combustion engine.
Eleven designs were considered for the tunnel, most notably,
one by the engineer recently responsible for finishing the Panama
Canal, George Washington Goethals. He envisioned a single,
bilevel tunnel with opposing traffic on each level. Goethals
made a planning project cost estimate of $12 million and 3 years
for construction. World War I had consumed much of the nation’s
steel and iron production, so his design made use of cement
blocks as the tunnel’s structural shell. His design was the front-
running plan 共“Hudson vehicle tube.” 1919兲 but he had respon-
sibilities elsewhere and was not named chief engineer for the
project.
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Clifford M. Holland was named to head the project along with
a board of five consulting engineers 共“Name interstate tunnel en-
gineers.” 1919兲. Holland came to the project with vast experience
in constructing subways and tunnels in New York. The cost of the
project was taken to be $12 million, Goethals’ planning estimate.
Holland produced a report in February of 1920 based on his
analysis of the Goethals’ design of the project. His findings were
not what had been expected. Holland found
• Goethals’ width of 7.47 m would not accommodate the volume
of traffic.
• Concrete blocks would not withstand the structural loads ex-
erted on the tunnel.
• The construction methods required by Goethals’ design were
completely untried.
• The estimated cost of construction was grossly low.
• The work could not be completed in 3 years.
The board of consulting engineers gave unanimous support for
Holland’s analysis. Holland then presented a design of his own
which was supported unanimously by the consulting engineers.
Holland’s design, which was a major scope change, called for
twin cast-iron tubes. One advantage was that construction would
follow established methods of tunnel construction that had been
implemented for rail tunnels under the East River and further up
the Hudson. Holland estimated the cost at $28,669,000 共“Asks
$28,669,000 for Jersey tube.” 1920兲 and construction time at 3
1/2 years.
Debate about the tunnel design continued for more than a year
creating disagreements between the New York and New Jersey
Commissions and delaying the work—a schedule change. A dis-
agreement about awarding a contract on the New Jersey side fur-
ther delayed the start of construction and added over half of a
million dollars in cost. Construction started on the New York side
in October of 1920 and in late December 1921 the New Jersey
portion of the tunnel was bid 共“Way all cleared for Jersey tunnel.”
1921兲. The mandated completion date was December 31, 1926.
The construction schedule had now grown to 5 years.
Estimated project cost increased multiple times throughout the
early years of construction as a result of scope creep, schedule
delays, and inflation. Increased traffic forecast necessitate larger
entrance/exit plazas and acquisition of more right of way 共“Ve-
hicular tube is growing.” 1923兲. Then increases in material and
labor costs had added another $6 million to the project—inflation.
By the beginning of 1924, the mid-1923 reestimated costs had
been increased by $14,000,000 共“Vehicular tunnel cost up
$14,000,000.” 1924兲 due to functional and aesthetic factors—
scope creep. More intricate roadway designs for approaches, wid-
ening of the approach roadways, and architectural treatments
increased the costs—more scope creep. Redesign of the ventila-
tion system added 15.24 cm to the tunnel diameter and
222 / JOURNAL OF MANAGEMENT IN ENGINEERING © ASCE / OCTOBER 2009
J. Manage. Eng., 2009, 25(4): 221-229
$4,422,000. Holland also decided to substitute cast-steel for cast-
iron to increase the strength and safety factors of the tunnel—
more scope creep. Last, the New Jersey ventilation shafts had to
be redesigned along with their corresponding foundations at a
cost of $700,000 due to unexpected soil conditions—unforeseen
conditions. All of these changes increased the estimate to over
$42.5 million.
New funds were appropriated and it was believed that these
were sufficient to complete the project, but by February of 1926,
there was another increase of $3,200,000 共“$3,200,000 more
asked for tunnel.” 1926兲. The commission explained that the new
costs were due to increases in labor and material costs—challenge
in controlling cost. At this time Holland died of heart failure and
his assistant, Milton H. Freeman, took over as chief engineer only
to die of pneumonia 4 months later. Ole Singstad, the designer of
the ventilation system then became chief engineer and brought the
project to completion. Having three different chief engineers
within 5 months created confusion—unforeseen events. In April
of 1924 water rushed into one of the tunnels from a leak forcing
workers to make a hasty escape—more unforeseen conditions. A
final appropriation was requested in early 1927 brought the total
project cost to $48,400,000. On November 13 of 1927 the tunnel
officially opened 共“Work on tunnel began 7 years ago.” 1927兲.
Flyvbjerg Study
Estimating problems are not limited to a particular owner or
project type. Research has shown that project costs are consis-
tently underestimated. In one study by Flyvbjerg et al. 共2002兲, it
was found that this underestimation occurs in 9 out of 10 trans-
portation infrastructure projects around the world. Flyvberg et al.
共2002兲 has preformed numerous studies on the cost of mega
projects and risk, particularly from the prospective of urban
policy and planning. These studies have been widely cited by
public officials. The tone of his writing seems to imply that engi-
neers deliberately underestimate the cost of projects and other
researchers have made similar conclusions that purposeful under-
estimation of project cost occurs early in project development to
gain project funding 共Hufschmidt and Gerin 1970; Pickrell 1992兲.
Yet other studies such as those by the United States General Ac-
counting Office 共GAO兲 concentrate more on identifying the
causes of project cost growth and do not blame engineers as cul-
prits deliberately underestimating cost. The GAO reports do paint
a picture of engineers not properly considering all of the factors
that can impact project cost 共GAO 1997, 2002兲. Not withstanding
Flyvbjerg et al.’s 共2002兲 reading of the data, his reports are an
excellent source of world wide data on project cost growth as he
has been meticulous in his data acquisition methods.
The data of Flyvbjerg et al. 共2002兲 indicate that worldwide
transportation construction costs are on average 28% higher than
their estimated cost. Rail projects have the worst project underes-
timation track record with an average cost escalation of 44.7%
共Table 1兲. Bridge projects follow at 33.8% being underestimated
and then road projects with an average cost escalation of 20.4%.
Transportation projects on a whole are found to experience aver-
age cost escalation of 27.6%. Underestimation or inaccurate cost
estimation appears to be found throughout the world, though
North America fares better than Europe. Additionally, Flyvbjerg
et al. 共2002兲 conclude that there is no indication that estimating
practices have improved over the past 70 years, the time period
from which his sample was taken.
Cost increases have plagued the industry for years as indicated
by the Holland Tunnel project and summarized more recently by
 Table 1. Inaccuracy of Transportation Project Cost Estimates 共Flyvbjerg et al. 2002兲
All projects
Average cost
Number escalation Number
Project type of cases 共%兲 of cases
Rail 58 44.7 23
Bridge 33 33.8 15
Road 167 20.4 143
All projects 258 27.6 181
Flyvbjerg et al. 共2002兲. Before researchers and industry alike can
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work to improve cost estimating, the factors that lead to increases
in cost estimates must first be identified and classified to allow for
the development of appropriate mitigation strategies.
Problem
Managing capital construction projects requires the coordination
of a multitude of human, organizational, technical, and natural
resources. Quite often, the engineering and construction com-
plexities of such projects are overshadowed by economic, soci-
etal, and political challenges. These challenges influence cost and
are factors which engineers are often least equipped to appreciate.
Within the transportation industry, project cost escalation has at-
tracted management and stakeholder attention at federal, state,
regional, and local levels. Facility owners in the United States
face a major challenge in controlling project budgets over the
time span between project initiation and the completion of con-
struction. Over this time span there are many factors that can
influence a project’s final costs.
All major projects can take years to move from planning to
construction and for highly complex and technologically chal-
lenging projects, the duration can easily be a decade or more.
Over that period, changes to the project scope and its definition
can occur. During the early stages of a project many factors in-
fluence project costs.
One study found that 50% of the large active transportation
projects in the United States had overrun their initial budgets
共Sinnette 2004兲. News reports of high profile project cost escala-
tion cause the public to lose confidence in the ability of agencies
to effectively perform their responsibilities. For example, the Bos-
ton Big Dig was presented to the public with an estimated cost of
$2.6 billion 共1982 dollars兲. As it neared completion, it was ex-
pected to have a total cost of $14.6 billion 共2002 dollars兲 共Board
on Infrastructure and the Constructed Environment 2003兲. Cost
increases trigger disruptions to programs and often downstream
projects have to be delayed or postponed indefinitely to accom-
modate higher construction cost of a single earlier project.
The cost escalation problem is faced by every transportation
agency in the country as projects evolve from a concept in the
long-range planning process, are prioritized for programming, and
are subject to detailed development prior to construction. Project
cost increases, as reflected by budget overruns during the course
of project development, are caused by a number of factors that
have been individually identified through a large number of stud-
ies and research projects. These factors, the causes behind esti-
mate problems and a lack of accuracy, differ with project
development phase and project complexity. Through identifica-
tion of critical cost escalation factors actions can be taken to
mitigate the impact of these factors on project and program costs.
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J. Manage. Eng., 2009, 25(4): 221-229
Europe North America
Average cost Average cost
escalation Number escalation
共%兲 of cases 共%兲
34.2 19 40.8
43.4 18 25.7
22.4 24 8.4
28.7 61 23.6
While these individual factors are widely known they have not
been captured before in a single publication. This compilation is
necessary so that researchers and industry can identify global
strategies to address the factors, and then methods and tools to
implement the strategies. This paper provides a framework for
categorizing factors based on internal versus external sources,
which is particularly relevant to transportation projects.
Methodology
The cost escalation factors that lead to project cost growth have
been documented through a large number of studies. Studies have
identified factors individually or by groups. Each factor presents a
challenge to an agency seeking to produce accurate project cost
estimates. As part of a larger study seeking to improve cost esti-
mates and management of costs from project conception to bid
day, a thorough literature review was conducted to identify fac-
tors that influence cost estimates 共Anderson et al. 2006兲. The lit-
erature review included exploration of research reports and
publications, government reports, news articles, and other pub-
lished sources.
Upon completion of the literature review the factors were ana-
lyzed and categorized by the researchers into factors that drive the
cost increases experienced by transportation construction projects.
This was accomplished by triangulation where multiple investi-
gators or data sources suggested the same factor. This categoriza-
tion took the individual factors which had been identified in
previous research and established a global framework for address-
ing the issue of project cost escalation. Upon final categorization
the cost escalation factor framework was verified through trian-
gulation of data from interviews with more than 20 state highway
agencies 共SHAs兲 around the nation 共Fig. 1兲. A previous project
that supported identification of the factors had included telephone
interviews with all 50 SHAs 共Schexnayder et al. 2003兲. An inter-
view instrument was prepared and tested initially during onsite
Fig. 1. State highway agencies interviewed through course of
research
 Table 2. Cost Escalation Factors by Cause and Development Phase
Source Cost escalation factor
Internal • Bias
• Delivery/procurement approach
• Project schedule changes
• Engineering and construction complexities
• Scope changes
• Scope creep
• Poor estimating
• Inconsistent application of contingencies
• Faulty execution
• Ambiguous contract provisions
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• Contract document conflicts
External • Local concerns and requirements
• Effects of inflation
• Scope changes
• Scope creep
• Market conditions
• Unforeseen events
• Unforeseen conditions
interview with two SHAs. The revised interview instrument was
then sent to the SHAs before the interview so that they could
prepare. The interviews were conducted onsite for five SHAs
through individual interviews and through a group “peer ex-
change.” The remaining interviews were conducted by telephone.
In all cases, the researchers followed the interview protocol to
ensure consistency in data collection. The resulting categorization
of cost escalation factors can help project owners and engineering
professionals focus their attention on the critical issues that lead
to cost estimation inaccuracy.
Cost Escalation Factor Classification
The triangulation analysis considered methodologies from past
studies and interviews to create a categorization for the causes of
cost escalation. A better understanding of the cost escalation fac-
tors is achieved through understanding the forces driving each
factor or where the factor originates. With this understanding it is
possible to design strategies for dealing with these cost escalation
factors.
The factors that affect the estimate in each project develop-
ment phase are by nature internal and external. Factors that con-
tribute to cost escalation and are controllable by the agency/owner
are internal, while factors existing outside the direct control of the
agency/owner are classified as external. This arrangement of fac-
tors is shown in Table 2. The presentation order of the factors
should not be taken as suggesting a level of influence. Table 2 is
constructed to provide an over arching summary of the factors. It
summarizes the factors into logical divisions and classifications
and helps in visualizing how project cost estimates are affected. It
is important to note that one of the factors points to problems with
estimation of labor and material cost, but most of the factors point
to “influences” that impact project scope and timing.
Internal
Internal factors are cost escalation factors that can be directly
controlled by the project’s sponsoring agency/owner. While nu-
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J. Manage. Eng., 2009, 25(4): 221-229
merous internal factors can lead to underestimation of project
costs during the planning and design stages of development seven
primary internal factors are well documented: bias, delivery/
procurement approach, project schedule changes, engineering and
construction complexities, scope changes, scope creep, poor esti-
mating, and additionally there is the issue of inconsistent appli-
cation of contingencies. Cost escalation does not only occur
during the planning and design phases of a project. Project cost
growth often manifests itself during construction. Focusing early
on internal factors will reduce cost growth at bid time or during
construction 共Anderson et al. 2006兲. Internal factors that lead to
the underestimation of project costs during the execution of a
project stem from poor project management and defective design
documents. More specifically, these factors can include inconsis-
tent application of contingency, faulty execution, ambiguous con-
tract provisions, and contract document conflicts. Each of these
factors separately or in combination with others can cause signifi-
cant project costs increases over time.
Bias is the demonstrated systematic tendency to be overopti-
mistic about key project parameters. It is often viewed as the
purposeful underestimation of project costs to ensure a project
remains in the construction program. This underestimation of
costs can arise from the estimators’ identification with the agen-
cy’s or firm’s goals for maintaining a construction program. It can
also be the result of pride and a feeling that our agency is smarter
than those others that had problems and will not succumb to the
issues of scope changes, scope creep, poor estimating, or any of
the other factors.
The project development process for some government agen-
cies is such that the legislature establishes a project budget by
legislative act and that budget is based on preliminary cost esti-
mates. Later, if the executing agencies estimate is higher than
the budget, the project cannot be let. As a result, engineers and
agencies feel the pressure to estimate with an optimistic attitude
共Akinci and Fischer 1998; Bruzelius et al. 1998; Condon and
Harman 2004; Flyvbjerg et al. 2002; Hufschmidt and Gerin 1970;
Pickrell 1992兲.
Delivery/procurement approach effects the division of risk be-
tween the agency/owner and the constructors, and when risk is
shifted to a party who is unable to control a specific risk, project
cost will likely increase. The decision regarding which project
delivery approach, 共e.g., design-bid-build, design-build, or build-
operate-transfer兲 and procurement methodology 共e.g., low bid,
best value, or qualifications based selection兲 affects the transfer of
project risks. In addition to the question of risk allocation, lack of
experience with a delivery method or procurement approach can
also lead to underestimation of project costs. Many agencies and
owners are looking to reduce project schedules to deliver much-
needed projects quickly but accelerated schedules are only
achievable at a cost. While the end results of applying different
procurement approaches should be beneficial, some hard lessons
have been learned regarding the proper allocation of risks and
what each new contracting method entails, in terms of agency/
owner responsiveness, expectations, and time 共Harbuck 2004;
New Jersey Department of Transportation 1999; Parsons Brinck-
erhoff Quade & Douglas, Inc. 2002; Science Applications Inter-
national Corporation 2002; Weiss 2000兲.
Project schedule changes, particularly extensions, caused by
budget constraints or design challenges can cause unanticipated
increases in inflation cost effects even when the rate of inflation is
accurately predicted. Agencies/owners must think in terms of the
time value of money and recognize that there are two components
to the issue: 共1兲 the inflation rate and 共2兲 the timing of the expen-
 ditures. Many agencies and owners have fixed annual or biannual
budgets and project schedules must often be adjusted to ensure
that project funding is available for all projects as needed. Esti-
mators frequently do not know what expenditure timing adjust-
ments will be made 共Board on Infrastructure and the Constructed
Environment 2003; Booz Allen & Hamilton Inc. and DRI/
McGraw-Hill 1995; Callahan 1998; Hufschmidt and Gerin 1970;
GAO 1999; Semple et al. 1994; Touran et al. 1994兲.
Engineering and construction complexities caused by the
project’s location or purpose can make early design work very
challenging and lead to internal coordination problems and
project component errors. Internal coordination problems can in-
clude conflicts or problems between the various disciplines in-
volved in the planning and design of a project. Constructability
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problems that need to be addressed may also be encountered as
the project develops. If these issues are not addressed appropri-
ately, cost increases are likely to occur 共Board 2003; The Big Dig:
Key facts about cost, scope, schedule, and management 2003;
Booz Allen & Hamilton Inc. and DRI/McGraw-Hill 1995; Calla-
han 1998; GAO 2003; Hufschmidt and Gerin 1970; GAO 1997,
1999, 2002; Touran et al. 1994兲.
Scope changes, which should be controllable by the agent/
owner management, can result in underestimation of project
costs. Such changes may include modifications in project con-
struction limits, alterations in design and/or dimensions of key
project items such as adjustments in type, size, or location of
project components, as well as other increases in project elements
共Board on Infrastructure and the Constructed Environment 2003;
Booz Allen & Hamilton Inc. and DRI/McGraw-Hill 1995; Calla-
han 1998; Chang 2002; Harbuck 2004; Hufschmidt and Gerin
1970; Mackie and Preston 1998; GAO 1999; Merrow 1988;
Semple et al. 1994; Touran et al. 1994兲.
Scope creep is the tendency for the accumulation of many
minor scope changes to increase project costs. While individual
scope changes may have only minimal cost impacts, the accumu-
lation of these minor changes, which are often not essential to the
intended function of the facility, can result in a significant cost
increase over time. Many of these minor changes are real needs
that are recognized as more is known about the project but others
are often only nonessential additions. Projects often seem to grow
naturally as the project progresses from inception through design
development to construction. These changes can often be attrib-
uted to the different needs of the traveling public or environmen-
tal compliance in the area being served 共Akinci and Fischer 1998;
Board on Infrastructure and the Constructed Environment 2003;
Booz Allen & Hamilton Inc. and DRI/McGraw-Hill 1995; Calla-
han 1998; Chang 2002; Harbuck 2004; Hufschmidt and Gerin
1970; Mackie and Preston 1998; GAO 1999; Merrow 1988;
Semple et al. 1994; Touran et al. 1994兲.
Poor estimating can lead to project cost underestimation. Es-
timate documentation must be in a form that can be understood,
checked, verified, and corrected. The foundation of a good esti-
mate is the formats, procedures, and processes used to arrive at
the cost. Poor estimation includes general errors and omissions
from plans and quantities as well as general inadequacies and
poor performance in planning and estimating procedures and
techniques. Errors can be made not only in the volume of material
and services needed for project completion but also in the costs of
acquiring such resources 共Arditi et al. 1985; Booz Allen & Hamil-
ton Inc. and DRI/McGraw-Hill 1995; Chang 2002; Harbuck
2004; Hufschmidt and Gerin 1970; Merrow 1988; Pickrell 1992兲.
Inconsistent application of contingencies causes confusion as
to exactly what is included in the line items of an estimate and
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J. Manage. Eng., 2009, 25(4): 221-229
what is covered by contingency amounts. Contingency funds are
typically meant to cover a variety of possible events and problems
that are not specifically identified or to account for a lack of
project definition during the preparation of early planning or pro-
gramming estimates. Misuse and failure to define what costs con-
tingency amounts cover can lead to estimate problems. In many
cases it is assumed that contingency amounts can be used to cover
added scope and planners seem to forget that the purpose of the
contingency amount in the estimate is to cover lack of design
definition. Agencies and owners run into problems when the con-
tingency amounts are applied inappropriately. Inconsistent appli-
cation of contingency can be both an internal factor contributing
to underestimation during the planning and preliminary design
stage and a contributor to cost overruns during final design or
construction phases of the project. During project construction,
contingency funds are inappropriately applied to construction
overruns and then not available for their intended purpose 共Noor
and Tichacek 2004; Ripley 2004兲.
Faulty execution by an agency/owner in managing a project is
one factor that can lead to project cost overruns. This factor can
include the inability of the agency’s/owner’s representatives to
make timely decisions or actions, to provide information relative
to the project, and failure to appreciate construction difficulties
caused by coordination of connecting work or work responsibili-
ties 共Board on Infrastructure and the Constructed Environment
2003; Callahan 1998; Chang 2002; Touran et al. 1994兲.
Ambiguous contract provisions dilute responsibility and cause
misunderstanding between an owner and project design and con-
struction contractors. Providing too little information in the
project documents can lead to cost overruns during the execution
of the project. When the core assumptions underlying an estimate
are confused by ambiguous contract provisions forecast accuracy
cannot be achieved 共Callahan 1998; Chang 2002; Harbuck 2004;
Mackie and Preston 1998; Touran et al. 1994兲.
Contract document conflicts lead to errors and confusion while
bidding and later during project execution they cause change or-
ders and rework 共Callahan 1998; Chang 2002; Harbuck 2004;
Mackie and Preston 1998; Touran et al. 1994兲.
External
External cost escalation factors are those factors over which the
agency/owner has little or no direct control over their impact.
However, the agency/owner needs to consider them when esti-
mating project costs. During the planning and design phase of
project development external factors such as local government
concerns and requirements, fluctuations in the rate of inflation,
scope change, scope creep, and market conditions can lead to
underestimation of project costs. During project construction ex-
ternal factors such as local government concerns and require-
ments, market conditions, unforeseen events, and unforeseen
conditions can be responsible for increases in project cost. The
possibility of such incidents must be considered during estimate
preparation. Again it must be recognized that each of these ele-
ments can act separately or in combination with others to cause
significant project cost increases.
Local concerns and requirements typically include mitigation
of project impacts on the surrounding community as well as ne-
gotiated scope changes or additions. Actions by the agency/owner
are often required to alleviate perceived negative impacts of con-
struction on the local societal environment as well as the natural
environment. Measures may include but are not limited to intro-
 ducing changes to project design, alignment, and the conduct of
construction operations. These steps are often taken to appease
the local residents, business owners, and environmental groups.
The required accommodation is often unknown during the early
stages of project development. There are a multitude of examples
of “drastic” measures that are taken to accommodate local gov-
ernment and citizen concerns as well as national concerns with
two of the most notable examples being actions during the
Legacy Highway project in Utah and the Big Dig in Massachu-
setts. In Utah environment concerns raised by the community
played a major role in delaying the project and increasing the
cost. In Massachusetts the community demanded a signature
bridge across the Charles River. The resulting cable-stayed bridge
with Y-shaped towers added significantly to the projects cost.
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Local Concerns and Requirements can affect project costs dur-
ing the execution phase. Similar to the effects during the planning
and design phases, mitigation actions imposed by the local gov-
ernment, neighborhoods, and businesses as well as local and na-
tional environmental groups during the construction of a project
can extend the project duration affecting inflation allowances or
add direct cost. By not anticipating these changes, agencies/
owners can be plagued by project cost increases 共Board on Infra-
structure and the Constructed Environment 2003; Booz Allen &
Hamilton Inc. and DRI/McGraw-Hill 1995; Callahan 1998;
Chang 2002; Daniels 1998; Harbuck 2004; Hudachko 2004;
“Legacy Parkway: History of the Legacy Parkway.” 2004;
Mackie and Preston 1998; GAO 1999; Merrow 1988; Parsons
Brinckerhoff Quade & Douglas, Inc. 2002; Pearl 1994; Sawyer
1952; Schroeder 2000; “Summary of independent review commit-
tee findings regarding Woodrow Wilson Bridge superstructure
contract” 2002; Touran et al. 1992 1994; Woodrow Wilson Bridge
project superstrucyure contract 共BR-3兲: Review of the engineer’s
estimate vs. the single bid 2002兲.
Effects of inflation is a key factor in the underestimation of
costs for many projects. The time value of money can adversely
affect projects when 共1兲 project estimates are not communicated
in year-of-construction costs, 共2兲 project completion is delayed
and therefore the cost is subject to inflation over a longer duration
than anticipated, and/or 共3兲 the rate of inflation is greater than
anticipated in the estimate. Industry has varying views regarding
how inflation should be accounted for in project estimates and in
budgets. In the case of projects with short development and con-
struction schedules, the effect of inflation is usually minor; how-
ever projects having long development and construction durations
can encounter unanticipated inflationary effects. The cost esti-
mates for the Big Dig in Boston are an example of inflation ef-
fects. The Big Dig estimate was originally developed in 1982
based on the Federal Highway Administration guidelines stated in
the Interstate Cost Estimate manual. The procedures called for the
exclusion of inflationary factors. Inflation is a large portion of the
cost overruns experienced on the project 共Akinci and Fischer
1998; Arditi et al. 1985; Board on Infrastructure and the Con-
structed Environment 2003; Booz Allen & Hamilton Inc. and
DRI/McGraw-Hill 1995; Hufschmidt and Gerin 1970; Merrow
1988; Pickrell 1992; Touran et al. 1994兲.
Scope changes, which are not controllable by the owner, can
lead to underestimation of project cost escalation. In California
the new east span bridge between Oakland and Yerba Buena Is-
land was the responsibility of the California Department of Trans-
portation 共Caltrans兲. The legislation act that funded the bridge
placed it under the jurisdiction of the Metropolitan Transportation
Commission 共MTC兲. Based on its rights by jurisdiction the MTC
selected an asymmetrical self-anchored suspension bridge design
226 / JOURNAL OF MANAGEMENT IN ENGINEERING © ASCE / OCTOBER 2009
J. Manage. Eng., 2009, 25(4): 221-229
with a single tower. This was a fundamentally different bridge
than the one Caltrans had envisioned resulting in large cost in-
creases. Agencies have serious estimate inaccuracies when scope
changes are imposed externally 共Board on Infrastructure and the
Constructed Environment 2003; Booz Allen & Hamilton Inc. and
DRI/McGraw-Hill 1995; Callahan 1998; Chang 2002; Harbuck
2004; Hufschmidt and Gerin 1970; Mackie and Preston 1998;
GAO 1999; Merrow 1988; Semple et al. 1994; Touran et al.
1994兲.
Scope creep is similar to changes in scope; however, this is the
effect of the accumulation of multiple minor scope changes.
Projects seem to often grow naturally as the project progresses
from inception through development to construction. These
changes can often be attributed in the case of transportation and
many other types of projects to the changing needs or growth of
the population in the area to be served. Minor changes can often
occur in response to local agency or citizen requests. 共Akinci and
Fischer 1998; Board on Infrastructure and the Constructed Envi-
ronment 2003; Booz Allen & Hamilton Inc. and DRI/McGraw-
Hill 1995; Callahan 1998; Chang 2002; Harbuck 2004;
Hufschmidt and Gerin 1970; Mackie and Preston 1998; GAO
1999; Merrow 1988; Semple et al. 1994; Touran et al. 1994兲.
Market conditions or changes in the macro environment can
affect the costs of a project, particularly large projects. Often only
large contractors or groups of contractors can work or even obtain
bonding for a large project. The size of the project affects com-
petition for a project and the number of bids that an agency/owner
receives for the work. Typically, the risks associated with large
projects are much greater, both for the owner and contractor, and
that affects project costs. Inaccurate assessment of the market
conditions can lead to incorrect project cost estimating. Market
conditions affect the project costs during the execution phase
similar to the effects during the planning phase. Changing market
conditions during the construction of a project that reduces the
number of bidders, affects the labor force, and other related ele-
ments can disrupt the project schedule and budget 关Board on In-
frastructure and the Constructed Environment 2003; Booz Allen
& Hamilton Inc. and DRI/McGraw-Hill 1995; Callahan 1998;
Chang 2002; Mackie and Preston 1998; GAO 1999; Merrow
1988; Pearl 1994; Sawyer 1952; “Summary of independent re-
view committee findings regarding the Woodrow Wilson Bridge
superstructure contract” 2002; Touran et al. 1994; Woodrow Wil-
son Bridge project bridge superstructure contract 共BR-3兲: Review
of the engineer’s estimate vs. the single bid 共2002兲兴.
Unforeseen events are unanticipated and typically not control-
lable by a project owner; these could be occurrences such as
floods, hurricanes, tornadoes, or other weather related incidents.
Typically these are called “acts of God.” These acts can bring
construction to a standstill and have been known to destroy work
creating the need for extensive rework or repair. Events controlled
by third parties that are also unforeseen include terrorism, strikes,
and changes in financial or commodity markets. These actions can
have devastating results on projects and on project costs 共Akinci
and Fischer 1998; Arditi et al. 1985; Callahan 1998; Chang 2002;
Hufschmidt and Gerin 1970; Merrow 1988; Semple et al. 1994;
Touran et al. 1994兲.
Unforeseen conditions are notorious for causing cost overruns.
Unknown soil conditions can effect excavation, compaction, and
structure foundations. Contaminated soils may be present. Utili-
ties are often present that are not described or described incor-
rectly on the drawings. There are a multitude of problems that are
simply unknown during the planning and design phases and
which can increase project cost when they become apparent
 during construction 共Akinci and Fischer 1998; Arditi et al. 1985;
Callahan 1998; Harbuck 2004; Hufschmidt and Gerin 1970;
Merrow 1988; Semple et al. 1994; Touran et al. 1994兲.
State Highway Agency Interviews
As part of a larger study to increase consistency and accuracy in
development of cost estimates and management of cost estimates
from conception to the final engineers estimate the researchers
identified and categorized cost escalation factors. During this pro-
cess the researchers conducted structured interview with over 20
SHAs to discuss their cost estimating and cost estimate manage-
Downloaded from ascelibrary.org by Iowa State University on 10/21/15. Copyright ASCE. For personal use only; all rights reserved.
ment processes. During these interviews the SHAs were also
asked about problems and potential weaknesses of their processes
and about cost escalation factors. All SHAs reaffirmed the iden-
tified cost escalation factors. Several of the more telling com-
ments included:
• Loss of experienced staff which leads to new and inexperi-
enced staff conducting estimate and estimate management ef-
forts which can lead to poor estimating.
• Environmental agencies typically do not get involved at the
planning level and the lack of communication at this level can
influence cost escalation through several factors including en-
gineering and construction complexities, delivery/procurement
approach, scope changes and scope creep.
• The delivery/delivery approach needs to be investigated in
more detail including increased exploration of combining
projects. Sometimes projects that have gone through the sys-
tem separately end up being combined into one project at let-
ting.
• Higher costs due to local concerns and requirements including
environmental, historic, and cultural issues, are often encoun-
tered and problems occur in identifying which projects will
experience these issues because of external impacts.
• Projects where the local government has been promoting the
project without detailed designs and once the SHA begins to
work on concept development the costs increased substantially
leading to inconsistent application of contingencies.
• Lack of consistent standards in developing estimates can lead
to poor estimating.
These are comments from a number of different individuals in
several SHAs but they are typical of comments made during the
interviews.
Implications
Singularly or in any combination the identified factors will under-
mine a project cost estimate. The outcome of a project, whether
through cost, schedule, quality or another owner specified mea-
sure, often determines an owner’s satisfaction with a project. Any
one of the 18 cost escalation factors can taint the project for the
owner, the designer, and contractor. The constant need to improve
the nation’s infrastructure with the limited funds available is the
duty of many agencies. This need stems from the deterioration of
overused systems, requirements for increased safety standards,
and the growing population. Identification and understanding the
factors that lead to cost escalation on all projects encourages
agencies in their efforts to perform this given duty. However, a
deeper understanding of the process and the ability to influence
projects in early project development is needed to further enhance
JOURNAL OF MANAGEMENT IN ENGINEERING © ASCE / OCTOBER 2009 / 227
J. Manage. Eng., 2009, 25(4): 221-229
an agency’s ability to provide successful projects.
Knowledge of the cost escalation factors that impact project
cost and an awareness of their potential significance is the first
step to mitigation of prospective consequences. Actions may be
taken internally to address the internal cost escalation factors,
while communication, education, and engagement of external
sources will aid in managing and anticipating external cost esca-
lation factors. Proactive measures to limit cost impacts may be
taken to mitigate factors that occur during the planning and de-
sign phases of project development. For example, risk analysis
methodologies can be used to identify uncertainties related to
external factors such as potential adverse site conditions. These
areas of uncertainty can be translated into risks-related cost im-
pacts and associated contingencies.
One example of a preemptive action to control a cost escala-
tion factor includes early identification of the project delivery
system and procurement approach. Late identification of the
project delivery system or procurement approach can lead to un-
warranted additional costs associated with repletion of work or
application of additional resources that may not have been neces-
sary with early identification of these project characteristics.
There is no silver bullet to achieve better project cost esti-
mates. The factors cannot be sorted into a definitive prioritized
structure as different factors have a greater affect on specific
projects. The factors should be examined on each project indi-
vidually. Development of thorough estimate documentation and
approval processes in a cyclical process through project develop-
ment will lead to cost estimate consistency, improved accuracy,
and better control of scope changes internally. Education and
communication of third parties regarding the cost and schedule
impacts that additions to the projects through scope creep will at
least buffer some of the negative press that is experienced on
projects that are in the public spotlight.
Conclusions
Eighteen cost escalation factors were identified through a com-
prehensive literature review and verified through intense inter-
views with over 20 transportation agencies. Identification of these
cost escalation factors supports efforts to understand the causes of
project cost escalation. This understanding permits the develop-
ment of strategies, methods, and tools for better cost estimation
and cost estimating management. Classification of the cost esca-
lation factors empowers estimators, agency/owners, and contrac-
tors to readily identify when specific factors are impacting a
project. Understanding these factors allows for appropriate ac-
tions to mitigate factor impacts. Project participants can take ac-
tion to curtail or control the effects of these identified cost
escalation factors throughout the life of the project. However,
“the key to success is to realize and understand the challenges
early in the planning process, to develop strategies to address
them and to establish accurate and achievable expectations”
共Capka 2004兲.
Acknowledgments
The writers express their appreciation to the National Cooperative
Highway Research Program 共NCHRP兲, Transportation Research
Board, under the National Academy of Sciences for sponsoring
 this research. Publication of this paper does not necessarily indi-
cate acceptance by the Academy of its contents, either inferred or
specially expressed herein. The writers also thank the NCHRP
Project 8–49 Panel for their comments and direction during the
research process. Additionally, the writers thank the state highway
agency personnel who supported this research through their time
and effort, without their valuable contributions this research
would not have been possible.
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