From Melbourne’s North East Link to Queensland’s doomed Paradise Dam, we outline why many megaprojects have blown their budgets – and how cost engineers can help keep them down.
Massive budget blowouts in major Australian public infrastructure projects are cropping up left and right.
As revealed last week by Victoria’s auditor-general, the North East Link road project is now costing taxpayers $26.2 billion, up 67.6 per cent on its 2017-18 costing.
In Queensland, January saw the announcement that the Paradise Dam will cost at least $4.4 billion to rebuild, after safety work begun in 2020 to rebuild the flood-damaged dam wall was declared a failure.
Early this month, Transgrid announced its Project EnergyConnect, a 900-km electricity transmission connection between South Australia, Victoria and NSW, had blown out from an estimated cost of $2.28 billion to $4.1 billion.
To cost engineers, these figures represent avoidable scenarios.
Abhijnan Datta CPEng, Project Director, Infrastructure at Turner and Townsend and National Chair of the Australian Cost Engineering Society, said cost engineers are concerned with three major goalposts: cost, time and scope.
“A lot of people confuse cost engineering with project accounting, or financial accounting,” he told create. “The best way to put it is: a cost engineer is like the navigator in the car rally. They are providing insights to the driver along the way. They are doing all the calculations; they need to understand the scope of work.
“Unless you understand all of it together, it’s very hard for you to be a functioning project controls engineer or cost engineer.”
It’s all in the planning
A common denominator in trouble-plagued projects is a lack of thorough early planning. It’s a truism, but planning is key. Spending more time on the drawing board before tools are picked up will save time and money down the track.
“On a lot of the projects you hear about the overrun, but the first step is to say, what is it overrunning? So, the first step is understanding the scope and having a thorough estimate.”
The political element attending major infrastructure works is another curveball that can wrong-foot a project from the start.
“I always say that it’s a politician’s dream to get the shovel on the ground at the earliest and a cost engineer’s nightmare. Major projects are a big political opportunity and there can be pressures to hasten the process. But these kinds of projects are large and complex and typically, when it goes wrong, it goes horribly wrong.
“It’s the job of the cost engineer to invest in the basics of data, capture lessons learned and leverage the data to gain insights from it. It’s about spending time on the boring stuff.”
Inland Rail
A massive infrastructure rail project linking freight between Melbourne and Brisbane, Inland Rail has doubled its original cost estimate from $16.4 billion in 2020 to $31.4 billion. It will have run four years over time if it meets its 2030 completion date.
As a logistics project, Inland Rail is relatively straightforward in engineering terms, Datta said. The major issue has been the lack of appreciation for risks in mega projects and approval timelines. Dr Kerry Schott’s review of the project outlined 19 recommendations; one of them was reviewing the Australian Rail Track Corporation’s risk management and reporting systems, with a view to addressing issues experienced with the approval process.
Running through three states and jurisdictions adds complexity to the project.
“A lot of these mega projects suffer from a gross underestimation of risks. Half of the challenges for Inland Rail are hardly technical. These are stakeholder challenges.”
Projects such as this can have their detailed upfront construction programs undermined by the technicalities of the upfront work such as environmental approvals, legislation and land acquisition.
“Engineers know how to build but they are not traditionally good at communicating and navigating stakeholders,” Datta said. “Project organisation needs to understand those complexities.”
Snowy Hydro
Set to pump water through 27 km of tunnels between two dams in the heart of Kosciuszko National Park in NSW, Snowy Hydro 2.0 has grown from an initial cost of $2 billion to an estimated $12 billion.
The project took a turn when its tunnel boring machine, dubbed Florence, became stuck in soft ground for the better part of 2023.
“It was a huge celebration when it got launched, and then it got stuck in the sludge,” Datta said. “It’s a technically complex project, but a cost engineer is there to think of risks: what’s the uncertainty in this project with respect to ground conditions?”
In a project such as this, Datta said, reference class forecasting is a useful tool. Looking at similar projects and drawing references can help form a reliable estimate.
“You do a bottom-up estimate, but you also look at reference classes – you take that data where it has been done a number of times. Those things come naturally to cost engineers. They have the understanding of engineering, but also the understanding of project management, stakeholder management, data, decision making, communication. They have ownership of that almost single source of truth for the project.”
North East Link
Victoria’s major road project has had a budget blow-out to $26.2 billion. Statistically, however, road projects have the least chances of going wrong.
“Like transmission-line projects, a road project is linear and repetitive,” Datta said. “Technically, they’re quite simple.”
They might be a civil engineer’s dream, but it’s crucial to get things right on paper before getting people mobilised on the project.
Planning for change
Scope creep – where a project’s parameters gradually expand due to added features, requirements or changes requested by stakeholders – is a common occurrence on major projects. By investing in proper change control with the help of cost engineers, anything that changes from the original scope can be monitored and allowed for.
“My message is, don’t get down to building something unless the requirements are clear, unless you have a proper understanding of the project, investing enough time on your drawing board before just going gung-ho and going out to the site,” Datta said.
“Projects don’t go wrong – they literally start wrong. A lot of times it’s a vision or aspiration, which is great – that’s how humanity functions, but you can’t start building something just based on vision or aspiration. It has to have that deeply researched, thoroughly tested program before you start getting boots on the ground.”
Good stuff Larissa
This needs more people considering
Worth a read; Bent flyvbjerg – How Big Projects Get Done
Adds to all of the above
Not enough planning
Too keen to strike soil
etc
Key issue is uniqueness bias
Great article and brings home the problems with costing projects.
In my experience, budget ‘blow-outs’ in infrastructure projects are often a result of the tendering process where uncertainty and risk are often buried under Variations. It’s not usually scope creep that’s the problem.
For example, one Tenderer might price risk accurately and comprehensively, only to submit a tender that gets perceived as far too expensive. A second Tenderer might game the situation and only cost to the letter of the Tender. Leaving well-known risk such as overly soft ground (for example) as an uncosted Variation will substantially reduce the submitted price, and will be favourably received.
It is always up to the entity releasing the Tender (usually a government for these infrastructure projects) to ensure risk is properly priced in the submitted Tenders and not hidden in Variations. Otherwise, Tenderers will avoid causing ‘sticker shock’ and remain competitive by using Variations in the full knowledge of the inevitable budget blow-outs.
This is a great article and really brings home the problems with costing projects. Difficult to solve the root problem though.
In my experience, budget ‘blow-outs’ in infrastructure projects are often a result of the tendering process. Uncertainty and risk are often buried under Variations and not costed at all.
For example, if one Tenderer prices risk accurately and comprehensively, they run the risk of submitting a tender that gets perceived as far too expensive and uncompetitive. A second Tenderer might game the situation and only cost to the letter of the Tender. If the second Tenderer leaves a risk like overly soft ground as an uncosted Variation, they will have a substantially reduced price which will be favourably received. So the Project goes ahead, soft soil gets struck, and government foots the bill for the inevitable Variation.
Alternatively, there may be no hidden Variations and all risk is expected to be borne by the Tenderer. When substantial risk instantiates as is inevitable on a large project, the Tenderer cannot resort to Variations and risk being bankrupted and unable to finish.
It is always up to the entity releasing the Tender (usually a government for these infrastructure projects) to ensure risk is properly priced in the submissions and not avoided or hidden in Variations to reduce the up-front sticker price.
I worked on the original Snowy Scheme, a 25 year long project which was brought in on time and budget. I then worked with SMEC on many dam and hydro projects all of which bar one, which was adversely affected by a huge flood, were completed on time and on budget.
But then politicians, accountants and lawyers decided to change the rigorous system of project development as they considered it too slow, too protracted and too rigid. Also instead of independent checking we had “quality assurance”. What a joke. Now we have so reduced the initial checks and balances and removed the independent umpires that the pirates have taken over the ship.
It was obvious to many of us what would happen and it has. Snowy 2 is an utter disgrace as is Inland Rail.
In the early ’90s, working in a state road authority, a colleague grumbled that he occasionally gets a call from senior executive management wanting to know how much it costs to build a highway from A to B, and the answer is wanted there and then, in order to provide the answer to the Roads Minister quicksmart. I don’t know if he is exaggerating, but therein lies the cause of cost overruns. A number done on the back of an envelope, so to speak, is not going to be reliable.
I don’t know much about the Snow 2.0 contract, but it would seem to me that there has not been adequate site investigation done prior, and the TBM chosen is the wrong type. A TBM that is more suited for variable ground conditions would have been more suitable.
Interesting comments on poor project planning and resultant scope creep which rightly adds to the overall costs of projects, however in the case of Inland Rail an independent report substantially changed its delivery model.
Prior to this report a major section of the project, Gowie to Kagaru in Queensland, was previously planned to be undertaken as a Public Private Partnership (PPP). The PPP already was in train and other contractor arrangements were in place for Border to Gowie. The Environmental Impact Studies were in an advanced stage.
The recommendations in the report adopted by the Federal Government resulted in the Queensland sections of Inland Rail being deferred to await outcomes of EIS process. The PPP delivery was removed at an unknown cost but added significant upfront capital costs to the project. While the overall value of the project may have been similar regardless of delivery mechanism under the PPP, capital funding requirements would not have required full value upfront funding as is now reported.
Thank you, Abhijnan, Travers, Paul, and Colin, for your insightful comments. As you may know, EA is preparing for engagement with the 2025 federal election. The QLD Division Committee has been advocating for the state government to establish a Chief Engineer Office and an Independent Infrastructure Authority, similar to Building QLD, which was abolished a few years ago. As you’re aware, we currently have a Chief Engineer in the ACT and previously had one in Victoria.
I’d love to hear your thoughts on this, especially given your experience. Would you be open to connecting on LinkedIn or sending me an email at joseph.tam.ea@gmail.com so we can exchange views? I believe this initiative could provide essential engineering leadership in government and address some of the issues you’ve mentioned. Additionally, an independent authority would ensure a thorough review process, helping to guarantee that proper planning, investigation, checks, and balances are in place before embarking on major projects.
Great article – nice work Larissa Foster and Abhi Datta