The federal government has hundreds of agencies and thousands of programs, and it spends almost $4 trillion a year. The government has grown too large to manage efficiently. Agencies have little incentive to control costs or improve quality, and Congress does a poor job of overseeing the executive branch to ensure good performance. As a result, many federal agencies suffer from wasteful spending practices.¹

One aspect of federal waste is frequent cost overruns on major projects, such as weapon systems and infrastructure. If a government project is initially estimated to cost $1 billion, it may end up costing $2 billion by the time it is finished.

This essay looks at the causes of cost overruns, and examines some of the budget areas that have the most serious problems, including defense, energy, and transportation.

Scope of the Problem

The federal government proceeds with large projects on the basis of estimated costs, but once projects get underway officials often revise the costs upward. The public ends up with a larger tax bill than originally promised.

Cost overruns have plagued the federal government since the beginning. Way back in 1836, for example, a Ways and Means Committee report criticized river and harbor projects of the Army Corps of Engineers. All 25 of the projects reviewed by the committee that year were overbudget, and “many” had cost overruns of 50 percent or more.²

Economists Stanley Engerman and Kenneth Sokoloff studied a sample of major government infrastructure projects throughout U.S. history and found that most had substantial cost overruns.³ The construction of the Erie Canal between 1817 to 1825, for example, went 46 percent overbudget, and the canal’s later expansion went 142 percent overbudget. The construction of the Panama Canal between 1902 to 1913 by the Corps of Engineers went 106 percent overbudget.⁴

In recent years, many federal projects have had large cost overruns. The cost to create the Healthcare.gov website launched in 2013 grew from $464 million to $824 million.⁵ The International Space Station more than quadrupled in cost from $17 billion to $74 billion.⁶ And a Veterans Affairs hospital currently being constructed in Orlando has more than doubled in cost from $254 million to $616 million.⁷

Cost overruns on government projects are a global phenomenon. For example, construction costs for Olympic Games often escalate, with the 2012 London Olympics doubling in cost, and the 1992 Barcelona Olympics quadrupling in cost.⁸ One of the most startling overruns of recent decades was the construction of the Sydney Opera House in the 1960s, which ended up costing 14 times the original estimate.⁹ But one project even topped that increase: the cost of the Scottish parliament buildings completed in 2004 soared to 16 times the original estimate.¹⁰

Some of these projects are extreme outliers, but there is a clear pattern internationally of substantial cost overruns on government projects.¹¹ Describing government infrastructure, the World Bank concluded, “studies show a history of extensive cost and time overruns in construction projects across the sectors and in countries around the world. . . . The rising expense can be crippling for governments, particularly in developing countries as they try to improve basic services.”¹²

A leading expert on cost overruns is Bent Flyvbjerg, a Danish professor of planning. His co-authored 2003 book, Megaprojects and Risk, concluded that “cost overruns of 50 percent to 100 percent in real terms are common in megaprojects.”¹³ In one of his studies, Flyvbjerg looked at 258 large transportation projects across 20 countries.¹⁴ He found that 90 percent were overbudget. Rail projects, for example averaged a 45 percent cost overrun, in constant dollars.

Another study by a team at Oxford University looked at 245 large government dam projects across 65 countries.¹⁵ The study found that average dam construction costs were 96 percent higher than budgeted, in constant dollars. Thus, real dam costs have typically doubled from the original estimates.

This issue is important because the true costs of projects determine whether or not they make any economic sense. In the Oxford study, for example, the average projected benefits of the dams were just 40 percent higher than the original estimated costs. Since the costs, on average, increased 96 percent, the study concluded that large dams are not economically viable in most cases.¹⁶

Unfortunately, policymakers and planners do not seem to learn from past mistakes. Flyvbjerg finds that the magnitude of cost overruns on major projects has not declined over time.¹⁷ Engerman and Sokoloff come to similar conclusions.¹⁸ So there appear to be systematic factors that induce governments to either consistently mismanage projects, low-ball initial cost estimates, or both.

Causes of Cost Overruns

In areas such as infrastructure and defense procurement, there are technical reasons why cost overruns may occur on major projects. The costs of materials, labor, or other inputs may change in unexpected ways. Environmental or geological issues may arise, or projects may face delays for reasons not envisioned. Project planners may have “optimism bias,” meaning that they are eager for a positive result and mistakenly overlook possible problems.

However, expert planners and engineers should use their judgments to consider contingencies, and to include leeway in their initial cost estimates. They should study past projects, consider risk factors, and construct conservative estimates. Any optimism should be tempered by experience dealing with problems on prior projects. If planners did make realistic projections based on experience, one would expect that in a sample of projects, the errors in cost estimating would go both ways—some projects would be underbudget and some would be overbudget.

However, that is not what happens with large government projects. In studying hundreds of projects, Flyvbjerg and his colleagues conclude that the differences in initial and final cost figures “are too consistent and too one-sided for this.”¹⁹ Projects generally run overbudget, not underbudget. Also, as noted, the cost overrun problem does not seem to have diminished over time. Yet, as Flyvbjerg notes, “it seems unlikely that a whole profession of forecasting experts would continue to make the same mistakes decade after decade instead of learning from their actions.”²⁰

So it appears that a main cause of cost overruns is that project promoters—including interest groups, consultants, officials, and politicians—create pressure for project planners to low-ball their initial cost estimates. Flyvbjerg calls the problem “strategic misrepresentation” of project costs.

With the federal government, there are structural incentives that encourage both low-balled estimates and a lack of cost control once projects get underway. Unlike businesses, federal agencies do not have to earn profits, so they have little reason to restrain costs. Businesses often abandon activities when the costs spike and losses are expected, but there is no such built-in corrective for federal projects that go astray. About 10 percent of all U.S. companies go out of business each year, indicating the harsh consequences of private failure.²¹ By contrast, failures and cost overruns in the government often mean that agencies get rewarded with more funding.

A 2014 Government Accountability Office (GAO) report on Department of Defense (DoD) contracting noted:

In DoD, there can be few consequences if funds are not used efficiently. For example, as has often been the case in the past, agency budgets generally do not fluctuate much year to year and, programs that experience problems tend to eventually receive more funding to get well.²²

Another problem in the government is that disciplining workers and managers is difficult because of strong civil service and union protections. Just 0.5 percent of federal workers get fired each year, which is just one-sixth the private-sector firing rate.²³ Also, federal pay is generally tied to longevity, not performance. The result is that federal workers and managers do not have strong incentives to ensure that projects are executed on time and on budget.

Now consider Congress. The main incentive steering political behavior is reelection, and so members try to satisfy voters in their districts. Members also have family and business ties in their districts. Securing major projects for one’s district brings prestige to members, who believe that they will be rewarded by voters.

Unfortunately, when members put their states and districts first, it often comes at the expense of other Americans. Policymakers support big and costly projects that benefit their states, even when the projects make no economic sense for the overall nation. When cost overruns or other failures develop on a project in a particular congressional district, the member has an incentive to continue supporting it anyway.

Politicians are spending other people’s money, which they do not spend as carefully as their own. In markets, costs are something to be minimized. But for politicians, costs represent favorable spending on constituents. If a Pentagon weapon system is being built by a contractor in a member’s district, cost overruns are a political benefit to the member because it means more local spending and jobs.

Contractors also play a role in cost overruns. If they know that low bids will help win federal business, they have an incentive to underestimate project costs. That strategy will pay off if contractors know from experience that bids are just the initial floor of funding. Contractors will bid low if they know that overbudget projects that are already underway will receive added funding.

Alan Stern, a former associate administrator of the National Aeronautics and Space Administration (NASA), pointed to numerous bureaucratic and political reasons for chronic cost overruns:

Endemic project cost increases at NASA begin when scientists and engineers (and sometimes Congress) burden missions with features beyond what is affordable in the stated budget. The problem continues with managers and contractors who accept or encourage such assignments, expecting to eventually be bailed out. It is worsened by managers who disguise the size of cost increases that missions incur. Finally, it culminates with scientists who won’t cut their costs and members of Congress who accept steep increases to protect local jobs.²⁴

Flyvbjerg focuses on the low-balling of initial costs as the main cause of cost overruns. He and his colleagues conclude that “project promoters routinely ignore, hide, or otherwise leave out important project costs and risks in order to make total costs appear low” and to gain initial project approval.²⁵ Put another way, politicians, officials, and contractors who support projects use “salami tactics.” Artificially low costs are presented to help gain initial funding, and then higher costs are revealed one slice at a time with the hope that projects are too far along to be canceled.

Martin Wachs, an infrastructure expert at RAND Corporation, comes to similar conclusions about the causes of cost overruns:

I have interviewed public officials, consultants, and planners who have been involved [in transit projects and ridership forecasting] and I am absolutely convinced that the cost overruns and patronage overestimates were not the result of technical errors, honest mistakes, or inadequate methods. In case after case, planners, engineers, and economists have told me that they had to ‘revise’ their forecasts many times because they failed to satisfy their superiors. The forecasts had to be ‘cooked’ in order to produce numbers that were dramatic enough to gain federal support for projects whether or not they could be fully justified on technical grounds.²⁶

William Ibbs, a professor of construction management at the University of California, Berkeley, concurs that governments often lowball initial cost estimates to help get projects underway: “I’m not saying they’re committing fraud, but let’s say they’re overly optimistic. … They’ll get the work going and then the public will be reluctant to cancel a project because they’ve spent all this money so far.”²⁷

Former San Francisco mayor Willie Brown was even more blunt than Ibbs or Wachs. In a 2013 opinion piece, he described the sources of cost overruns on projects in his city:

News that the Transbay Terminal is something like $300 million over budget should not come as a shock to anyone. We always knew the initial estimate was way under the real cost. Just like we never had a real cost for the Central Subway or the Bay Bridge or any other massive construction project. So get off it. In the world of civic projects, the first budget is really just a down payment. If people knew the real cost from the start, nothing would ever be approved. The idea is to get going. Start digging a hole and make it so big, there’s no alternative to coming up with the money to fill it in.²⁸

Brown was in the California assembly for 30 years and mayor of San Francisco for 8 years, so he knows how the government works. He is saying directly that officials provide fake initial estimates to get projects approved, and then projects are moved ahead before the truth is known so that there is no turning back. Major shares of funding for San Francisco’s Transbay Transit Terminal and Central Subway came from the federal government.²⁹

The priority that politicians and officials put on minimizing the initially projected costs of programs is illustrated by the structuring of the Affordable Care Act (ACA) in 2010. President Obama promised that health care reform would not “add one dime to the deficit,” so lawmakers needed to structure the ACA to make it appear as if it reduced deficits within the official 10-year budget window.³⁰ This was accomplished by raising taxes right away and delaying spending until a few years down the road. That design gave supporters an advantage in congressional debates.

Defense Projects

The Department of Defense (DoD) is notorious for cost overruns on its purchases of weapons and equipment. As one of the first major procurements under the Constitution, the government bought six Navy frigates in 1794. The ships were projected to cost $688,889, but a myriad of problems pushed the ultimate cost up 70 percent to $1,176,721.³¹

Over the decades, that pattern has been repeated many times. The Pentagon building itself, constructed in Virginia in the 1940s, “was built upon a foundation of lies, secrecy, and cost overruns.”³² The Pentagon building ending up costing $75 million to build, more than double the original estimate of $35 million.

Former Comptroller General David Walker said that the Pentagon has “a long-standing track record of over-promising and under-delivering with virtual impunity.”³³ Congress has made some attempts to control defense cost overruns. The Nunn-McCurdy Act of 1982 requires DoD to alert Congress if a major project has cost growth above certain thresholds, and then to possibly perform an in-depth project review and restructuring.³⁴ The Weapon Systems Acquisition Reform Act of 2009 created a new Pentagon cost assessment office and various procedural reforms. Numerous secretaries of defense have focused on procurement reform.

Despite some reforms, more changes are needed. A 2008 GAO report found that “DoD’s major weapon system programs continue to take longer, cost more, and deliver fewer quantities and capabilities than originally planned.”³⁵ And a 2014 GAO report noted, “Weapon systems acquisition has been on GAO’s high risk list since 1990 … While some progress has been made on this front, too often we report on the same kinds of problems today that we did over 20 years ago.”³⁶

The GAO tracks the estimated costs of major weapons programs in real or constant dollars. The typical cost overrun percentage has not fallen over time. For the 91 programs examined in 2005, R&D costs were 33 percent overbudget, on average, and procurement costs were 18 percent overbudget.³⁷ For the 78 programs examined in 2014, R&D costs were 53 percent overbudget, on average, and procurement costs were 46 percent overbudget.³⁸

Policymakers and analysts often blame the Pentagon’s use of cost-plus or cost-reimbursement contracts—rather than fixed-price contracts—as a key source of cost overruns. Cost-plus contracts seem to give a “blank check” to contractors because they allow costs to rise over time. Studies find that fixed-price contracts appear to have less cost growth than do cost-plus contracts.³⁹ President Obama issued a Memorandum in 2009 that pointed to an increase in the use of cost-plus contracts across the federal government, and he directed that fixed-price contracts should be preferred in most cases.⁴⁰

However, some experts argue that greater use of fixed-price contracts would not necessarily reduce overall procurement costs.⁴¹ Producing advanced weapons is, of course, a complex activity, which makes it difficult to set the tight up-front parameters that are needed for fixed-price contracts. Fixed-price contracts are often modified to add new equipment capabilities, which tends to push up overall program costs.⁴² So finding the best solution for Pentagon contracting is not easy, and different types of contracts are likely appropriate for different types of procurement.

Nonetheless, there is wide agreement that the current DoD procurement system involves a bloated bureaucracy and excess paperwork, and the whole process moves too slowly.⁴³ The system produces results biased strongly toward cost overruns, as the GAO studies find. A main cause of Pentagon cost overruns appears to be decisions to change existing contracts to add new requirements after projects are underway.⁴⁴ That, in turn, may be caused by either poor planning or the purposeful exclusion of known requirements so that initial cost estimates appear low.

The Joint Strike Fighter (JSF), or F-35, is the largest Pentagon acquisition program. Total estimated program costs are about $400 billion.⁴⁵ Real, per-unit costs have soared 75 percent since 2001, as shown in Table 1.⁴⁶ The GAO noted that DoD began its JSF acquisition “without adequate knowledge about the aircraft’s critical technologies or its design.”⁴⁷ DoD purchased aircraft before operating test flights, which differed from traditional procedures. According to the undersecretary of defense for acquisition, Frank Kendall, that decision amounted to “acquisition malpractice.”⁴⁸

Another high-profile project that went off-track was the purchase of new Marine One helicopters for the president. The VH-71 project began in 2002, but it soon got bogged down. Estimated costs for the project doubled from $6.5 billion to $13 billion.⁴⁹ GAO pointed to management failure as the culprit:

The VH-71 program’s failure to follow acquisition best practices was a critical factor in the program’s poor performance that led to its ultimate termination. It started with a faulty business case, did not perform appropriate systems engineering analysis to gain knowledge at the right times, and failed to make necessary trade-offs between resources and requirements even after years of development.⁵⁰

Fortunately, the DoD scrapped the VH-71 program in 2009, but after $3.2 billion had already been spent.⁵¹ A Washington Post review of the project found that “the design became so overloaded with new requirements — to be able to hover longer and at high altitudes, travel great distances without refueling, and defend against missile attacks — it essentially became an impossible task.”⁵²

The GAO has noted that the military branches “overpromise capabilities and underestimate costs to capture the funding needed to start and sustain development programs.”⁵³ And the auditing organization has noted that unlike in private companies where investment spending is a cost to be controlled, in the DoD “new products in the form of budget line items can represent revenue. An agency may be able to justify a larger budget if it can win approval for more programs. Thus, weapon system programs can be viewed both as expenditures and revenue generators.”⁵⁴

Ironically, even efforts to reduce DoD costs have gone overbudget. DoD has gone through numerous Base Realignment and Closure (BRAC) rounds to close excess facilities. GAOfound that the most recent round was originally expected to cost $21 billion, but will end up costing $35 billion.⁵⁵ The cost of one component—the consolidation of the National Geospatial-Intelligence Agency—has grown from $1.1 billion to $2.6 billion.⁵⁶

The Pentagon makes lots of mistakes, but Congress deserves most of the blame for cost overruns because it writes the laws and holds the purse strings. Rather than looking out for taxpayers, many members of Congress fight attempts to reduce spending in their districts, including spending on weapons that the Pentagon does not want. Defense contractors exploit this parochialism, and they skillfully spread out research and production work across many states to maximize congressional support.

These sorts of political machinations were explored by congressional aide Winslow Wheeler in his book, The Wastrels of Defense.⁵⁷ He argued that even in national defense, the pursuit of parochial advantage “has become a full-time preoccupation that permeates Congress’s activities and members’ decisionmaking processes.”⁵⁸ Wheeler found that members overseeing the defense budget put most of their efforts into grabbing benefits for their states, and not into ensuring value for taxpayers and ensuring the effectiveness of our armed forces. He argued that Congress has “degenerated into a gaggle of wastrels competing for selfish advantage.”⁵⁹

Table 1 provides a sampling of cost overruns on defense projects. The costs are the total per-unit amounts in constant 2015 dollars, including both development and procurement costs.

Table 1. Sampling of Defense Cost Overruns

Defense Projects60	Per-Unit Cost Estimate and Date of Estimate
	Original		Recent or Final
Littoral Combat Ship	$360m (2004)		$667m (2014)
Evolved Expendable Launch Vehicle	$102m (1998)		$376m (2013)
Joint Strike Fighter (F-35)	$79m (2001)		$138m (2013)
JPALS Landing System	$29m (2008)		$77m (2014)
G/ATOR Radar	$24m (2005)		$61m (2014)

Note: Per-unit costs in constant 2015 dollars. m=million.

Energy Projects

Mismanagement has been pervasive in the Department of Energy (DOE) since Congress created it in the 1970s. Projects for conventional energy, renewable energy, environmental clean up, and nuclear security have all experienced large cost overruns.

The largest part of DOE’s budget is the National Nuclear Security Administration (NNSA), which will spend $13 billion in 2015.⁶¹ This agency handles the safety and security of America’s nuclear weapons stockpile, an activity that has been plagued with cost overruns. For example, “costs have skyrocketed for the Mixed Oxide Fuel Fabrication Facility at the Savannah River plant in South Carolina,” according to the Washington Post.⁶² When the NNSA began this program in 2002, design and construction were expected to cost $1 billion, but by 2014 total costs were estimated at $7.8 billion, a more than seven-fold increase. The project has already consumed $5 billion in taxpayer funding, and a group of prominent experts is now calling for it to be cancelled.⁶³

The second largest part of DOE’s budget is environmental clean up, which will cost more than $6 billion this year.⁶⁴ This activity is the legacy of waste created by federal nuclear weapons sites in the decades following World War II. These sites had long been environmental messes, but Congress had taken little notice. Then during the 1980s, a series of reports lambasted DOE for its lax safety and environmental standards, and polices began to change.⁶⁵

Since 1990, federal taxpayers have paid more than $150 billion to clean up the mess from the government’s nuclear activities.⁶⁶ Unfortunately, “DOE’s past efforts to treat and dispose of high-level waste have been plagued with false starts and failures, resulting in steadily

growing estimates of the program’s total cost,” noted GAO.⁶⁷ In 2008 GAO found that “nine of 10 clean up projects we reviewed have experienced cost increases and schedule delays in their life cycle baseline, ranging from $139 million for one project to more than $9 billion for another, and schedule delays ranging from 2 years to 15 years.”⁶⁸

The largest of the nuclear production sites was Hanford in Washington State. A key waste treatment plant at Hanford ballooned in cost from $4.3 billion in 2000 to $13.4 billion by 2012, as shown in Table 2.⁶⁹ Overall, $19 billion has been spent cleaning up the Hanford site since 1989, and the effort is still years behind schedule and plagued with problems.⁷⁰

Federal energy research has been another black hole for taxpayer dollars. An early subsidy project was the Clinch River Breeder Reactor, which was an experimental nuclear fission plant in Oak Ridge, Tennessee. In 1971, the Atomic Energy Commission, which pushed the project, estimated that it would cost $400 million. But the project’s estimated cost rose steadily, and by 1983 it had ballooned to $4 billion.[71] The project was finally cancelled, but after $1.7 billion had already been spent.

In recent years, one of largest boondoggles was the Illinois-based FutureGen. It was launched in 2003 by the George W. Bush administration to build a low-emission coal power plant and demonstrate carbon capture technologies. The government was to share the cost of the project with private energy companies. It was originally estimated to cost $950 million, but by 2008 the cost had ballooned to $1.8 billion.⁷² The Bush administration wisely decided to cancel it.

In 2010 the Obama administration revived the project, which it dubbed FutureGen 2.0. The initial cost estimate for FutureGen 2.0 was $1.3 billion, but over time the cost rose to $1.65 billion.⁷³ The project made no economic sense, but was sustained by pork barrel politics, including the efforts of Illinois Senator Dick Durbin. The administration finally admitted failure on the project in 2015, and began closing it down.

Table 2. Sampling of Energy Cost Overruns

Energy Projects	Cost Estimate and Date of Estimate
	Original		Recent or Final
Hanford nuclear waste site74	$4.3b (2000)		$13.4b (2012)
Superconducting Supercollider75	$4.4b (1987)		$11.8b (1993)
NNSA-Savannah River76	$1.0b (2002)		$7.8b (2014)
National Ignition Facility77	$2.1b (1995)		$5.3b (2014)
Clinch River Breeder Reactor78	$400m (1971)		$4.0b (1983)
FutureGen clean coal project79	$950m (2003)		$1.8b (2008)

Note: m=million, b=billion.

Transportation Projects

A pattern of cost overruns on government transportation projects goes back to the 19th century. We noted, for example, that an 1836 Ways and Means Committee study found that many Army Corps’ river and harbor projects were substantially overbudget, and that the cost of Panama Canal construction doubled.

Proponents of government infrastructure spending often point to the success of the Erie Canal, which opened in 1825. But the proponents usually don’t mention the slew of government boondoggles that followed it. The Erie Canal was a big success, but that prompted politicians in Michigan, Pennsylvania, Ohio, Indiana, Maryland, and Illinois to spend lavishly on their own, often dubious, canal schemes.⁸⁰ State politicians overestimated the demand for canals and underestimated the construction costs. Routes were often chosen for political reasons, not to maximize economic benefits. It turned out that the Erie Canal was a uniquely high-return route, while nearly all the rest of the state-sponsored canals in the mid-19th century created large taxpayer losses.

Today’s equivalent of spending on boondoggle canals is spending on urban rail systems. The federal government will spend about $13 billion on urban transit in 2015.⁸¹ Federally funded rail projects have long been prone to cost overruns and inflated ridership projections. A 1990 Department of Transportation (DOT) report examined the costs of 10 large rail projects.⁸² Nine of the projects had cost overruns, and the average overrun was 50 percent.

Little has changed since that study. Martin Wachs, the RAND infrastructure expert, says, “of 35 public transit projects I have studied in the U.S., 33 overestimated patronage [ridership] and 28 underestimated costs.”⁸³ A new study by Randal O’Toole and Michelangelo Landgrave looked at the costs of 45 urban rail projects across the nation since the 1980s.⁸⁴ They found that most rail projects went substantially overbudget and had inflated ridership projections. On average, the rail projects doubled in cost between when they were approved and when they were completed.

Looking internationally at a sample of 58 rail projects, Flyvbjerg and colleagues found that the average cost overrun, in constant dollars, was 45 percent.⁸⁵ They found that the problem of cost overruns has not diminished over the past seven decades. Similarly, O’Toole and Landgrave found that cost overruns on rail projects have not lessened since the 1980s.

Regarding the benefits of rail, Flyvbjerg found that ridership was 51 percent less, on average, than had been estimated on his sample of 58 projects.⁸⁶ O’Toole and Landgrave find a similar overestimate of ridership. Looking at transportation projects overall, Flyvbjerg and colleagues concluded, “The use of deception and lying as tactics aimed at getting projects started appears to best explain why costs are highly and systematically underestimated and benefits overestimated in transport infrastructure projects.”⁸⁷

One current project with a huge cost overrun is the East Side Access train tunnel in New York City between Queens and Manhattan. The original proposal in 1999 put the cost at $4.3 billion and completion by 2009. But now the project is expected to cost $10.8 billion and be completed by 2023, as shown in Table 3.⁸⁸ Federal taxpayers will pay $2.7 billion of the project’s bill. Almost all aspects of the project are overbudget, including terminal construction, engineering, train cars, tracks, and signals.⁸⁹

Cost overruns have also been common on federally funded highway projects. A 2003 GAO study looked at 30 large federal highway projects, and found that 23 had cost overruns, with half of the overruns larger than 25 percent.⁹⁰ The largest cost overrun in recent years was Boston’s Big Dig or Central Artery project. The initial cost estimate in 1985 was $2.6 billion, and completion was expected in 1998. The cost ultimately soared to $14.6 billion and the project was completed in 2005, as shown in Table 3.⁹¹ The federal share of the costs was $8.5 billion.⁹²

Part of the problem with federally funded transportation projects is the bureaucracy. GAO points to the “fragmented approach as five DOT agencies with 6,000 employees administer over 100 separate programs with separate funding streams for highways, transit, rail, and safety functions. This fragmented approach impedes effective decision making and limits the ability of decisionmakers to devise comprehensive solutions to complex challenges.”⁹³ By adding more officials and more paperwork, federal involvement in state transportation projects reduces accountability and encourages cost overruns and failure.

These sorts of bureaucratic problems have played out with New York’s World Trade Center rail station. When completed in 2015, the station will have cost about $4 billion, double the original estimate of $2 billion.⁹⁴ The Wall Street Journal studied the project and found:

Those redesigning the World Trade Center—destroyed by terrorists in 2001—were besieged by demands from various agencies and officials, and “the answer was never, ‘No,’ ” said Christopher Ward, executive director from 2008 to 2011 of the Port Authority of New York and New Jersey, the project’s builder.”

…The Port Authority, run jointly by the two states, has long been known for political infighting. City, state and federal agencies, as well as real-estate developer Larry Silverstein, also joined in. In public and private clashes, they each pushed to include their own ideas, making the site’s design ever more complex, former project officials said. These disputes added significant delays and costs to the transit station…

Former New York Mayor Michael Bloomberg, for example, insisted the memorial plaza be finished by the 10th anniversary of the Sept. 11, 2001 attacks. The request added more than $100 million to costs and months of delay.⁹⁵

The newspaper concluded that the World Trade Center rail station is “a project sunk in a morass of politics and government.”⁹⁶ That is true of many federally funded transportation projects.

Table 3. Sampling of Transportation Cost Overruns

Transportation Projects	Cost Estimate and Date of Estimate
	Original		Recent or Final
Boston Big Dig97	$2.6b (1985)		$14.6b (2005)
New York City East Side Access98	$4.3b (1999)		$10.8b (2014)
San Francisco-Oakland Bay Bridge99	$1.4b (1996)		$6.3b (2013)
Denver International Airport100	$1.7b (1989)		$4.8b (1995)
New York City WTC Rail Station101	$2.0b (2004)		$4.0b (2015)
Denver West Light Rail102	$250m (1997)		$707m (2013)
Virginia Springfield interchange103	$241m (1994)		$676m (2003)

Note: m=million, b=billion.

Air Traffic Control Projects

The Federal Aviation Administration (FAA) operates the nation’s air traffic control (ATC) system. It has long had problems with cost overruns and schedule delays on its technology upgrade projects. Back in the 1980s, for example, the Advanced Automation System was initially expected to cost $2.5 billion. But by 1994, the estimated cost had soared to $7.6 billion and the project was seven years behind schedule.¹⁰⁴ The FAA ended up restructuring some parts of the program and killing others, with $1.5 billion of the completed work thrown down the drain.

A 2005 Department of Transportation study looked at 16 major ATC upgrade projects and found that the combined costs had risen from $8.9 billion to $14.5 billion.¹⁰⁵ The cost of the Standard Terminal Automation Replacement System (STARS) project had almost tripled in cost to $2.7 billion and was years behind schedule. A GAO analysis the same year found similar cost overruns and delays on a range of projects. The report said, “For more than two decades, ATC system acquisitions under the National Airspace System modernization program have experienced significant cost growth, schedule delays, and performance problems.”¹⁰⁶

Today the FAA is funding a range of initiatives to modernize ATC called NextGen. In 2012 GAO reviewed 30 components of NextGen and found that 11 of the 30 projects are overbudget and half are behind schedule.¹⁰⁷ The largest and most critical programs have the most serious problems. The Wide Area Augmentation System, for example, has tripled in cost from $1 billion to $3 billion, as shown in Table 4.

A 2013 report from the United States Travel Association warned that our “air traffic control system uses technology from the World War II era that causes systematic delays and cancellations.”¹⁰⁸ And it said, “NextGen remains mired by setbacks, cost overruns and delays as a result of FAA mismanagement.”¹⁰⁹ A 2013 study from the Eno Center for Transportation had similar conclusions, noting “many stakeholders are losing confidence in FAA’s ability to move forward” with NextGen.¹¹⁰

Looking ahead, increases in the demand for air travel are expected to severely strain the ATC system. Airspace is getting crowded and our antiquated ATC is causing delays and wasting fuel. ATC is an increasingly high-tech industry, and yet Congress has trapped this crucial part of aviation inside of an old-fashioned bureaucracy at the FAA.

Other countries have improved performance by separating ATC from their governments. Canadian reforms of the 1990s provide a good model for U.S. reforms. Canada moved ATC to a stand-alone nonprofit corporation, Nav Canada, which has an excellent safety record and is a leader in innovation. Nav Canada has won three International Air Transport Association Eagle Awards since 2001 as the world’s best air traffic control provider.¹¹¹

In 2015 Senate hearings, witnesses lamented the slow progress of U.S. ATC modernization compared to advances in other countries.¹¹² The head of the U.S. National Air Traffic Controllers Association described some of Canada’s advantages in reducing costs and speeding progress:

They have the air traffic controller, the engineer, and the manufacturer working together from conceptual stage all the way through to training, implementation, and deployment within their facilities. And what that does is it saves time and money. And they actually are developing probably the best equipment out there, and they are selling it around the world. And they are doing it in a 30-month to three-year time frame, when we have to look much longer down the road because of our procurement process in this country.¹¹³

ATC technology is complex, and so occasional cost overruns are understandable. But the FAA’s problems have been ongoing for decades. Privatizing U.S. ATC would create incentives to reduce cost overruns and delays, and it would give managers the flexibility they need to implement new aviation technologies.

Table 4. Sampling of Air Traffic Control Cost Overruns

Air Traffic Control Projects	Cost Estimate and Date of Estimate
	Original		Recent or Final
Advanced Automation System114	$2.5b (1983)		$7.6b (1994)
Wide Area Augmentation System115	$1.0b (1998)		$3.0b (2011)
STARS116	$940m (1996)		$2.7b (2011)
En Route Automation Modernization117	$2.1b (2003)		$2.5b (2011)

Note: m=million, b=billion.

Building Construction Projects

The federal government owns more than 250,000 buildings, including offices, hospitals, and warehouses.¹¹⁸ The government has long been a poor manager of it assets. The GAO has had federal property holdings on its “high risk” waste list for years.¹¹⁹ When the government constructs new buildings, the projects are prone to cost overruns and delays.

Perhaps the largest construction fiascos of recent years have been in the Department of Veterans Affairs (VA). In 2013 GAO studied the four largest VA hospital construction projects, which are in Denver, Orlando, New Orleans, and Las Vegas. The agency found that the combined costs for the projects have doubled, from $1.5 billion to $3 billion.¹²⁰ GAO pinned the blame on “weaknesses in VA’s construction management processes.”¹²¹

The problems have continued since GAO’s 2013 analysis. A recent estimate for the combined cost of the four hospital projects is $3.9 billion.¹²² The Denver facility has quintupled in cost from $328 million in 2004 to $1.7 billion today, as shown in Table 5. Despite the failed management, the Washington Post reported in 2015 that the VA official overseeing the four hospital projects had received $64,000 in performance bonuses.¹²³

Table 5. Sampling of Construction Cost Overruns

Construction Projects	Cost Estimate and Date of Estimate
	Original		Recent or Final
Denver VA hospital construction124	$328m (2004)		$1.7b (2015)
Capitol Visitor Center125	$265m (2000)		$621m (2008)
DHS headquarters126	$3.4b (2006)		$4.5b (2013)
Denver International Airport127	$2.1b (1990)		$4.8b (1995)

Note: m=million, b=billion.

Conclusions

Cost overruns on large projects are pervasive in the federal government. The problem has not diminished over time, and it appears to stem from a mixture of deceit and mismanagement. One of the consequences is that taxpayers are likely footing the bill for many projects that create benefits worth less than the costs. Flyvbjerg argues that cost overruns result in the “survival of the unfittest,” meaning that projects with the most exaggerated benefits and low-balled costs get approved, rather than the most worthy projects ¹²⁸

To help cure the cost overrun disease, the government should increase transparency in major contracting. Agencies should release details about proposed projects early in the process, and they should actively solicit critiques of projects from independent engineers and economists.

Federal agencies should also benchmark the costs and schedules of proposed projects against similar past projects to inject more realism into planning.¹²⁹ And agencies should perform and release detailed evaluations of projects after they are completed, so that policymakers and contractors can learn from them and avoid mistakes in the future.

However, more fundamental reforms are needed. When possible, funding and decisionmaking for major projects should be decentralized out of Washington. Energy research should be left to the private sector. Air traffic control should be privatized, as it has been in Canada. Urban transit should be left to local governments and the private sector. Highway funding should be left to state governments and the private sector.

It is true that cost overruns are a risk on all types of large projects, whoever undertakes them. But the federal government’s track record on major project management is particularly poor, and many federal agencies do not seem to learn from past mistakes. Using their own funding, state and local governments and the private sector would have stronger incentives to minimize costs and reduce delays on major investment projects.

---