A few of the pitfalls facing major capital projects

Posted: Tuesday, July 17, 2007

The following is prompted by Tim Whiting's My Turn, "Where are Juneau's priorities," published July 6.

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One of the major gripes of the general public is the fact projects cost more in the end than initially indicated. Having been involved in major capital projects for more than 50 years, I can provide some insight as to why this happens.

The first thing to realize is that the true final cost of a project is only known after the project is completed, the contractor paid and all claims settled. Until that stage of a project, all cost figures are estimates. Obviously, the closer the project gets to completion, the closer the estimate will be to the final cost.

In the planning stage, it is not uncommon to include a 25 percent contingency amount in the estimate to cover future uncertainties. I have seen projects with a 50 percent contingency amount!

When the materials and work can be better defined, the contingency amount is usually reduced. Normal contingency estimates used just prior to soliciting bids are between 10 percent and 15 percent. This engineer's estimate is usually used to establish the construction appropriation.

Assuming the project goes forward, incidents can cause the need for use of whatever contingency amounts are included in the appropriation. The city of Beverly Hills, Calif., in expanding its city hall, ran into unexpected asbestos that had to be cleaned up before the project continued. I understand that cleanup cost the city about $1 million.

Finally, after all of the construction is completed the owner and contractor must address claims made during construction and not addressed at that time. This adds to the cost in man power and monetary amounts.

The above addresses some of the pitfalls with respect to normal capital construction programs. There is, however, another element in the equation, and that is the efforts of people to sell a project to the decision-making body. That body may be the borough Assembly, state legislature or the general public. Knowing that a high planning estimate will not be looked on favorably, the project is estimated in the planning stage at the lowest reasonable amount for the decision-makers. It is no surprise that many projects come in over budget.

Roger Allington

Bellevue, Wash.

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