Government Infrastructure Spending Beset with Widespread Cost Overruns*

By KEN WYSOCKY | Spring 2022

With cost overruns on bridge, road and other infrastructure megaprojects in Wisconsin as certain as death, taxes and Packers’ title-run failures, budget hawks are on high alert with new federal money about to inundate the state.

The Infrastructure Investment and Jobs Act is expected to spread an additional $5.4 billion out over the next five years, on top of the $1.4 billion to $2.2 billion in state and federal funding the Badger State has spent annually on highway construction alone.

“For many decades ... infrastructure projects and cost overruns have gone hand in hand,” says state Sen. Duey Stroebel (R-Saukville). “While some infrastructure projects have been far more egregious than others, we’ve historically seen cost overruns of 25 to 50 percent for transportation projects and projected benefits that often fail to fully materialize.” Even The New York Times, often a booster of government spending, warns of “Years of Delays, Billions in Overruns: The Dismal History of Big Infrastructure.”

And along with the waste, 10% — or roughly $540 million — of Wisconsin’s Infrastructure Act money could be used fraudulently, says Stephen Street, state inspector general for Louisiana and president of the Association of Inspectors General.

"There's built-in fraud with such a gargantuan amount of money," Street says. "Any time you have that amount of money, it's almost impossible to oversee every dime... it just can't be done. There's not enough personnel, not enough man hours in a day.

"And at the end of the day, it all comes out of taxpayers' pockets."

Egregious examples

Even the most ardent proponents of big-government spending on infrastructure can’t deny Wisconsin’s sad history of cost overruns:

  • The recently completed, six-year project to widen I-39/I-90 from Madison to the Illinois state line, originally estimated to cost $715 million, came in at more than $1.2 billion.
  • The cost of reconstructing part of Madison's Beltline (U.S. Highway 12), initially budgeted for $150 million, now is expected to almost double.
  • An expansion of the Babcock Hall Dairy Plant at the University of Wisconsin-Madison was, at last count, more than $33 million over budget.
  • A bridge over the St. Croix River between Oak Park Heights, Minnesota, and St. Joseph, Wisconsin, cost $27 million more than its initial $647 million price tag.

The national examples — the Los Angeles-to-San Francisco bullet-train project, $70 billion over budget and counting; and the Big Dig, the highway, bridges and tunnel project in Boston, that ran roughly $20 billion over budget — are legendary. 

A study of 258 large transportation projects built between 1927 and 1998 in 20 countries found that 90% of projects were more expensive than expected. Rail projects ran an average of 45% above estimates; tunnels and bridges an average of 34% more expensive; and road projects an average of 20% over budget.

Bent Flyvbjerg, co-author of the study and perhaps the world’s preeminent expert on infrastructure costs, calls it the Iron Law of Megaprojects. These projects always are “over time, over budget, under benefit, over and over again.”

Audit criticizes practices

Wisconsin's Legislative Audit Bureau (LAB)— an independent, nonpartisan arm of the state Legislature — often has criticized the Wisconsin Department of Transportation's (WisDOT) budgeting practices for highway programs.

An LAB spokesperson declined requests to answer questions about those criticisms and instead referred the Badger Institute to State Highway Program, a 5-year-old study. Although a bit dated, the report is damning.

The cost of 19 major road projects from 2006 to 2015 totaled about $1.5 billion — roughly twice as much as the original $772 million total estimates. Another 16 projects underway in 2016 cost $5.8 billion, more than twice the initial $2.7 billion estimate.

WisDOT is not consistently using its performance measures to manage and improve its operations, State Auditor Joe Chrisman said in the report.

"We make recommendations for DOT to use its funds more effectively and improve its management of the state highway program," the report says. "In addition, the legislature could consider modifying statutes to require DOT to provide it with cost estimates that include all costs associated with potential projects, including the effects of inflation, and to regularly report information to it about the ongoing costs of each major highway project."

Why are cost overruns so pervasive? “The larger the project, the greater the likelihood the costs of materials, labor and other inputs will change in ways that were not properly accounted for at the front end,” Stroebel says. The layers of bureaucracy, regulations and labor requirements that accompany federal funding for infrastructure projects only add to those costs.

Strong civil service and union protections make it difficult to control labor costs and discipline managers for poor cost estimates, according to a report compiled in 2015 by Chris Edwards and Nicole Kaeding of the Cato Institute.

Steve Hanke, who has been studying infrastructure projects for more than 50 years, lays the blame on bloated government agencies not held accountable for budgeting, planning and cost-benefit errors in the same way as private companies. 

Hanke, a professor of applied economics at The Johns Hopkins University in Baltimore and a water infrastructure specialist on President Ronald Reagan's Council of Economic Advisers, calls it "the bureaucratic rule of two." A public infrastructure project will cost twice as much compared to a private company doing the same project.

“Private companies build infrastructure all the time that’s on time and on budget,” he says. “They know shareholders don’t want projects coming in late and over budget because that reduces profits and dividends.

“But with government, who cares about cost overruns? They’re irrelevant. Name one politician who gets in hot water because of cost overruns. It just doesn’t happen.”

Stroebel agrees, noting that most privately funded projects that don’t pass cost-benefit muster probably would be abandoned.

“There is no similar built-in corrective mechanism for government projects that run over budget,” he says.

“The politicization of infrastructure spending and decision-making also exacerbates these problems, as bringing home the bacon for one’s legislative district too often trumps the careful consideration of opportunity costs and crowds out the private sector.”

Intentional lowballing?

But Flyvbjerg sees something more dishonest: the practice of intentionally underestimating costs to win approval for projects that wouldn’t make sense economically if the true costs were known upfront.

In a pair of studies, Flyvbjerg asserts that cost estimates and cost-benefit analyses used to calculate the viability and ranking of projects are “highly systematically and significantly deceptive.” He calls this lowballing “strategic misrepresentation.”

"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," he wrote in a followup study.

"If people knew the real cost from the start, nothing would ever be approved," former San Francisco Mayor Willie Brown once wrote. "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."

If officials often understate costs, they very often overstate infrastructure project benefits, too. A Federal Transit Administration survey of 27 public transit projects that opened between 2007 and 2015 found that ridership two years after opening was on average 21% lower than had been estimated. Designers overestimated ridership by a whopping 77% for projects that opened between 1990 and 2002, according to the study.

Any cures?

Is there anything Wisconsin officials can do to minimize cost overruns? Hanke suggests a model used in France, a combination of public financing and building contracts managed by private-sector inspectors.

"The government also imposes huge penalties for cost overruns," Hanke says. "France is the only country that efficiently handles public infrastructure."

Flyvbjerg suggests a close review of the outcomes of similar projects to root out biases from past cost-benefit analyses. Analysts should be given incentives for accurate forecasts and severe penalties for erroneous forecasts, he says. 

Agencies should solicit critiques of projects from independent engineers and economists and make detailed evaluations of projects after they are completed, so that policymakers and contractors can learn from thier mistakes, Edwards and Kaeding recommend in their report.

Stroebel advocates for tighter supervision of projects. He also proposes establishing mechanisms in which those who compile cost-benefit forecasts be held accountable for inaccurate forecasts. At the very least, their work should be scrutinized by independent, third-party audits or reviews.

"These are ideas worth exploring to ensure there is more accountability in what has otherwise been a broken process," says Stroebel.

Deeply ingrained processes and political forces make these changes seem wishful. After the legislature enacted accountability provisions for projects, prompted by the Legislative Audit Bureau's criticism of WisDOT five years ago, the MacIver Institute uncovered an internal LAB memo saying WisDOT wasn't following the new laws.

WisDOT's track record on project oversight, Stroebel says, "doesn't inspire much confidence."

Without a commitment to oversight, expect projects that will be too big and too expensive to stop.

Ken Wysocky of Whitefish Bay is a freelance journalist and editor.

*The headline on the print version of this story was “On the road to waste & fraud.” The sub-headline was “Lost and squandered millions are as much a part of infrastructure projects as concrete and rebar.”

Read more Diggings

WisDOT officials defend some infrastructure practices – not responsive on others

This sidebar was left out of the print version of the magazine for space purposes.

By Ken Wysocki | May 9, 2022

During the next five years, the Wisconsin Department of Transportation (WisDOT) will have a lot to say about how to spend $5.4 billion state share of federal infrastructure funding.

WisDOT declined a request to interview someone about that spending and the agency’s dismal track record on cost overruns on major infrastructure projects. The department agreed to answer some of our questions by email while sidestepping others. The department did not respond to an email with follow-up questions.

For brevity’s sake, this is an edited version of the department’s statement, which amounts to a defense of its processes and procedures:

  • The department uses a “thorough process” to document contract modifications that exceed the construction budget. Changes are only approved if needed to produce a quality product and/or to address issues that were unknown at the time of design.
  • The department strives to have final project costs as close as possible to the amount that was originally budgeted. While staying within budget is important, WisDOT’s top priority is delivering a quality project. Therefore, project costs may increase through change orders due to issues recognized in the field.
  • There are unknowns associated with most projects. For example, a project might have isolated subsurface conditions different than expected that require excavation and replacement. Eliminating all unknowns with extensive testing prior to collecting bids would not be cost-effective. Instead, a project team evaluates every change request and determines if it is justified, based on the scope and cost of work.
  • The department tracks on-budget performance with a performance-measurement tool called MAPSS (Mobility, Accountability, Preservation, Safety and Service). The department aspires to hold project change orders to an average within 3% of the original contract amount, well under the industry average of 5%.

WisDOT, however, is making progress, says state Sen. Robert W. Cowles (R-Green Bay), vice chair of the Senate Committee on Transportation and Local Government and co-chair of the Joint Legislative Audit Committee. Craig Thompson was appointed secretary of the department in 2019.

 “Anytime there’s a lot of money flopping around, there’s definitely the potential for waste,” Cowles says. “But until we know better, I’m not going to throw them (WisDOT) under the bus.

 “They got pounded pretty good by the last audit, but I think they’ve made a lot of improvements … and have been pretty responsive. So, until there’s another audit, I feel pretty good about it.”

Cowles also wants the state Legislature to take more responsibility for adding projects to WisDot’s priority list, even when it doesn’t know where the funding will come from.

— Ken Wysocky