Project Management29 December 2024

The Cost of Underestimation: A Review of Front-End Cost Estimation in Major Public Projects

Introduction

Cost estimation in major public projects is a critical process that significantly influences project selection, resource allocation, and overall project success. Accurate cost estimates during the front-end phase are essential for ensuring that public funds are used effectively and that projects deliver the intended value for society. However, numerous studies have documented a consistent trend of cost underestimation and overruns in public projects. This literature review aims to summarize, synthesize, and evaluate the existing research on cost estimation practices in the front-end phase of major public projects, highlighting the main themes, points of agreement and debate, research gaps, relevant methodologies, and the development in the field. This analysis will help to provide a comprehensive understanding of the challenges and opportunities associated with achieving realistic cost estimates in the early stages of public projects.

Overview of the Front-End Phase

The front-end phase of major public projects, also referred to as the concept or initiation phase, is the period where the business case is developed and the initial decision to fund the project is made. This phase is characterized by high uncertainty and a lack of information regarding important parameters such as scope, historical input data, and other crucial project details. The front-end phase is critical because it sets the direction for the entire project, making it essential to have realistic cost estimates to avoid selecting unsuitable projects. Despite its importance, the front-end is an understudied topic in project management literature. There is no universal definition of the front-end phase, as it depends on how the project itself is defined. This review focuses on the initial part of the process, particularly the first conceptual cost estimate.

III. Main Themes in Cost Estimation Research

Research on cost estimation in major public projects reveals several recurring themes:

Challenges with Unrealistic Cost Estimates:
Numerous studies document that cost estimates in different project stages and subsequent budgets have been too low. Flyvbjerg et al. (2002), Love et al. (2022) and Morris and Hough (1987) are among those that document this trend.
There are many examples of significant cost increases between the front-end and later project stages. For example, Welde and Odeck (2017) found a mean cost increase of 53% from the initial conceptual project description to the formal investment decision for road projects. In some cases, cost increases have been more extreme, with some projects experiencing increases of over 500% between the front-end and start of project execution.
Unrealistic cost estimates in the front-end can lead to the selection of the wrong projects for further development or the persistence with inefficient project proposals, resulting in a poor allocation of public funds. Eliasson (2023) argues that this systematic problem distorts project selection and design, ultimately leading to less benefit for society.
Uncertainty in Cost Estimation:
The front-end phase is characterized by high uncertainty due to a lack of information and undefined scope.
Uncertainty can be categorized into resolvable uncertainty (epistemic), which can be reduced over time with more information, and radical uncertainty (ontological), which is associated with unforeseen events that cannot be predicted.
Managing uncertainty is crucial for effective project management, and it encompasses various dimensions, including financial, technical, regulatory, environmental, stakeholder, and schedule uncertainties.
Flyvbjerg and Budzier (2011) discuss the concept of "black swans" – rare, unpredictable events with massive impacts – noting that 1 in 6 of the studied projects were black swans, with an average cost overrun of 200%.
Practices for Realistic Cost Estimates:
The organization and management of the estimation process are as important as applying specific models or methods.
The importance of historical data in improving cost estimates is widely recognized. However, there is a need for improvement in the collection, storage, and accessibility of such data.
A well-planned and structured estimation process with the right experts is critical. Torp and Klakegg (2016) emphasize the importance of having the right experts and a structured approach.
Using top-down models and conceptual cost-estimating practices based on expert opinions can produce fast and reliable results in the early stages of a project.
Uncertainty analyses are considered a vital part of the estimation process and should provide guidance for subsequent processes. However, there is room for improvement in how these are conducted and how their results are implemented.
Proper documentation of the estimate throughout the process, along with clear communication of uncertainty to decision-makers, is also emphasized as a crucial part of a realistic estimation process.

Methodologies in Cost Estimation Research

The methodologies used in cost estimation research vary. The research in the provided sources primarily uses a qualitative approach, including semi-structured interviews and workshops, to gather data and understand the lived experiences of cost engineers. This is complemented by a systematic literature review, which includes empirical studies from construction and infrastructure projects. Other studies focus on the quantitative evaluation of different estimation models through formal testing. These studies often highlight and test specific models or approaches, such as Building Information Modeling (BIM), Reference Class Forecasting (RCF), and the Multistep Ahead (MSA) approach. Some studies emphasize the importance of input data quality, risk factor identification, and the cost-effectiveness of the estimation process. Overall, the methodologies used aim to enhance the efficiency and accuracy of cost estimation practices in the front-end of major projects.

Points of Agreement, Debate, and Research Gaps

Agreement:
There is a strong consensus that realistic cost estimates are critical in the front-end of major public projects to ensure effective project selection and resource allocation.
The impact of uncertainty on cost estimation is also widely acknowledged, and there is a general agreement that managing uncertainty is essential for effective project management.
The importance of historical data and expert input in improving cost estimates is also agreed upon. Using historical data in cost estimation is recognized as valuable to establish a starting point and a basis for comparing alternatives.
The need for a well-planned and structured estimation process that includes the right experts is also generally accepted.
Debate:
While many studies focus on the evaluation of specific methods and models like BIM, RCF or MSA, there is also a view that the organization and management of the overall process may be more important than the application of any specific model or method.
There is debate on the extent to which uncertainty can be managed in the front-end, especially concerning radical uncertainty and "black swan" events.
There is also a debate regarding whether external factors (political influence, stakeholder pressure, etc.) or internal practices (poor documentation, insufficient expertise etc.) are the most significant contributors to estimation inaccuracy.
Research Gaps:
There are limited studies on practices to ensure realistic cost estimates specifically in the front-end, with much of the focus being on cost performance in later stages of a project.
There is a need for more research on how to improve the current practices of cost engineers to enhance the accuracy of their estimations.
There is a scarcity of research on the organization and management of the cost estimation process itself, as opposed to a focus on methods or models.
There is a lack of focus on the evaluation of cost estimation outcomes, i.e. whether estimates actually match the final costs of a project.
More research is needed on the human factor and the impact of leadership styles on the cost estimation process.
There is a lack of research on how to improve the use of historical data sets, with suggestions that better sharing, storage, and structuring of these data sets is needed.

Development in the Field

The field of cost estimation in major public projects has evolved over time, with some key shifts in emphasis and understanding:

There has been a shift from a focus on specific models or methods to emphasizing the importance of the overall estimation process, with an emphasis on the organization and management of the estimation team.
There is an increased recognition of the critical role of uncertainty management in cost estimation, acknowledging that the front-end is characterized by both resolvable and radical uncertainty.
There is a greater awareness of the need for interdisciplinary input and a holistic perspective in the estimation process, acknowledging that stakeholders often view projects from different perspectives.
There is now more emphasis on the importance of documentation throughout the entire cost estimation process, and the need to improve the accessibility of historical data and to communicate the uncertainties in the estimates to decision-makers.

VII. Critical Insights and Synthesis

This body of work collectively highlights that cost estimation is not an isolated technical activity but is influenced by a complex interplay of internal and external factors. The research emphasizes the need to balance the technical aspects of cost estimation (such as the use of specific methods and models) with organizational, communicative, and human factors. The available literature suggests a shift from focusing on the technical aspects of cost estimation towards the importance of managing uncertainty through the entire process. Despite various techniques and methods being developed, cost overruns remain common. This suggests that a more holistic view of the problem is needed that takes into consideration the entire process, not just the specific models used.

The lack of research on evaluating cost estimation outcomes is a significant gap, suggesting that future studies should evaluate how different estimation practices affect the final costs of projects. Furthermore, there is a need to acknowledge the difference between radical and resolvable uncertainty in the front-end, as this distinction impacts the practices that can be used to improve estimation accuracy. Focusing on what we do not know and on uncertainty, both resolvable and radical, is crucial for better analysis, realistic cost estimates, and a reasonable basis for decision-making and project management. The literature also emphasizes that the front-end estimate is not intended to be a final budget, but rather to provide decision-makers with enough information to avoid unsuitable projects.

VIII. Conclusion

The literature on cost estimation in major public projects highlights the persistent challenge of achieving realistic cost estimates in the front-end phase. The research has moved from a focus on specific models and methods to recognizing the significance of the organizational and management aspects of the estimation process, as well as an emphasis on uncertainty management. The main themes include the challenge of cost underestimation and overruns, the impact of uncertainty, and the practices that can be used to ensure realistic cost estimates. Points of agreement include the criticality of realistic estimates, the role of uncertainty, historical data, and expert input, whereas points of debate include the importance of specific models vs the overall process, and the role of external vs internal factors. The identified research gaps are related to a lack of research in the front-end of projects, insufficient evaluation of the cost estimation outcomes, as well as the need for further understanding of the role of the human factor and leadership styles on the cost estimation process.

Future research should focus on addressing these gaps through empirical studies, evaluating the effectiveness of various organizational practices, and developing robust methods for dealing with both resolvable and radical uncertainty. Ultimately, the literature emphasizes that a focus on managing uncertainty, along with a holistic approach to the estimation process, is essential for achieving realistic budgeting and responsible decision-making in major public projects.

(Berg et al., 2025)

What is the "front-end" phase of a major public project, and why is it so critical?

The front-end phase, also known as the concept or initiation phase, is the early stage of a project where the business case is developed and the initial decision to fund the project is made. It's crucial because it sets the direction for the entire project. Decisions made in this phase determine if a project is worth pursuing, so it is critical to get the cost estimates as accurate as possible to avoid wasting resources on projects that don't make sense. The front-end is characterized by high uncertainty and a lack of detailed information, but it is also the phase where the most impact can be made to the overall success of the project.

Why are cost estimates often inaccurate in the front-end phase of major public projects?

Cost estimates in the front-end phase are frequently inaccurate due to a number of factors, including: a high degree of uncertainty because the project scope is not well-defined; a lack of access to reliable historical data; and pressure from stakeholders and decision makers to keep costs low. Additionally, cost engineers may dive into too much detail too early, which obscures underlying uncertainties and leads to an overly optimistic estimate that doesn't account for unknowns. There is also a tendency to use what is at hand and quantify what can be easily quantified which can cause an availability bias, and important risks may be missed.

What are the key challenges in conducting uncertainty analysis during the front-end phase?

Uncertainty analysis is critical in the front-end to understand potential cost variations, but it is also challenging. One major challenge is the lack of a shared understanding of what uncertainty means. Decision-makers often desire a single, precise number rather than understanding the uncertainty range in the estimate. Cost engineers also struggle to balance addressing known uncertainties while accounting for unpredictable, "radical" uncertainties, or "unknown unknowns" that cannot be predicted with current estimation methods. The use of external expertise for uncertainty analysis can also impact the continuity of the process.

What role does historical data play in cost estimation, and what are the challenges in using it effectively?

Historical data is essential for establishing a starting point for cost estimates and comparing different options in the front-end phase. However, challenges in utilizing such data include its inconsistent storage across different agencies and its lack of accessibility. Data is often kept in arbitrary “individual systems” rather than centrally maintained, and is not always openly shared. This limits its effectiveness and prevents project teams from learning from past experiences. There is also the risk that the existing datasets are not structured enough for effective use.

How does the organization and management of the cost estimation process affect the accuracy of estimates?

The organization and management of the cost estimation process are vital for achieving realistic estimates and, according to this research, are more important than relying on any single estimation model or method. This includes factors like ensuring a clear scope, providing sufficient time for iterative estimations, establishing guidelines for a shared understanding of terminology, facilitating access to historical data and promoting information sharing between projects. These are factors that are outside the control of the estimation team and highlight the importance of the agency or project leadership to set up the best practices to enable more accurate estimates.

How does the "human factor" impact cost estimation in the front-end phase?

The "human factor" significantly influences cost estimation due to the different perspectives and expertise brought by team members. This is especially important during the uncertainty analysis, which requires experienced people that can challenge the assumptions that are often implicit in project management. The ability to maintain a holistic view and challenge biases also depends on the competence of the individual in charge of the estimation process. Also, individual biases and pressures from decision-makers can also impact the accuracy of cost estimates by leading to overly optimistic outcomes.

What are the key recommendations for improving cost estimation practices in the front-end?

Several recommendations are provided to improve cost estimation practices, including: (1) Better documentation of assumptions and background for the estimate, (2) clearer mandates outlining the purpose and scope, (3) recognizing the complex front-end context and understanding uncertainty (4) utilizing a top-down approach to avoid premature detail, (5) allowing sufficient time for multiple iterations of the estimate, (6) focusing on what we do not know rather than what we are sure of, (7) promoting dialogue before, during, and after estimation, and (8) communicating the uncertainty inherent in the estimates.

Why is focusing on uncertainty so important for cost estimation in the front-end?

Focusing on uncertainty, rather than just on what is known, is crucial for realistic budgeting and responsible decision-making. The front-end is characterized by a high degree of uncertainty, which includes both resolvable uncertainty (known unknowns) that can be reduced over time and radical uncertainty (unknown unknowns) that cannot be predicted. By focusing on both types of uncertainty the estimation teams can avoid over-precision when it is not warranted and can encourage decision makers to take uncertainty into account rather than thinking a cost estimate represents the absolute cost of the project. This also pushes the project teams to focus on project design which can mitigate the risk of more radical uncertainties having an outsized impact on the project.

Reference:

Berg, H., Strand Alfredsen Larsen, A., Klakegg, O. J., & Welde, M. (2025). Cost estimation in major public projects’ front-end phase: An empirical study on how to improve current practices. Project Leadership and Society, 6. https://doi.org/10.1016/j.plas.2024.100171