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The Importance of Cost Control


If I had an hour to talk about high-speed rail in Canada, I would spend the first 50 minutes talking about cost control.


This is not hyperbole. Cost control is that important for the success of high-speed rail in Canada.


It will make it or break it.


Cost control can be the difference between a project being profitable and bleeding money over its lifespan. It can be the difference between a project being a no-brainer and a white elephant. It can be the difference between a project becoming reality and remaining ‘lines on a map’.


Costs have gotten out of control in North America and this is well-documented. It has delayed many projects and prevented others from being built.


So how do we prevent a similar fate for high-speed rail in Canada?


How do we keep costs under control and make it a reality?


Overbuilding, Overcharging and Nasty Surprises


If we want to get costs under control, we need to understand the nature of the current cost escalation. Contrary to conventional wisdom, it is not primarily a result of rising labour or material costs. It is the result of overbuilding, overcharging and what I call ‘nasty surprises’.


Overbuilding is when excessive amounts of infrastructure are built that cannot be justified for reasons of future-proofing. We see this when transit planners try to make every station a cathedral, politicians demand a circuitous alignment or when contractors specify grade separations 2 m higher than they need to be.


Overcharging is self-explanatory and happens when the contracting party doesn’t have a good sense of what things should cost.


‘Nasty Surprises’ is any unplanned disruption and includes workers’ strikes, construction difficulties and contract disputes. They can lead to massive cost overruns. With any project comes unpredictability, however, the probability and effect of nasty surprises can be minimized or amplified depending on how the project is managed and structured.


If we’re going to keep costs under control, our solutions will need to address these three things.


Now let’s go over them.


Cost-Control Measure #1: In-House Expertise


A lack of in-house expertise is perhaps the most commonly cited cause of recent transportation project cost escalation. Imagine going to a car dealership without having done any research. What do you think the car salesman would recommend to you? They would probably overcharge you and recommend unnecessary and costly features. The same happens in the transportation industry when the government lacks any expertise of its own: consultants overcharge and specify excessive designs and requirements.



In-house expertise keeps contractors honest. It helps prevent overbuilding as the project is being planned by a team whose goal is to keep costs down. In places where costs are controlled effectively, projects are planned to an advanced stage in-house.


If you are a planner or a consultant, this may sound like I am attacking your livelihood. However, one needs to look at the bigger picture; if large projects such as high-speed rail succeed, there will be more work and opportunities for everyone in the future.


Cost-Control Measure #2: Smart Tendering Practices


Most projects in North America are contracted out as big lump-sum projects with hefty contingencies. The former increases risk and the latter attempts to reduce risk but actually just increases costs. (Contractors will always find ways to eat into the contingency no matter how big. In Italy, a country where project costs have been largely controlled, budgets typically have a maximum contingency of 10%.)



Tendering should instead be handled in a way that fosters competition and reduces risk. Instead of tendering out an entire project to one consortium, they should be broken into smaller pieces. This creates competition, thereby driving prices down and providing redundancy; if one of the contractors fails, there are others ready to pick up the slack.


Tendering should also employ itemized price lists. With itemized price lists, each bidder states the quantity and price of each item. This allows evaluators to filter out bidders who are grossly overbidding or underbidding. It also mitigates the risk from change orders, which can lead to significant delays, litigation and cost overruns. A project can be adjusted by simply changing the number of items required.


Cost-Control Measure #3: Accountability and Independence


In Italy, there are appointed officers who are accountable for the success of a transportation project and ensure that changes made during the course of the project are reasonable. This helps protect the project not only from expensive change orders but also from politicians who may want to make politically opportunistic though costly changes to the project. Politicians have a role to play but only at the vision level, not when it comes to project specifics. Theses practices ensure they stay in their lane.


Cost-Control Measure #4: Lining Up the Ducks In Advance


An ounce of prevention is worth more than a pound of cure. It's important to have as much settled as possible before construction begins as delays during construction mean cost overruns. Public consultation should take place so that any alignment and design issues can be resolved well before the project's start date. Labour agreements, building codes and standards should be in place for the duration of the project well before any shovels are put in the ground.



By employing these cost-control practices, there is no good reason why we can’t build large transportation projects at a similar cost to what is seen in Italy, Spain or France. Designing the management, planning and procurement practices needs to be given as much (or perhaps more) attention and care as the high-speed rail system itself.


If you want to learn more about how high-speed rail can become a reality in Canada, please check out Build It Right - A Study on High-Frequency Rail/High-Speed Rail in Canada.





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