Case Study

Determining the Probability of Project Cost Overruns

Peter E. D. Love1; Xiangyu Wang2; Chun-pong Sing3; and Robert L. K. Tiong4

Abstract: The statistical characteristics of cost overruns experienced from contract award in 276 Australian construction and engineering
projects were analyzed. The skewness and kurtosis values of the cost overruns are computed to determine if the empirical distribution of the
data follows a normal distribution. The Kolmogorov-Smirnov, Anderson-Darling, and chi-squared nonparametric tests are used to determine
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the goodness of fit of the selected probability distributions. A three-parameter Frechet probability function is found to describe the behavior of
cost overruns and provide the best overall distribution fit. The Frechet distribution is then used to calculate the probability of a cost overrun
being experienced. The statistical characteristics of contract size and cost overruns were also analyzed. The Cauchy (< A$1 million), Wakeby
(A$1 to 10 million, < A$101 million) and four-parameter Burr (A$11 to 50 million) tests were found to provide the best distribution fits and
used to calculate cost overrun probabilities by contract size. Ascertaining the best fit probability distribution from an empirical distribution at
contract award can produce realistic probabilities of cost overruns, which should then be incorporated into a construction cost contingency.
DOI: 10.1061/(ASCE)CO.1943-7862.0000575. © 2013 American Society of Civil Engineers.
CE Database subject headings: Australia; Construction costs; Probability; Project management.
Author keywords: Australia; Cost overrun; Distribution fitting; Probability; Probability distribution.

Introduction
The ability to make accurate cost predictions is critical to successful
project delivery. In an attempt to assess the likelihood of cost
overruns and put in place mechanisms to reduce their impact,
several techniques have been espoused (Jahren and Ashe 1990;
Birnie and Yates 1991; Attala and Hegazy 2003; Flyvbjerg
2008; Bhargava et al. 2010). Despite the application of such
techniques as well as the adoption of innovative organizational
and managerial practices, cost overruns in projects remain a
pervasive problem (Hester et al. 1991; Ibbs and Allen 1995; Love
2002; Bhargava et al. 2010). Cost overruns have been attributed
to the occurrence of optimism bias or strategic misrepresentation
during the formation of a project’s budget (Flyvbjerg 2007a, b).
Optimism bias is the demonstrated systematic tendency for
people to be overly optimistic about the outcome of planned
actions (Kahneman et al. 1982; Lovallo and Kahneman 2003).
This includes overestimating the likelihood of positive events and
underestimating the likelihood of negative events. Alternatively,
strategic misrepresentation is the planned, systematic distortion
or misstatement of fact; it is essentially lying (Jones and
Euske 1991).
1
John Curtin Distinguished Professor, School of Built Environment,
Curtin Univ., GPO Box U1987, Perth, WA 6845, Australia (corresponding
author). E-mail: p.love@curtin.edu.au
2
Professor, School of Built Environment, Curtin Univ., GPO Box
U1987, Perth, WA 6845, Australia. E-mail: x.wang@curtin.edu.au
3 such as a Cauchy. Fitting an empirical distribution to data can
Senior Lecturer, School of Built Environment, Curtin Univ., GPO Box
U1987, Perth, WA 6845, Australia. E-mail: chunpong.sing@curtin.edu.au
4
Associate Profesor, School of Civil and Environmental Engineering,
Nangyang Technological Univ., Singapore. E-mail: CLKTIONG@ntu
.edu.sg
Note. This manuscript was submitted on August 11, 2011; approved on
January 31, 2012; published online on April 28, 2012. Discussion period
open until August 1, 2013; separate discussions must be submitted for in-
dividual papers. This paper is part of the Journal of Construction Engi-
neering and Management, Vol. 139, No. 3, March 1, 2013. © ASCE,
ISSN 0733-9364/2013/3-321-330/$25.00.
To assume that the aforementioned factors are the primary con-
tributors to cost overruns neglects the underlying complexity asso-
ciated with the design and construction process (Love et al. 2012).
As more information about a project’s requirements, specifically
those of a client, becomes available during the design process,
the budget that is established during feasibility is modified.
At the contract award, the expected cost to a client can be affirmed
and a reliable reference point can be established for determining a
project cost’s overrun. From this point, factors contributing to
cost overruns include material and labor shortages, price inflation,
rework, change orders, site access, unexpected site conditions,
and unforeseen events (Arditi et al. 1985; Semple et al. 1994;
Chang 2002; Knight and Fayak 2002; Gkritza and Labi 2008;
Love et al. 2011). Such causes may not have been considered
at the award of contract and typically arise during construction.
With a sufficient data set of projects, however, the probability
of a cost overrun from a contract’s award can be determined
(Jahren and Ashe 1990; Birnie and Yates 1991; Gkritza and
Labi 2008).
A cost overrun can be classified as a “random continuous var-
iable” because it can take an infinite range of values (Jahren and
Ashe 1990). Typically, the probability density function (PDF) of a
normal (otherwise known as Gaussian) distribution has been used
to determine project cost overruns (e.g., Flyvbjerg 2007b). A nor-
mal distribution is symmetric about its mean value and therefore
cannot be used to accurately model left- or right-skewed data.
Even if cost overrun data are symmetric by nature, it is possible
that they are best described using heavy tailed distribution models
be a difficult task considering the array of statistical distribution
choices that are available. The selection of an inappropriate statis-
tical distribution can produce incorrect probabilities, which can
adversely affect decision making and therefore lead to negative
outcomes. In addressing this shortcoming, this paper uses data
derived from 276 completed Australian construction and engineer-
ing projects to determine the “best fit” distribution so that a realistic
probability of project cost overruns from contract award can be
determined.

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J. Constr. Eng. Manage. 2013.139:321-330.

 Cost Overruns Table 1. Descriptive Statistics for Cost Overruns
Statistic Value
The term cost overrun is often referred to as a budget increase, cost
increase, or cost growth. A cost overrun should, however, be Sample size 276
distinguished from cost escalation, which is used to express an an- Range 328.35
Mean 12.22%
ticipated growth in a budgeted cost due to factors such as inflation.
Variance 426.54
A lack of a standard definition juxtaposed with the inappropriate Standard deviation 20.65
distribution models has contributed to the formulation of inaccurate Coefficient of variation 1.689
cost overrun probability forecasts. Nijkamp and Ubbels (1999), Standard error 1.243
Flyvbjerg et al. (2002), and Odeck (2004), for example, defined Skewness 5.549
a cost overrun as the difference between forecasted and actual con- Excess kurtosis 60.25
struction costs. In this instance, the budget at the decision to build is
used as the reference for determining the overrun that may be
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incurred (Fig. 1). Actual construction costs (Acv ) are defined as
accounted construction costs at the time of project completion.
An alternative definition and reference point for determining a cost
overrun have been provided by Rowland (1981), Hinze et al.
(1992), and Zeitoun and Oberlander (1993), who suggested that
it is the difference between the original contract value (Ocv )
(i.e., contract award) and Acv at practical completion. The discrep-
ancy between definitions presented has contributed to significant
variability in the cost overrun percentages that have been reported
in the normative literature.
Table 1 provides a summary of studies that have examined cost
overruns in construction and engineering projects. The Auditor
General of Sweden (1994), for example, revealed that the average
cost overrun for eight road projects was 86%, with a range of −2 to
182%. In contrast, Odeck and Skjeseth (1995) examined 12 toll
projects and found the average cost overrun to be 5%, with a range
of −10 to 170%. In a further study undertaken by Odeck (2004), a
mean cost overrun of 7.9% and a range of −59 to 183% was re-
ported for 420 road construction projects. For bridges and tunnels,
Skamris and Flyvbjerg (1996, 1997) found the cost estimates from
the decision to build to actual completion experienced a cost
overrun of 50 to 100% (Table 1).
Issues relating to project types and their influence on cost
overruns have been examined and are subject to ongoing debate.
Flyvbjerg et al. (2002) revealed that there was a significant differ-
ence between the mean cost overruns for different project types
but not for geographical location. Conversely, however, Odeck
(2004) observed that project type did not influence the level of cost
overrun incurred.
Cost Overrun Determination
In Fig. 1 the project development process is identified along with
the reference points that are used to determine a cost overrun. As
noted previously, between the budget to contract award (between
Activities A and H), which is denoted as the Ocv , estimating
accuracy can be affected by an array of factors such as process char-
acteristics and knowledge, the degree of project definition, incen-
tives for accurate estimation, and human judgment and bias. Project
costs, however, increase either by changing their character or
changing the economic and institutional environment in which
they develop. Distinguishing between the factors that increase
project costs and those that affect the accuracy of estimates is
pivotal to determining an accurate cost overrun probability. The
percentage increase from the estimate when the decision to build
is made to contract award needs to be determined and separated
from a cost overrun analysis. When this is done, an appropriate
contingency at the decision to build can be determined and used

Fig. 1. Project development process: determination of cost overrun

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J. Constr. Eng. Manage. 2013.139:321-330.

 to ensure a higher degree of estimating certainty about the expected
construction costs at contract award.
When large infrastructure projects, for example, are announced,
governments customarily inform the public of the projects’ ex-
pected budget. An air of skepticism pertaining to the budgeted cost
prevails within the public domain as it is widely accepted that the
forecasted costs will increase. From the time when a project is
budgeted and announced to the actual commencement of construc-
tion may take years and therefore leave the project susceptible to
cost increases. Furthermore, depending on the size and complex-
ity of the project, its physical construction can also take several
years. The Fiona Stanley Hospital (FSH), currently under construc-
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tion, in Perth, Western Australia (WA), is the state’s largest social
infrastructure project ever. In 2004 it was originally budgeted at
A$420 million, and after 4 years of planning and design a revised
budget of A$1.76 billion was established. Before construction had
even commenced the project had overrun its original budget by
320%. In 2010 the WA auditor general concluded (WA Auditor
General 2010a, p. 5):
: : : the opening date is between three and a half and four
years later than originally planned. In common with other
capital projects, the original estimates were unrealistic and
were not based on a good understanding of what this major
project would involve. Better definition of the requirements
of the hospital has resulted in scope changes which have
increased forecast costs, and delayed the opening.
The revised budget did not include the essential fit-out needed to
run a working hospital. However, construction and building works
accounted for only A$755 million of the revised 2008 budget.
Other major budgeted items included escalation due to inflation
(A$431 million), professional fees (A$186 million), and a contin-
gency (A$110 m).
The Perth Arena project currently being constructed has been
subjected to a significant cost overrun. With an original bud-
get of A$160 million established in 2005, it was expected to be
fully operational by 2009. Poor governance and significant
changes in scope have resulted in significant cost and schedule
blowouts, and when completed the total estimated cost is expect-
ed to exceed A$500 million (i.e., more than a 200% increase).
In 2010 the WA auditor general concluded (WA Auditor General
2010b, p. 5):
On current estimates, it will cost $483 million, more than
three times the original estimate of $160 million. The Arena
is scheduled to open almost three years later than originally
planned, in November 2011 rather than January 2009. Insuf-
ficient scoping and planning meant that both the original cost
estimate and opening date were unrealistic. Key decisions on
the project during contract negotiations have altered the
planned allocation of risks between the state and contractor,
increased the risks to the state, and led to project delays and
cost increases. These decisions were made without systematic
or sufficient analysis of their impact, consideration of alterna-
tives, external scrutiny or legal advice.
According to Flyvbjerg and Cowi (2004), inaccurate budgets
of this nature are a result of optimism bias. As a result, reference
class forecasting was developed to mitigate the risk of optimism
bias that may arise during the formulation of a budget (Flyvbjerg
and Cowi 2004; Flyvbjerg 2007a, 2008). This approach does not
try to forecast specific uncertain events that will affect a particular
project but instead places a project in a statistical distribution of
outcomes from the class of reference points. Essentially, Flyvbjerg
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J. Constr. Eng. Manage. 2013.139:321-330.
(2008) has assumed that projects of the same type experience sim-
ilar degrees of optimism bias and cost overruns, which is contrary
to the findings reported elsewhere (e.g., Love 2002; Odeck 2004;
Love et al. 2009).
In the case of FSH and Perth Arena, the initial estimates were
unrealistic because their scope had not been well defined and
fully understood. Furthermore, during the design process of the
FSH, its size increased by 44% as a consequence of a demand
for additional single beds and clinical facilities. Similarly, in the
case of the Perth Arena, major issues contributing to its cost in-
crease were design costs (þA$7 million), changes to the building’s
design (þA$55 million), the inclusion of fit-out and transition to
operation (þA$42 million), and an underground car parking
facility (þA$34 million). Clearly, without a defined scope, any
budget that is formulated at the decision to build would be inaccu-
rate and subject to changes. Consequently, using the initial budget
as a reference point to determine a cost overrun is misleading and
will naturally lead to an overinflated value that does reflect a
project’s new characteristics and changed scope. With this in mind,
the use of the contract award can provide an ameliorated point
of reference for determining cost overruns and therefore can allow
for apples-to-apples comparisons.
Costs and Project Size
Research has suggested that the likelihood of a cost overrun in-
creases with contract size and complexity as well as the number
of change orders (Rowland 1981; Hinze et al. 1992). Specifically
change orders. The change-order rate is defined as the “ratio
between the dollar amount change of change orders and award
amount” (Jahren and Ashe 1991, p. 548). Rowland (1981) found
that as the change-order rate increased, contract size increased,
whereas Randolph et al. (1987) revealed that as the change-order
rate decreased, contract size increased. Jahren and Ashe’s (1990)
examination of 1,576 construction projects found that a cost over-
run rate of 1 to 11% is more likely to occur on larger projects than
smaller projects as managers typically have longer periods of time
to rectify cost-related issues and therefore keep cost overrun rates
low. Likewise, Odeck’s (2004) research showed that larger over-
runs were experienced in smaller projects. This suggests that larger
projects may be better managed and that longer completion times
provide an opportunity to make adjustments to facilitate cost con-
trol (Jahren and Ashe 1991; Vidalis and Najafi 2002; Odeck 2004).
To improve cost control, there is a need to put in place strategies to
prevent those factors that cause cost overruns from occurring. It
is beyond the scope of this paper to examine the causes of cost
overruns. A detailed review of the subject matter can be found in
Frimpong et al. (2003), Ashan and Gunawan (2010), Bhargava
et al. (2010), Jergeas and Runwanpura (2010), and Love et al.
(2011, 2012).
Research Approach
The data set presented in Love et al. (2009) for Australian con-
struction and engineering projects is used to develop “best-fit”
statistical distributions so that probabilities for cost overruns at
contract award can be determined. For the purpose of clarity,
the method of data collection and dataset characteristics will be
presented again.
Questionnaire Survey
The questionnaire survey developed for the study reported in Love
et al. (2010) was used to extract cost overrun information as well as
 that relating to rework costs and causes. Stratified random sampling
was used to select the study sample from the telephone directory
Yellow Pages for the various regions of Australia. Two main ben-
efits can be derived from using a stratified sample:
1. It can ensure that adequate and representative respondents
within each subgroup under study are acquired.
2. It ensures that respondents within the same group are
homogeneous.
Before the sample size for the main study could be determined, a
pilot survey was completed with 30 building and 20 civil engineer-
ing contractors. Because the survey of building contractors was
undertaken first, it was considered to be reliable; it was then used
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Procedure
Descriptive statistics such as the mean (M), standard deviation
(SD), and interquartile were calculated. A one-way analysis of vari-
ance (ANOVA) was used to determine if cost overruns significantly
varied between construction and engineering projects and original
contract value at a 0.05 significance level. Probability density func-
tions (PDFs) were developed using EastFit 5. A PDF for a continu-
ous distribution can be expressed in terms of an integral between
two points:
Zb
fðxÞdx ¼ Pða ≤ X ≤ bÞ ð1Þ

to pilot the civil engineering sample. The firms sampled comprised a

design and engineering consultants, project managers, and contrac-
A cumulative distribution functions (CDF) was also produced.
tors. The rationale was to test the suitability, clarity, and compre-
For theoretical continuous distributions the CDF is expressed as a
hensibility of the questionnaire and measure the response rate.
curve and denoted by
Participating firms were contacted by telephone and informed of
the research aims and objectives and informed that all responses Zx
would remain strictly confidential, though generalizations of the FðxÞ ¼ fðtÞdt ð2Þ
findings would be made available to all participants. −∞
Upon participant consent, questionnaires were mailed to the
sample, with a stamped addressed return envelope enclosed. Par- The empirical CDF, which is displayed as a stepped discontinu-
ticipants were invited to critically review the questionnaires’ design ous line and dependent on the number of bins, is represented by
and structure by adding comments onto the document itself in order 1
to provide constructive feedback. Comments received were posi- Fn ðxÞ ¼ · ½Number of observations ≤ x
ð3Þ
n
tive, and therefore the questionnaire remained largely unaltered
for the main surveys, although a few minor layout changes were The PDF, CDFs, and distribution parameters (α, β, γ, μ, k, m,
made to increase clarity. A total of 25 responses were received σ, ξ) for continuous distributions such as beta, Burr, Cauchy, error,
in the building project pilot survey, giving an 83% response rate. Gumbel max/min, Johnson SB, normal, and Wakeby were exam-
ined using the maximum-likelihood estimate method. Using
For the civil engineering project survey, a total of 17 responses
StatAssist 5.5, the best-fit distribution was then determined using
were received, giving an 85% response rate. These high response the following goodness-of-fit tests, which measure the compatibil-
rates were obtained because prior consent to support the work was ity of a random sample with a theoretical probability distribution:
obtained from all survey participants. • Kolmogorov-Smirnov statistic (D): based on the largest vertical
In the main survey, 420 and 300 questionnaires were distributed difference between the theoretical and empirical CDF:
to design consultants, contractors, and project managers for build-

ing and civil engineering projects, respectively. Because no funda- i−1 i
D ¼ max Fðxi Þ − ; − Fðxi Þ ð4Þ
mental changes were required to either of the pilot questionnaires, 1≤i≤n n n
they were added to the samples. For the building and civil engineer-
• Anderson-Darling statistic (A2 ): a general test to compare the fit
ing projects, 161 and 115 responses were received, respectively,
of an observed CDF to an expected CDF. The test provides more
which represents a total consolidated response rate of 36% for both
weight to a distribution’s tails than does the Kolmogorov-
surveys, which is within an acceptable range for a survey with Smirnov test. The Anderson-Darling statistic is defined as
industry practitioners (Alreck and Settle 1985).
1X n
A2 ¼ −n − ð2i − 1Þ · ½InFðxi Þ þ Inð1 − Fðxn−1þ1 ÞÞ

Data Reliability n i¼1

Data reliability relates to the data source and the identification of ð5Þ
the position held by the respondent completing the questionnaire • Chi-squared statistic (χ2 ): determines if a sample comes from a
(Oppenheim 1992). Therefore, it was critically important that only population with a specific distribution. The chi-squared statistic
selected senior personnel who had sufficient knowledge and expe- is defined as
rience about the procurement processes associated with a project
answered the questionnaire. From the total responses gathered, X
k
ðOi − Ei Þ2
χ2 ¼ ð6Þ
133 respondents provided information relating to their individual Ei
i¼1
job position and title, and it was revealed that most respondents
held senior positions within their organizations. Based upon this where Oi is the observed frequency for bin i and Ei is the
finding the direct mailing to individuals in organizations seemed expected frequency of bin i calculated by
to have achieved its objective of reaching senior staff that plays
a significant role in construction project management. In addition, Ei ¼ Fðx2 Þ − Fðx1 Þ ð7Þ
because, in accordance with the study design, questionnaires were
mailed to organizations in different states in Australia, the risk of Here F is the CDF of the probability distribution being
duplicating projects was minimized. tested, and x1 and x2 are the limits for bin i.

324 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / MARCH 2013

J. Constr. Eng. Manage. 2013.139:321-330.

 The foregoing goodness-of-fit tests were used to test the null
(H0 ) and alternative hypotheses (H1 ) that data set H0 follows
the specified distribution and that data set H 1 does not fol-
low the specified distribution. The hypothesis regarding the distri-
butional form is rejected at the chosen significance level (α) if the
statistic D, A2 , χ2 are greater than the critical value. For the pur-
poses of this research, a 0.05 significance level was used to evaluate
the null hypothesis. The p-value, in contrast to fixed α values, is
calculated based on the test statistic and denotes the threshold value
of significance level in the sense that H 0 will be accepted for all
values of α less than the p-value. Once the best-fit distribution was
identified, the probabilities for cost overruns were calculated using
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To demonstrate the spread of a data set, the percentage of cost over-
run for the sample is plotted against Ocv (Fig. 2). It can be seen in
Fig. 2 that smaller projects experienced considerably larger cost
overruns than the two projects that were greater than $300 million.
An ANOVA test was used to determine if there were significant
differences between the cost overruns experienced in the construc-
tion and engineering projects (p ¼ 0.05). The analysis revealed
that there were no significant differences between the cost overruns
experienced between construction and civil engineering projects
[Fð1; 274Þ ¼ 0.611, p ¼ 0.41]. Previous analysis of this data
set revealed that project cost overruns did not vary with procure-
ment and tendering methods and project types (Love 2002; Love

the CDF. Then, to simulate the sample’s randomness and derive
cost overrun probabilities, a Mersenne twister, which is a pseudor-
andom number generating algorithm, was used to generate a
sequence of numbers that approximated the sample to 1,000
(Matsumoto and Nishimura 1998).
Results
Data from a total of 276 construction (n ¼ 161) and civil engi-
neering (n ¼ 115) projects were obtained. In the case of con-
struction projects, these ranged from banks to hospitals and hotels.
For the civil engineering sample, these ranged from tunneling to
road construction and sewer treatment plants. The summary statis-
tics reveal that the mean Ocv was A$23,142,486 (SD ¼ A$41;171;
772; minimum ¼ A$132;347; maximum ¼ A$390 million), and the
mean Acv was A$25,455,372 (SD ¼ A$45;090;928; minimum ¼
A$136;671; maximum ¼ A$420 million).
To better understand the makeup of the sample, an examination
of respondent stratification, geographical dispersion, and company
turnover was completed for the civil engineering sample. In terms
of respondent stratification, 45% were design consultants (archi-
tects, quantity surveyors, and structural, mechanical, and electrical
engineers), 31% were contractors, and 24% comprised project
managers. With regards to geographical dispersion, organizations
were situated across the states of Victoria (45%), New South Wales
(17%), Queensland (27%), South Australia (9%), and WA (2%).
In Table 2 the descriptive statistics for the cost overruns that
were incurred in the sampled projects are presented. The mean
overall project cost overrun for the sample was 12.22%
(SD ¼ 20.65) of Ocv . Means were also determined for the two
groupings of project type, construction and civil engineering,
and were found to be 12.22% (SD ¼ 24.22%) and 11.76%
(SD ¼ 13.76%), respectively. For construction projects the maxi-
mum cost overrun was 244% and the minimum was −84%
(i.e., cost underrun), which results in a range of 328%. For the civil
engineering projects sampled the maximum cost overrun was 109%
et al. 2009, 2010). Therefore, generic probabilities for determining
the occurrence of project cost overruns based upon the best-fit
probability distribution were calculated.
Distribution Fitting: Probability of Cost Overruns
The construction and engineering data sets were combined, and the
best-fit probability distribution was examined using the goodness-
of-fit tests Kolmogorov-Smirnov and Anderson-Darling. The re-
sults of the goodness-of-fit tests revealed that a three-parameter
(3P) Frechet distribution provided the best fit for the data sets
(Table 3).
A Frechet is a form of generalized extreme value distribution
(GEV) that is used as an approximation to model the maxima
of long (finite) sequences of random variables (Coles 2001).
The parameter α is a continuous shape parameter α > 0, β > 0,
and γ is a continuous location parameter, where γ ≡ 0 yields
the two-parameter Frechet distribution. The domain for the 3P
Frechet distribution is γ < x < þ∞. The PDF is expressed as

αþ1 
α 
α β β
fðxÞ ¼ exp − ð8Þ
β x−γ x−γ
The CDF is expressed as

α 
β
fðxÞ ¼ exp − ð9Þ
x−γ
The parameters for the Frechet (3P) were found to be
α ¼ 10.158, β ¼ 90.215, and γ ¼ −84.29. Figs. 3 and 4 present
the PDF and CDF based upon the calculated distribution parame-
ters. The calculated probabilities of a cost overrun are presented in
Table 4. The probability of a cost overrun of greater than 10% is
47%. Delimiters were also used to provide probabilities of cost
overruns within ranges. The probability of a project experiencing
0.56 % Cost Overrun Frechet (3P)

and the minimum was 11%, which results in a range of 98%.

Probability of Cost Overrun

0.48

0.4
Table 2. Percentiles for Project Cost Overrun
0.32
Percentile Value 0.24
Minimum −84.29 0.16
5% 0
10% 1.02 0.08
25% (Q1) 2.96 0
50% (median) 8.16
75% (Q3) 15.14 -0.08
90% 30.54 -40 -20 0 20 40 60 80 100 120
95% 40 Percentage of Cost Overrun
Maximum 244.06
Fig. 2. Frechet 3P: PDF for cost overruns
Note: Q1 = first quarter; Q3 = third quarter.

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J. Constr. Eng. Manage. 2013.139:321-330.

 Table 3. Goodness-of-Fit Tests for Construction and Engineering Projects
Sigma Kolmogorov-Smirnov Anderson Darling Chi-squared
Distribution type N α level (D) critical value (A2 ) critical value (χ2 ) critical value
Frechet 3P (construction 276 0.2 0.064 1.374 11.03
and engineering projects) 0.1 0.073 1.928 13.362
0.05 0.081 2.50 15.507
0.02 0.091 3.289 18.168
0.01 0.098 3.907 20.09
Cauchy <A$1 m 14 0.2 2.748 1.374 1.642
0.1 0.3141 1.928 2.705
0.05 0.348 2.501 3.841
0.02 0.389 3.289 5.411
0.01 0.417 3.907 6.634
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Wakeby A$1 to A$10 million 131 0.2 0.0937 1.374 N/A

0.1 0.1068 1.928 N/A
0.05 0.1186 2.501 N/A
0.02 0.132 3.289 N/A
0.01 0.142 3.907 N/A
Burr (4P) A$11 to A$50 million 101 0.2 0.1067 1.374 8.558
0.1 0.1216 1.928 10.64
0.05 0.1351 2.501 12.59
0.02 0.151 3.289 15.03
0.01 0.162 3.907 16.81
Cauchy A$51 to A$100 million 17 0.2 0.250 1.374 3.218
0.1 0.286 1.928 4.605
0.05 0.317 2.501 5.991
0.02 0.355 3.289 7.824
0.01 0.380 3.907 9.210
Wakeby >A$100 million 17 0.2 0.295 1.374 1.642
0.1 0.338 1.928 2.705
0.05 0.375 2.501 3.841
0.02 0.419 3.289 5.411
0.01 0.449 3.907 6.634

1 a cost overrun of between 1 and 5%, for example, is 16% (Fig. 3).
0.9 Cost Frechet 3P The likelihood that a project will exceed a mean cost overrun of
0.8
Overrun
12.22% is 60% [Pðx < x1Þ ¼ 0.60].
Probability of Cost Overrun

0.7
0.6
Project Size
0.5
0.4
An ANOVA was also used to determine if the cost overruns varied
0.3
with different Ocv ðp ¼ 0.05Þ. The homogeneity of variance as-
sumptions was violated for cost overrun comparisons; hence the
0.2
results of a t-test with equal variances not assumed are reported
0.1
(p ¼ 0.05). There were no significant differences for Ocv and
0
project cost overruns tð272Þ ¼ −1.21, p ¼ 0.289. Fig. 4 shows
-80 -40 0 40 80 120 160 200 240
a scatterplot of Ocv and the percentage of cost overrun that occurred
Cost Overrun
on each project. It can be seen that as Ocv increases, the cost over-
Fig. 3. Frechet 3P: CDF function for cost overruns run decreases. Table 5 indicates that construction projects greater
than A$1 million saw a mean cost overrun of 24.90%. For civil
engineering projects, the largest cost overrun of 14.01% occurred
in the smallest contract range, A$1 to A$10 million.
1
% Cost Overrun Cauchy While the data set was comparable in size to those of other stud-
Probability of Cost Overrun

0.8 ies that have examined cost overruns (e.g., Flyvbjerg et al. 2002),
the number of projects within established Ocv ranges is small for
0.6

0.4
Table 4. Generic Discrete Probabilities for Project Cost Overruns
0.2 Probability of cost overrun (%) PðX < X1Þ PðX > X1Þ
0 5 0.32 0.67
10 0.53 0.47
-0.2
0 100 200 300 15 0.69 0.31
Percentage of Cost Overrun 20 0.8 0.2
25 0.87 0.13
Fig. 4. Cauchy: PDF for construction projects less than A$1 million 30 0.91 0.09

326 / JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / MARCH 2013

J. Constr. Eng. Manage. 2013.139:321-330.

  
−1
Table 5. Generic Range of Probabilities for Project Cost Overruns x − σ2
fðxÞ ¼ πσ 1 þ ð10Þ
Probability of a cost overrun between PðX1 < X < X2Þ σ
1 and 5% 0.16
5 and 10% 0.2 The CDF is expressed as
10 and 15% 0.16
15 and 20% 0.11

1 x−μ
20 and 25% 0.07 FðxÞ ¼ arctan þ 0.5 ð11Þ
25 and 30% 0.05 π σ

each of the project classification types. Construction and engineer-
ing projects were combined to create a large data set to determine
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For the contract ranges A$1 to A$10 million (Table 7) and less
than A$101 million the best-fitting distribution was a Wakeby
(Table 7). This form of distribution is also a GEV. The parameters
of a Wakeby, α, β, γ, δ, and ξ, are all continuous. The domain for

the best-fit distribution for each range of cost overrun experienced

within a range of Ocv classifications. Only construction projects
had contract values less than $1 million; therefore, this category
was not combined with the engineering sample. Only two con- 0.44
% Cost Overrun Cauchy
0.4
struction projects exceeded A$200 million. As a result, these two

Probability of Cost Overrun

0.36
projects were combined into an Ocv classification of more than 0.32
A$101 million. The best-fit probability distribution for each range 0.28
of Ocv classifications was examined using the goodness-of-fit 0.24
tests: Kolmogorov-Smirnov, Anderson-Darling, and chi-squared 0.2
0.16
(Tables 6–8).
0.12
For projects greater than $1 million an unbounded Cauchy dis- 0.08
tribution with parameters σ ¼ 4.31, μ ¼ 3.47 was identified as the 0.04
best-fit solution (Table 6). A distribution of this nature has a pos- 0
-10 -5 0 5 10 15 20 25
itive excess kurtosis and is leptokurtic. It also has an acute peak Percentage of Cost Overrun
around the mean (that is, a lower probability than a normally
distributed variable of values near the mean). With this distribution Fig. 5. Cauchy: PDF for construction and engineering projects
σ is a continuous scale parameter (σ > 0) and μ a continuous A$51–$100 million
location parameter. The domain for this distribution is expressed
as −∞ < x < þ∞. All the critical values were accepted at the
nominated α level. The probability of cost overruns was then 1
determined using the Cauchy PDF function at the cost overrun % Cost Overrun Wakeby
Probability of Cost Overrun

levels identified (Fig. 5). 0.8

The probabilities derived for cost overruns are presented in 0.6

Table 8. For example, the probability of a project with an Ocv
0.4
of less than A$1 million experiencing a cost overrun of less than
25% is 93%. Alternatively, the probability of incurring a cost over- 0.2
run of more than 25% is 7%. Construction and engineering projects 0
with an Ocv within the range of A$51 to A$100 million were also
-0.2
found to possess a Cauchy distribution with parameters σ ¼ 2.95,
μ ¼ 4.303 (Fig. 6). -150 -100 -50 0 50 100 150
Using the Cauchy PDF, probabilities for cost overruns within Percentage of Cost Overrun
the range A$51 to A$100 million are also presented in Table 8.
The Cauchy PDF is defined as Fig. 6. Wakeby: PDF for construction projects A$1–$10 million

Table 6. Project Cost Overruns by Project Type and Contract Value

Ocv Standard Mean percentage Overrun standard
Project type Project size N Mean Ocv deviation overrun (%) deviation
Construction <A$1 million 14 A$513,546 A$344,668 24.90 64.81
A$1 to A$10 million 70 A$3,874,368 A$2,830,183 10.30 17.10
A$11 to A$50 million 60 A$21,860,966 A$10,099,633 12.90 16.77
A$51 to A$100 million 12 A$66,883,333 A$15,062,888 9.03 11.24
A$101 to A$200 million 6 A$162,666,666 A$22,339,800 13.79 16.68
>A$200 million 2 A$376,000,000 A$19,798,989 9.09 1.98
Subtotal 161 A$25,521,927 A$51,957,899 12.56 24.44
Civil engineering A$1 to A$10 million 61 A$8,136,604 A$3,464,888 14.01 17.11
A$11 to A$50 million 43 A$24,906,930 A$10,487,326 8.49 13.84
A$51 to A$100 million 7 A$77,285,714 A$12,499,523 7.90 10.80
>A$101 million 4 A$165,250,000 A$25,051,613 9.10 11.90
Subtotal 115 A$22,092,965 A$33,897,118 11.76 13.76
Total 276 A$24,093,193 A$45,275,566 12.22 20.65

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J. Constr. Eng. Manage. 2013.139:321-330.

 Table 7. Discrete Probabilities for Project Cost Overruns by Contract A four-parameter (4P) Burr distribution, which is a right-
Value skewed distribution, was found to be the best-fit distribution for
Contract Probability of contract ranges of A$11 to A$50 million (Table 8). The Burr dis-
value cost overrun (%) PðX < X1Þ PðX > X1Þ tribution has a flexible shape and controllable scale and location.
<A$1 5 0.64 0.36 It is sometimes considered an alternative to a normal distribution
10 0.81 0.19 when data demonstrate positive skewness. The parameters of the
15 0.88 0.12 (4P) Burr are all continuous: k is a shape parameter (k > 0), α a
20 0.91 0.09 shape parameter (α > 0), β a scale parameter, and γ a location
25 0.93 0.07 parameter (γ ≡ 0 yields the 3P Burr distribution). The distribution
30 0.94 0.06 parameters for the A$11 to A$50 million projects were found
A$1 to A$10 5 0.32 0.68 to be k ¼ 0.17857, α ¼ 42.483, β ¼ 67.778, γ ¼ −66.723 (Fig. 8).
million 10 0.57 0.43 Using the 4P Burr PDF, probabilities for cost overruns within the
15 0.73 0.27
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range A$11 to A$50 million were calculated and are presented in

20 0.82 0.18
25 0.88 0.12 Table 8. The (4P) Burr PDF is expressed as [Eq. (13)]
30 0.92 0.08
A$11 to A$50 5 0.36 0.64
million 10 0.61 0.39 Table 8. Range of Probabilities for Project Cost Overruns by Contract
15 0.76 0.24 Value
20 0.85 0.15 Probability of a cost
25 0.89 0.11 Contract value (A$M) overrun between PðX1 < X < X2Þ
30 0.93 0.07
A$51 to A$100 5 0.57 0.43 <A$1 1 and 5% 0.27
million 10 0.84 0.16 5 and 10% 0.21
15 0.91 0.09 10 and 15% 0.07
20 0.94 0.06 15 and 20% 0.003
25 0.95 0.05 20 and 25% 0.002
30 0.96 0.04 25 and 30% 0.001
>A$101 million 5 0.31 0.69 A$1 to A$10 million 1 and 5% 0.23
10 0.51 0.49 5 and 10% 0.25
15 0.68 0.32 10 and 15% 0.15
20 0.8 0.2 15 and 20% 0.09
25 0.87 0.13 20 and 25% 0.06
30 0.91 0.09 25 and 30% 0.04
A$11 to A$50 million 1 and 5% 0.25
5 and 10% 0.25
10 and 15% 0.19
this distribution is expressed as ξ ≤ x if δ ≥ and γ > 0, ξ ≤ x ≤ 15 and 20% 0.08
þα=β − γ=δ if δ < 0 or γ ¼ 0. The distribution parameters for 20 and 25% 0.05
the range A$1 to A$10 million were α ¼ 1833.9, β ¼ 42.444, 25 and 30% 0.03
γ ¼ −10.698, δ ¼ 0.15, ξ ¼ −42.405, and for more than A$51 to A$100 million 1 and 5% 0.34
A$100 million they were α ¼ 389.57, β ¼ 14.917, γ ¼ 4.8036, 5 and 10% 0.27
δ ¼ 0.3951, ξ ¼ −20.972. The probability distributions for each 10 and 15% 0.06
of the contract ranges are presented in Figs. 6 and 7. 15 and 20% 0.03
20 and 25% 0.01
Using the Wakeby PDF, the probabilities for cost overruns
25 and 30% 0.001
within the ranges A$1 to A$10 million and less than A$101 million >A$101 million 1 and 5% 0.14
are presented in Table 8. The Wakeby distribution is defined by the 5 and 10% 0.2
quantile function (inverse CDF): 10 and 15% 0.17
15 and 20% 0.11
α γ 20 and 25% 0.07
xðFÞ ¼ ξ þ ð1 − ð1 − FÞβ Þ − ð1 − ð1 − FÞ−δ Þ ð12Þ 25 and 30% 0.04
β δ

0.48
% Cost Overrun Wakeby 0.64 % Cost Overrun Burr (4P)
0.4
Probability of Cost Overrun

0.56
Probability of Cost Overrun

0.32 0.48
0.24 0.4
0.16 0.32
0.08 0.24
0.16
0
0.08
-0.08 0
-0.16 -0.08

-40 -20 0 20 40 60 0 50 100

Percentage of Cost Overrun Percentage of Cost Overrun

Fig. 7. Wakeby: PDF for construction and engineering projects less Fig. 8. (4P) Burr: PDF for construction and engineering projects less
than A$101 million than A$11–$50 million

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J. Constr. Eng. Manage. 2013.139:321-330.

 αkðx−y α−1
β Þ
FðxÞ ¼ α kþ1
ð13Þ
βð1 þ ðx−y
β Þ Þ
The CDF is expressed as [Eq. (14)]

 
x − y α −k
FðxÞ ¼ 1 − 1 þ ð14Þ
β award. When the decision to build is used as the reference point,
The identified statistical distributions were used to determine
realistic probabilities for cost overruns in construction and engineer-
ing projects from contract award. Such probabilities can be used
to determine an appropriate allowance for a construction cost
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contingency.
Cost Contingency
A contingency can be defined as “the amount of funds, budget or
time needed above the estimate to reduce the risk of overruns of
project objectives to a level acceptable to the organization” (Project
Management Institute 2008). Most projects will experience cost
increases between the decision to build and the contract award.
A design contingency is typically allocated for changes during de-
sign for factors such as incomplete scope definition and estimating
inaccuracy (e.g., Clark and Lorenzoni 1985). As a project becomes
more defined, the design contingency is absorbed into the budget
for specific cost elements (Gunhan and Arditi 2007). Any unre-
solved design issues at the time of contract award should be incor-
porated into the construction contingency (Gunhan and Arditi
2007). At the initial budget stage, a contingency of 30 to 50%
should be allowed for incomplete scope and 5 to 10% for estimat-
ing inaccuracies (Clark and Lorenzoni 1985). Thus, as a rule of
thumb, a 35 to 60% design contingency should be added to the
initial budget estimate figure. In the case of FSH and Perth Arena,
for example, the cost increase prior to contract award far outweighs
the suggested design contingency. Predicting the cost overrun from
the decision to build to contract award relies exclusively on a large
data set, so the empirical distribution of cost overruns can be used
to determine the best-fit statistical distribution for probabilistic
analysis.
A construction contingency is used for changes that may occur
during the construction process. Under a traditional lump sum con-
tract based on bills of quantities (BoQs), scope and design are sup-
posed to be fully defined and developed. As a result, Clark and
Lorenzoni (1985) suggest using a contingency value of 3 to 5%
(Clark and Lorenzoni 1985). In practice, complete drawings and
BoQs are generally not available when a project goes to tender
(Rowlinson 1999). A similar situation arises when nontraditional
methods are used to deliver projects. The present analysis revealed
that there was no statistical difference between the extent of cost
overrun experienced and procurement method used. From the fore-
going analysis, it is suggested that a construction contingency value
in excess of the average cost overrun of 12.22% be used to deter-
mine known unknowns (i.e., identifiable risks). For example, de-
sign errors and omissions contained within contract documents
have been found to contribute as much as 50% of a project’s cost
overrun (Love et al. 2009). From a client’s perspective, design er-
rors and omissions are identifiable risks and should be accommo-
dated within a contingency. The probabilities derived from the
statistical distributions provide the basis to monitor and reassess
project costs. Identifying the key factors contributing cost overruns
from contract award and assessing their likelihood of occurrence
can enable clients and contractors to implement appropriate risk
management strategies.
JOURNAL OF CONSTRUCTION ENGINEERING AND MANAGEMENT © ASCE / MARCH 2013 / 329
J. Constr. Eng. Manage. 2013.139:321-330.
Conclusion
Two different viewpoints exist with regard to the point at which a
cost overrun is determined. Within the infrastructure and transport
literature, cost overruns are invariably calculated from the decision
to build. In contrast, within the construction and engineering man-
agement literature, cost overruns are determined from contract
reported cost overruns can be phenomenally high and alarmist to
the general public. Between the decision to build and contract
award a project’s nature and scope can change dramatically to
the extent that an entirely different facility may be commissioned,
rendering cost overrun comparisons unrealistic.
Using the contract award as the reference point, cost overruns
from 276 construction and engineering projects were calculated.
The research revealed a mean cost overrun of 12.22%. No signifi-
cant differences for cost overruns were found among procurement
method, project type, and contract size. The empirical distributions
for the cost overruns were found to be non-Gaussian. Nonparamet-
ric goodness-of-fit tests were used to select the best-fit probability
distribution. A three-parameter Frechet probability function was
found to provide the best overall distribution fit to calculate the
probability of cost overruns. As a line of inquiry, the statistical
characteristics of contract size and cost overruns were also
analyzed. The Cauchy (<A$1 million), Wakeby (A$1 to 10 million,
<A$101 million), and four-parameter Burr (A$11 to $50 million)
were found to provide the best distribution fits and were therefore
used to calculate cost overrun probabilities by contract size. It is
suggested that distribution fitting of empirical distributions is nec-
essary to produce reliable and realistic cost overrun probabilities
and, as a result, improve decision making.
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