Just 13 months after raising the price of the Interstate Bridge Replacement (IBR) project by more than 50 percent, the state DOTs ay it will cost even more

We estimate project costs are likely to increase 20 percent or more, which would drive the price tag to as much as $9 billion, almost double the 2020 estimate..

While the DOTs blame “inflation” their own estimates show construction cost disinflation, with expected increases of no more than 3.5 percent per year for the rest of the decade.

The likely increase in costs will more than wipe out the $600 million in federal funds awarded to the project in December.  The cost of the IBR is increasing faster than the DOTs can find money to pay for it.

The “Cost Estimate Validation Process” (CEVP) that state DOTs implied would remedy future cost increases utterly failied

The use of lowballed construction cost estimates to sell highway megaprojects is part of a consistent pattern of “strategic misrepresentation.”  It’s  the old bait-and-switch:  get the customer to commit to buying something with a falsely low price, and then raise the price later, when its too late to do anything about it.

There will be likely future cost increases:  There are huge and unresolved risks to the projects actual cost, and the DOTs haven’t even turned a shovel of dirt yet.  The real price increases will likely come after construction starts.

ODOT has a consistent track record of lowballing pre-construction cost estimates, and recording huge cost overruns, with the average price of a major project doubling between pre-construction estimates and final costs.

Just 13 months ago, with great fanfare, the Interstate Bridge Replacement Project released a definitive new cost estimate for replacing  the I-5 bridges.  Costs jumped by 54% from earlier estimates, from $4.8 billion to as much as $7.5 billion.

Now IBR leaders are signaling the project will be even more expensive.  Oregon Public Broadcasting reports:

Planners for the effort to replace the aging span revealed Wednesday that it is going to be more expensive than previously thought. Program leader Greg Johnson didn’t put a number on the growing price tag, but he said the replacement project is falling victim to a “continuing creep of costs.”

How big a cost increase?  Likely a $9 billion project

IBR officials are being purposely vague about the cost increase, but given the wide range of their previous cost estimate–anything from $5 billion to $7.5 billion–the increase would have to be significant to lie outside this window.  At a minimum, we should probably expect an increase of 20 percent, with the costs increasing from a minimum of $6 billion to a maximum of $9 billion (or more).  Any smaller increase in costs would not significantly move the project out of the current range.  It seems entirely possible that the increase could be more than 20 percent.

While we’re generally reluctant to speculate on such matters, our earlier prediction of the increase in IBR costs was almost exactly correct.  As Willamette Week reported, our City Observatory prediction—made in May, 2022, seven months before the IBR estimates were released—that the cost of the IBR would balloon to between $5 to $7 billion was spot on, and slightly conservative.

Falsely Blaming Inflation

As they did a year ago, the DOTs are painting themselves as victims of inflation.

“One of the things all mega projects are experiencing is this inflation we’ve seen in the construction industry,” Johnson said. “We are going to be reissuing an overall program estimate probably later this summer.”

The trouble is, all of their earlier estimates–including those in 2020 and 2022–already allowed for inflation.  And more to the point, highway construction cost inflation, which did spike briefly during the pandemic, has subsided to historically typical levels–according to the official revenue forecast of the Oregon Department of Transportation. Here’s ODOT’s prediction of future capital cost inflation from their October 2023 forecast

Construction Cost Inflation is back to historic trend

From 2023 through 2031, ODOT expects that construction cost inflation will be about 3 percent per year—no higher than its long run historic average..

That represents almost no increase over the inflation that IBR officials said they had used in constructing their earlier forecasts of the IBR cost.  Keep in mind that cost estimates are made in “year-of-expenditure” dollars and according to their testimony to the Oregon Legislature, they model assumed the same construction time frame as the earlier estimates.  In January of 2021, the IBR team described the methodology they used to construct their estimates and predicted construction cost inflation of 2.2 percent to 2.3 percent per year after 2020:

As with the construction cost inflation factor, the program team used WSDOT’s Capital Development and Management (CPDM) historical and forecast cost indices for Preliminary Engineering (PE), Right-ofWay (RW) acquisition, and Construction activities (CN), using third-party data sources and statewide experience. The values used to escalate fiscal year (FY) 2012 dollars to FY 2020 are based on these indices by the three expenditure types, which include historical data through FY 2019. The overall effect of the three historical cost indices that were used to inflate from FY 2012 to FY 2020 equates to an average annual inflation rate from 2.0% to 2.2%, depending on which capital cost option is selected. Projected inflation rates by year beyond FY 2020 vary, averaging between 2.2% and 2.3% when applied to the expenditure schedules for the capital cost options.

By not showing their work, and describing exactly how their inflation estimates changed between their 2020 project cost estimate and their December 2022 cost estimate, the IBR is exaggerating the importance of inflation, and downplaying its inability to accurately calculate future costs.  It’s easy to blame inflation, but if a changed inflation outlook is really the cause of the cost increase, they should use their own agencies official estimates to show exactly how much the change in inflation affects the project’s cost: they haven’t.

The failure of “CEVP” to prevent further cost increases

At the time it presented its last set of cost estimates, IBR officials responded to legislative concern about cost increases by claiming that they had a sophisticated risk analysis tool to accurately predict future costs.  That tool, called the “Cost Estimate Validation Process” was presented as a kind of “magic wand” to avoid future increases. 

IBR administrator Frank Green assured the Oregon and Washington Legislators that the CEVP would help them manage costs:

Its a process that enables us to identify costs . . .we also go through a process where we bring subject matter experts to identify, on a program like this, what are some of the potential risks that we may encounter as we’re moving through development of the program.
. . . as we produce our CEVP report and publish it, it will show the list of risks, well over a hundred, that our team and our partners and our subject matter experts identified. It’s important to understand that we also identified strategies, that we as a team and our partners can take to minimize the potential impact of these risks.

Joint I-5 Committee Meeting, December 12, 2022 

As we pointed out a year ago, the IBR actually did not present the results of the “CEVP” when it released its new cost estimates, and claimed, in response to a public records request” that it had “no records” of having conducted a CEVP.

In reality, the CEVP doesn’t so much prevent cost increases as simply document, after the fact, why they occurred.  The next iteration of the CEVP will show how IBR officials made bad assumptions about design, schedule, environmental factors (like the in-water-work-window) that drove up costs or blew up the schedule.  In theory, the CEVP should anticipate these “risks”—in reality, it does nothing to prevent systematically bad or mistaken assumptions about project cost drivers.

ODOT’s Reign of Error:  Consistent Cost Overruns

For anyone who has followed ODOT cost estimates, this latest round of further cost increases comes as no surprise.  ODOT has consistently and badly under-estimated the ultimate cost of virtually every single one of its major highway construction projects.  As we’ve reported at City Observatory, ODOT’s cost estimates are a series of “exploding whales“—the Oregon Department of Transportation has a long string of 100 percent cost-overruns on its major projects.  Almost every large project the agency has undertaken in the past 20 years has ended up costing at least double–and sometimes triple–its original cost estimate.with the average large ODOT highway project seeing a 100 percent cost escalation between the time it is approved and its ultimate completion cost.  The likely $9 billion maximum cost of the IBR project, up from an estimated $4.8 billion “maximum” estimated by IBR in 2020 would put the IBR right in the middle of this cost doubling pattern.

As public finance scholar Bent Flyvbjerg has documented, these consistent errors are no accident:  they are a conscious, institutionalized practice of using low-balled initial cost estimates to secure support for a project, coupled with a strategy of revealing true costs only once the project is committed or under construction.

Cost Overruns Matter

The ever-increasing cost of the Interstate Bridge Project is problematic for many reasons.  First, the agency hasn’t fully identified (much less obtained) the funding needed for the current $7.5 billion cost estimate.  Oregon and Washington taxpayers will be on the hook for these amounts, and every cost increase raises they amount they have to contribute.  In effect, even a 10 percent increase in costs (and its likely to be double that, or more), would more that wipe out the value of the much ballyhooed $600 million grant awarded to the project in December, 2023.  In a real sense, project costs are escalating faster than ODOT and WSDOT can find new revenue.

There’s a second problem:  Rising costs could also invalidate the existing (and future) awards of federal funds.  As we’ve noted, federal law requires that highway projects be “cost-effective” in order to qualify for federal funds.  Cost-effectiveness is judged by a benefit-cost analysis.  In simple terms, if benefits don’t exceed costs, a project isn’t eligible for federal highway funds.  The current benefit cost analysis is already full of errors and suspect assumptions that inflate benefits, and was prepared by an IBR contractor with a clear (but undisclosed) conflict-of-interest.  If the new, higher level of costs were factored into the benefit-cost analysis, the project would be even shakier–and likely ineligible for federal funds because it isn’t cost effective.

Third, rising costs may force the project to try to extract more money from tolls.  If the project raises tolls, it will likely increase traffic diversion to I-205, with adverse effects on congestion and pollution.  The financial need for higher toll revenues may also undercut the viability of proposed toll-discounts for low income commuters.