It is notoriously hard for national and local governments or even private operators to accurately estimate the cost of building roads and bridges. This results in wide variations in the prices negotiated for similar projects. Moreover, completed projects often come in above the agreed price and schedule—as their scope drifts, change orders are made when it is found that essential items have been overlooked in the original contract, and poor engineering or poor planning cause rework and further delays.
McKinsey’s road-and-bridge-benchmarking tool gives asset owners a far more realistic view of what their projects should cost. It details more than 17,000 completed road-and-bridge-construction projects with price tags of between $100,000 and $300 million, and it breaks down the overall cost of each to show the preliminary engineering cost, the construction-engineering cost, and the construction cost. Analysis then reveals the average cost of similar types of project of similar size and scope. There are 12 project types in all, including the widening of freeways, bridge reconstruction, and building of new roads.
In this way, the analysis serves as a powerful negotiating tool. By providing the parameters of their own planned project, such as the length of the road, the number of lanes, or the location, asset owners can ascertain a benchmark cost for critical components of the work. Yet it also serves as a risk-management tool, as it details the causes of cost and schedule overruns. In building new freeways, for example, scheduling errors account for the largest number of cost overruns. With bridge replacements, changes made by owners to the scope of projects tend to be the biggest culprit. Similar analysis can be made of projects of similar size and scope.
Armed with such insights, asset owners are better positioned to prevent problems arising and to match best-in-class performance regarding costs and schedules. The analysis can even lead to the reshaping of an entire portfolio if it reveals that estimated costs are consistently too high, leaving room to finance more projects or reduce financing needs.
One US state authority used the benchmarking tool to identify annual savings of $700 million on a portfolio of similar-size projects: $200 million from initial negotiations, $200 million as a result of better engineering work, and $300 million from improved planning and design that reduced project overruns. Over time, as the authority’s ability to make more accurate cost and schedule estimates improved, it increased the number of projects it could finance on the same budget by 40 percent.