Learning Curves: Project Cost Estimates

Abstract

Cost underruns and overruns can be defined as the difference in the estimate of project costs upon which loan approval is based, and the final cost incurred at project completion. Of all Asian Development Bank (ADB) financed projects completed since 1995, 35% had a cost underrun higher than 20% of the estimated project cost, and 9% a cost overrun higher than 20%. Put together, almost half of the projects were characterized by inaccurate cost estimates. Cost underruns lead to loan cancellations and these impact both borrowing countries and ADBʹs operations. In the former, loan savings could have financed additional projects and, if ADB financing is from ordinary capital resources, unduly large loans incur unnecessary commitment fees. For ADB, cost underruns indicate inefficient allocation of scarce resources.