What's Going On With Project Cost Increases? (editorial)View Source
Members of the Inland Waterways Users Board had a lot of questions for Corps of Engineers representatives regarding recent revelations about cost increases for important inland waterways projects.
Inflation has eroded many of the gains made in funding major construction and rehabilitation projects achieved in the Infrastructure Investment and Jobs Act and the Inflation Reduction Act. Projects that were declared “funded to completion” are now found not to be fully funded. They require more funding to complete—much more, in some instances. Like the famous “Mission Accomplished” sign announcing a premature end to the Iraq war in 2003 when years of fighting still lay ahead, the announcement of “funded to completion” has proven to be premature as well.
Some of the announced cost increases are startling. The certified cost for the new lock being built in the Chickamauga Lock Replacement Project is $954.4 million as of March 16, an increase of $197.5 million, or 26 percent over the previous estimate. Additionally, about 2.5 years has been added to the lock operation date and three years for the final completion date. The contractor says it is significantly behind schedule, blaming cost and schedule impacts on a variety of issues, most notably COVID-19. A review of the claim is planned for February 2024.
Phase 2 of the Three Rivers project was authorized to proceed for a cost of up to $279.49 million; the certified cost estimate released in December was $355.68 million.
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Most dramatically, the IWUB had earlier learned that the cost of the Kentucky Lock Replacement Project had ballooned. While previously the $465,492,000 included in IIJA was expected to fund it to completion, the certified cost estimate completed in April 2022 indicated an additional $332 million was required, bringing the total project cost estimation to $1,561,073,000.
So what is behind these increases? We know that inflation increased sharply last year, reaching 9 percent annually, before moderating somewhat this year. It now hovers between 3 and 4 percent. That rate refers to monetary inflation, which the Federal Reserve can control to some extent.
There is also supply-side inflation. This refers to cost increases for materials and products based on many factors, including the rising cost of energy, supply-side kinks like semiconductor chip shortages, Russia’s invasion of Ukraine, Chinese logistics hiccups and challenges in specific markets for specific products. It also includes costs due to skilled labor shortages, about which Corps contractors have complained. There is not much the Fed can do about increases in energy prices, supply chains, commodities or materials prices or availability—or the skilled labor shortage.
In response to inflation—of both kinds—the Corps says it has been adding contingency funds to its project estimates to try to guarantee that each project will have enough funding to be completed. For example, the work at Montgomery Lock and Dam is on schedule, but a Corps spokesperson told the IWUB that the new certified project cost for Montgomery was completed June 16 and is now roughly $1.7 billion, which includes a “sizeable contingency” to cover market uncertainty and inflation. That is an addition of nearly $513 million to the total cost at Montgomery.
Do supply side inflation and contingency funds account for all the cost increases? Are there additional factors unique to each project? We know how capable the Corps of Engineers is and are looking forward to hearing how they tackle the challenge.