Reducing Cost Overrun in Public Housing Projects: A Simplified Reference Class Forecast for Small Island Developing States

Abstract

Inaccuracies in cost estimation on construction projects is a contested topic in praxis. Among the leading explanations for cost overrun (CO), factors accounting for large variances in actual cost are shown to have psychological or political roots. The context of public sector social housing projects (PSSHPs) in Small Island Developing States (SIDS) is positioned with similar CO challenges. This study is the fifth phase of a series of research projects on the vulnerability of PSSHPs to COs, and the need to de-risk cost estimates. The aim of this study is to present a simple and practical application of Reference Class Forecasting (RCF), a promising solution utilizing an “outside view” approach, as an effective control to reduce the variance of forecasted cost inaccuracies. Using a sample set of 82 housing projects, a reference class of 23 projects was selected based on properties such as design-build procurement type and local contractor involvement. A probability distribution was then established for this reference class, and required cost uplifts to be applied were based on the level of risk a housing agency is willing to accept for PSSHPs. Finally, the accuracy of the reference class was tested using a recently completed project. The results showed that the RCF method, based on a 50th percentile risk acceptance of CO, provides a closer estimate to the actual costs of the project as compared to the contracted costs. This empirical study is the first to undertake and implement RCF in the 52 SIDS and presents the first instance of practical RCF in public housing projects worldwide, thus providing a platform for improvement in future PSSHPs’ budget forecasting. The research can be applied to lessen societal and economic welfare losses as well as significant financial risks for governments. The implementation of practical safeguards, such as RCF, together with contemporary standard project controls, provides immediate advantages for enhancing accuracy in present forecasting approaches against financial risks. It allows for improved value derived from social infrastructure projects, improved supply of public housing, and consequently progress for these nations towards achieving their sustainable development goals.