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The US overspends on its transportation infrastructure compared to its international peers, and a team of university researchers wanted to understand why.
Their research found that the lack of DOT staff capacity and the lack of contractor competition in the market are key factors in the high project costs.
The researchers found that state and local governments spent $266 billion on roads alone by 2022, and that spending is projected to be more than three times higher than other high- and middle-income countries. It’s not just US highway projects that are expensive: 2021 Eno Center for Transportation study found US rail projects cost more and take longer to complete than similar constructions in other countries, especially those involving extensive tunnels.
To find out why highway construction costs are so high in the US, Zachary Liscow of Yale University, Will Nober of Columbia University and Cailin Slattery of the University of California, Berkeley surveyed procurement practices of infrastructure, spoke with state DOT employees and road builders and collected and analyzed project-level data across the country.
They submitted their 2023 paper, “Acquisition and infrastructure costs,” last month at the Washington, DC-based policy think tank’s 2024 Municipal Finance Conference.
According to the researchers, the paper is the first to use cross-state evidence to understand what role hiring practices play. They found that project quality and pricing are not uniform across the country: There is notable variation in procurement practices, costs, and road quality across the 50 states.
DOT’s lack of capacity drives up costs
Simply put, the researchers found that DOTs with more staff build cheaper roads.
There has been a “stunning decline in state DOT employment over the past 20 years, particularly in the wake of the Great Recession,” the authors found, and many state DOTs are now at limited capacity. One result of this situation is a greater reliance on consultants when building projects, which correlates with higher costs.
In fact, the researchers found that a one standard deviation increase in reported consultant costs is associated with a nearly 20%, or $70,000, increase in cost per lane mile. States with higher DOT employment per capita have lower infrastructure costs: a one standard deviation increase in DOT employment per capita correlates with 16% lower costs.
Respondents attributed the lack of detail in the project plans to both the lack of time or experience of DOT engineers and the use of consultants. When there isn’t enough specificity in the plans, it increases the risk to the contractor, which drives up the bids. Also, whenever the scope of a project changes, this initiates a costly and time-consuming renegotiation process, which contributes significantly to increased costs.
“We find that DOTs that provide more detail at the time of the rental offer have lower costs, while states with more change orders, which are often the result of poor planning, have higher costs” , according to the study.
The researchers found that an additional change order correlates with an additional cost of $25,000 per lane-mile on average, while costs are lower when DOT provides detailed project plans and projected unit costs.
The researchers also collected data on individual California DOT engineers and found that a substantial amount of the variation in the cost of an overhaul project can be explained by which engineer is assigned to it. Replacing an expensive construction engineer, at the 95th percentile of the cost distribution, with an average engineer would reduce costs by an average of 5.3%, which equates to $24,000 per mile or $220,000 per average project.
Lack of competition leads to expensive projects
Road projects also suffer from a lack of competition among builders, a factor procurement officials and subcontractors frequently cite to researchers. Most states have fewer construction firms than they did a decade ago, and most state DOTs report little communication with bidders.
A 12% increase in bidder scope correlates with a 17.6% decrease in costs, resulting in an average decrease of $65,000 per lane-mile and $1 million at the project level.
The researchers also examined external data on the highway construction industry and found that concentration in the industry appears to be increasing.
“Most states have experienced a loss of construction firms, and an increase in the size of remaining firms, over the past 10 years,” according to the paper.
They found that one additional bidder on a project is associated with 8.3 percent lower costs, or a savings of about $30,000 per lane mile, which translates to $460,000 for the average project.
Finally, the researchers found that limits on the amount of work that can be outsourced also correlate with higher costs.
“Restrictions on subcontracting may decrease competition by limiting the pool of potential prime contractors who can complete the project,” the authors wrote.
