Int. J. Oil, Gas and Coal Technology, Vol. 5, No.

1, 2012

An analysis of inaccuracy in pipeline construction

cost estimation
Zhenhua Rui*, Paul A. Metz and Gang Chen
Department of Mining and Geological Engineering,
University of Alaska Fairbanks,
Duckering Building 418, P.O. Box 750708,
Fairbanks, Alaska, 99775, USA
Fax: +1-907-474-6635
E-mail: zhenhuarui@gmail.com
E-mail: pametz@alaska.edu
E-mail: gchen@alaska.edu
*Corresponding author
Abstract: The aim of this paper is to investigate cost overrun of pipeline
projects. A total of 412 pipeline projects between 1992 and 2008 have been
collected, including material cost, labour cost, miscellaneous cost, right of way
(ROW) cost, total cost, pipeline diameter, pipeline length, pipelines location,
and year of completion. Statistical methods are used to identify the distribution
of the cost overrun and the causes for overruns. The overall average cost
overrun rates of pipeline material, labour, miscellaneous, ROW and total costs
are 4.9%, 22.4%, 0.9%, 9.1% and 6.5% respectively. The cost estimation of
pipeline cost components are biased except for total cost. In addition, the cost
error of underestimated pipeline construction components is generally larger
than that of overestimated pipeline construction components except total cost.
Results of analysis show that pipeline size, capacity, diameter, length, location,
and year of completion have different impacts on cost overrun of construction
cost components. [Received: May 26, 2011; Accepted: June 28, 2011]
Keywords: pipeline cost; cost overrun; cost estimation.
Reference to this paper should be made as follows: Rui, Z., Metz, P.A. and
Chen, G. (2012) An analysis of inaccuracy in pipeline construction cost
estimation, Int. J. Oil, Gas and Coal Technology, Vol. 5, No. 1, pp.2946.
Biographical notes: Zhenhua Rui is a PhD candidate in Energy Engineering
Management and MBA student at the University of Alaska Fairbanks. He also
received his Masters degree in Petroleum Engineering from the same
university, in addition to his Masters degree in Geophysics from China
University of Petroleum, Beijing. His current research is the Engineering
Economics of the Alaska In-state Natural Gas Pipeline.
Paul A. Metz is a Professor of Department of Mining and Geological
Engineering at the University of Alaska Fairbanks. He received his PhD from
Imperial College of Science Technology and Medicine. He also received his
MS in Economic Geology and MBA from the University of Alaska. His
research interest include: market and transportation analysis of mineral
resources; analysis of transport systems; engineering geological mapping and
site investigation; mineral and energy resource evaluation.

Copyright 2012 Inderscience Enterprises Ltd.

29

30

Z. Rui et al.
Gang Chen is a Professor of Department of Mining and Geological Engineering
at the University of Alaska Fairbanks. He received PhD in Mining Engineering
from Virginia Polytechnic Institute and State University. He also received his
MS in Mining Engineering from the Colorado School of Mines. His research
interest include: rock mechanics in mining and civil engineering; mine ground
engineering; frozen ground engineering and GIS application in mining industry.

Introduction

Cost error is the tendency for actual costs to deviate from estimated cost. Bias is the
tendency for that error to have a non-zero mean (Bertisen and Davis, 2008). Cost error or
bias is common and a global phenomenon in cost estimating (Flyvbjerg et al., 2003). Cost
estimating error and bias in other types of projects were mentioned and studied in many
papers. Pohl and Mihaljek (1992) reviewed 1,015 World Bank projects from 1947
to 1987 with 22% average cost overrun and 50% time overrun. Merrow (1998) found
that 47 of 52 megaprojects have an average overrun of 88%, and large projects and
megaprojects appear to have more cost growth than smaller projects. Flyvbjerg et al.
(2003) examined 258 transport infrastructure projects (rail, bridge and road) with average
28% cost overrun. Bertisen and Davis (2008) reviewed 63 international mining projects
with an average of 14% higher than estimated cost in the feasibility study. The literature
reviewed also shows that cost overrun exists over time. Overall cost overrun rates of all
Indiana departments of transportation projects was 4.5%, and 55% of all projects
experienced cost overruns (Bordat et al., 2004). Jacoby (2001) found that 74 projects with
a minimum cost of $10 million had 25% cost overruns. Many researchers also try to
explain the project cost overrun phenomenon. Some researchers proposed that optimism
and deception are major reasons for causing cost overrun (Flyvbjerg et al., 2003).
Some researchers believe that engineers and managers have incentive to underestimate
cost (Bertisen and Davis, 2008). Flyvbjerg (2007) suggested that cost underestimation
and overestimation of transport infrastructure appear to be intentional by project
promoters. Information asymmetries were also suggested as a reason for cost overrun
(Pindyck and Rubinfeld, 1995). Rowland (1981) mentioned that large projects increase
the likelihood of a high number of change orders. Jahren and Ashe (1990) suggested that
large projects have large cost overruns due to complexity, but also mentioned that
managers of large projects try to keep cost overrun rates from growing excessively large.
Large projects can lead to savings in unit cost, but it will limit the number of companies
who are able to carry out projects. Therefore, there is a trade-off between economies of
scale and competitive bidding practices (Bordat et al., 2004). Odeck (2004) indicated that
large projects have better management than small projects. Soil, drainage, climate and
weather conditions have an impact on design standard and cost of materials for road and
rail projects, and location influences construction and material cost due to varying
distance from supplies (RGL Forensics, 2009). An Australian study shows that publicprivate partnership projects perform better than traditionally procured projects, While a
European study shows public-private partnerships exhibit higher costs than traditionally
procured infrastructure (Infrastructure Partnerships Australia, 2008; RGL Forensics,
2009). Flyvbjerg (2007) suggested that more research on the role of ownership in causing

An analysis of inaccuracy in pipeline construction cost estimation

31

efficiency difference between projects needs to be conducted. He also used technical,

psychological and political-economic factors to explain cost overruns.
Although many studies have been conducted on projects cost overrun, there are
limited available references about pipeline project cost overrun. With available pipeline
data, this paper will focus on the cost estimation error of pipeline construction
components, and will investigate and identify the frequency of occurrence of cost
overruns as well as the magnitude of the differences between estimated cost and actual
cost in pipeline projects. In addition, cost overrun in terms of pipeline project size,
pipeline capacity, diameter, length, location, and year of completion are also investigated.

Data source

In this study, the pipelines are selected on the basis of data availability. The Oil and Gas
Journal pipeline cost data are collected from Federal Energy Regulatory Commission
filings from gas transmission companies, which are published by the Oil and Gas Journal
annual data book (Penn Well Corp, 19922009). Due to limited offshore pipeline data,
the pipeline data set in this paper contains only onshore pipeline data, and the pipeline
cost in this paper does not include compressor station cost.
The pipeline data set provides location and year, pipeline diameter and length.
Pipelines in the data set were distributed in all states in the USA except Alaska and
Hawaii. It also contains the cost information of 15 Canadian pipelines. The pipelines
were completed between 1992 and 2008. Unfortunately, the data does not show the
construction period of the pipelines. Therefore, cost is defined as real, accounted costs
determined at the time of completion. The entire data set has 412 onshore pipelines. The
data include estimated and actual cost of five cost components. The estimated costs are
defined as budget, or forecast, costs at the time of decision to build the pipeline. The
actual costs are defined as real accounted costs determined at the time of completing
pipelines (Flyvbjerg et al., 2003). The five cost components are material, labour,
miscellaneous, right of way (ROW) and total costs. Material cost covers cost of line pipe,
pipeline coating and cathodic protection. Labour costs consist of the cost of pipeline
construction labour. Miscellaneous cost is a composite of the costs of surveying,
engineering, supervision, contingencies, telecommunications equipment, freight, taxes,
allowances for funds used during construction, administration and overheads, and
regulatory filing fees. ROW cost contains the cost of ROW and allowance for damages.
The total cost is the sum of material cost, labour cost, miscellaneous cost and ROW cost
(Penn Well Corp, 19922009).
The location information for U.S pipelines was provided in a state format. A total of
48 states were referred to, except for Alaska and Hawaii. The US Energy Information
Administration (EIA) breaks down the US Natural Gas pipelines network into six
regions: Northeast, Southeast, Midwest, Southwest, Central and Western. The state
grouping is defined based on 10 federal regions of the US Bureau of Labour Statistics
(EIA, 2010). The map of regional definitions is shown in Figure 1. These regional
definitions are used to analyse geographic difference. In this paper, the USA pipeline data
are divided in to six regions according to the EIA definition. In addition, there are 15
Canadian pipelines, but reports did not show a specific province in Canada.

32

Z. Rui et al.

Figure 1

US natural gas pipeline region map (EIA) (see online version for colours)

Note: Alaska and Hawaii are not included in the US Natural pipeline network map.

In order to take a comparative analysis, all costs are adjusted by the Chemical
Engineering Plant Cost Index to 2008 dollars. The Chemical Engineering Plant Cost
Index is widely applied on process plants for adjusting construction cost. The Chemical
Engineering Plant Cost Index has 11 sub-indexes and a composite index, which is the
weight average of the 11 sub-indexes (Chemical Engineering, 2011). Pipeline index and
construction labour index is used to adjust pipeline material and labour cost. The
Chemical Engineering Plant Index is applied to pipeline miscellaneous and ROW cost.

Performance of individual pipeline construction component cost

estimation

This section will evaluate performance of pipeline construction component cost

estimation. Several methods may be used to study the difference between the estimated
cost and the actual cost. In this study, the estimated cost and the actual cost are used to
calculate cost overrun rate as a measurement of cost overrun. The formula for cost
overrun rate is:
Cost overrun rate = (actual cost - estimated cost) / estimated cost

If the cost overrun rate is positive, the cost is underestimated, otherwise it is

overestimated. In this paper, all cost overrun rates are calculated with the above formula.
The histogram of the cost overrun rate for pipeline construction components are
shown in Figure 2 to Figure 6. If the cost error is small, the histogram would be narrowly
concentrated around zero. If underestimated cost is as common as overestimated cost, the
histogram would be symmetrically distributed around zero. It appears that five figures
exhibited non-symmetric distributions, and none of them satisfied the above mentioned

An analysis of inaccuracy in pipeline construction cost estimation

33

assumption. For material cost, 172 (42.0% of total) pipelines were underestimated, and
238 (58.0% of total) were overestimated. For labour cost, 273 (66.7% of total) pipelines
were underestimated, and 136 (33.3% of total) were overestimated. For miscellaneous
cost, 166 (40.8% of total) pipelines were underestimated, and 241 (59.2% of total) were
overestimated. For ROW cost, 174 (45.7% of total) pipelines were underestimated, and
207 (54.3% of total) were overestimated. For total cost, 222 (54.0% of total) pipelines
were underestimated, and 189 (46.0% of total) were overestimated.
Figure 2

Cost overrun rates of material cost (see online version for colours)

Figure 3

Cost overrun rates of labour cost (see online version for colours)

34

Z. Rui et al.

Figure 4

Cost overrun rates of miscellaneous cost (see online version for colours)

Figure 5

Cost overrun rates of ROW cost (see online version for colours)

In summary, more pipelines were overestimated for material, miscellaneous and ROW
costs, while more pipelines were underestimated for labour and total cost. In general, the
percentage of overestimated pipelines implies that there are still a fairly good number of
pipelines being completed with costs less than the estimated cost. In addition, the
majority of pipelines (87.1% for material cost, 72.3% for labour cost, 67.3% for
miscellaneous cost, and 89% for total cost) have cost overrun rates between 0.4 and 0.4.
However, only 49.0% of the pipelines for ROW cost have cost overrun rates between

An analysis of inaccuracy in pipeline construction cost estimation

35

0.4 and 0.4. It demonstrates that ROW cost overrun is more severe than cost
components, which is also indicated by its standard deviation (SD) (Table 1).
Figure 6

Table 1

Cost overrun rates of total cost (see online version for colours)

Summaries of cost overrun of pipeline construction cost components

Skewness
Kurtosis
Minimum
Maximum
Range
Average
Standard deviation
Total number of pipelines
Number of underestimated pipelines
Number of overestimated pipelines

Material

Labour

Miscellaneous

ROW

Total

5.77
49.22
0.95
5.67
6.61
0.05
0.55
410
172
238

4.83
44.88
0.94
7.04
7.98
0.22
0.62
409
273
136

4.77
42.06
0.94
4.56
5.50
0.01
0.56
407
166
241

3.25
15.77
1.00
4.55
5.55
0.09
0.81
381
174
207

2.20
12.29
0.94
2.12
3.06
0.07
0.34
411
222
189

Furthermore, statistical summaries of cost overrun of individual pipeline construction

components are shown in Table 1. Skewness is a quantitative way to measure symmetry
of the distribution. Symmetrical distribution has a skewness of 0. Positive skewness
means that the right tail is heavier than the left tail. Negative skewness means that the
left tail dominates distribution. Kurtosis is a quantitative method to evaluate whether the
shape of the data distribution fits the normal distribution. A normal distribution has a
kurtosis of 0. Kurtosis of a flatter distribution is negative and that of a more peaked
distribution is positive (Hill et al., 2007). Values of skewness and kurtosis in Table 1
show that none of the cost overrun of five components is symmetrical normal
distribution, which matches the implication from the histogram graphs. Some

36

Z. Rui et al.

transformation techniques (such as natural log transformation) are applied to cost overrun
rate data for fitting them to normal distribution, but the data transformations are
unsuccessful. Therefore, the non-parametric statistical test is used in the below sections.
P-value will be produced by each test. In statistics, traditionally, p < 0.01 is considered
highly significant, p < 0.05 is significant. This criterion is also adopted in this paper.
Table 1 shows that the minimum cost overrun rate for individual cost components are
between 94% (labour cost) and 100% (ROW cost). The maximum cost overrun rate for
individual cost components are between 212% and 704%. The value of minimum and
maximum indicates that cost performance for some pipelines is extremely bad. The
labour cost overrun has the largest maximum-minimum range of 798%, while total cost
overrun has the smallest range of 306%. The SD of individual cost components are fairly
significant, between 34% and 81% of the estimated cost. The large maximum-minimum
range and SD indicate that performance of pipeline construction cost estimating is very
unstable. It is noteworthy that labour cost has the largest maximum-minimum range
and second largest SD, and ROW cost has the largest SD. Therefore, it is difficult to
estimate labour cost and ROW cost accurately. Total cost overrun has the smallest
maximum-minimum range and SD due to its aggregation of other components.
Average cost overrun is a key parameter to measure cost estimation performance of
individual pipeline construction cost components. The labour cost has the highest average
cost overrun of 22%, followed by ROW cost of 9%, total cost of 7%, material cost of 5%
and miscellaneous cost of 1%. The material, labour, ROW and total costs show positive
average cost overrun, while the miscellaneous cost has negative average cost overrun.
This result denotes that, in average, actual cost is larger than estimated cost for all
pipeline construction cost components except the miscellaneous cost.
As mentioned before, there are more pipelines with overestimated material,
miscellaneous and ROW costs than those with underestimated pipelines, and there are
more pipelines with underestimated labour and total costs than those with overestimation
of these two cost components. However, it is an interesting finding that the average cost
overruns of material and ROW cost are still positive, even though there are more
pipelines with overestimated material cost, and ROW cost. It appears that cost estimation
of pipeline construction cost components is biased, and the underestimating error is
generally greater than the overestimating error for some pipeline construction cost
components. In this paper, two statistical tests are performed to investigate this inference.
A binomial test is conducted to examine if the error of cost overestimating is as
common as the error of cost underestimating. As shown in Table 2, the p-value of the
binomial test rejects the null hypothesis that the overestimating error is as common as the
underestimating error for material, labour, miscellaneous, and ROW cost estimation
(p < 0.05, two sided test), but fails to reject that for total cost (p > 0.05, two sided test).
Therefore, the cost estimations of all pipeline construction cost components are biased
except total cost. Furthermore, the non-parametric Mann-Whitney test is employed
to test if the cost underestimating error is the same as the cost overestimating error. The
p-value shown in Table 2 shows that the error of underestimated pipelines cost overrun
are much larger than the error of overestimated pipelines cost overrun for material,
labour, miscellaneous and ROW cost (p < 5%, one sided test), but not for total cost (p >
5%, two sided test). Hence, the underestimating error is significantly more common and
larger than the overestimating error for all pipeline cost components, but not for total
cost.

37

An analysis of inaccuracy in pipeline construction cost estimation

Table 2

Statistical tests of cost overrun of pipeline construction cost components

Binomial test
Mann-Whitney test

Material

Labour

Miscellaneous

ROW

Total

0.001
0.047

0
0

0
0

0
0.039

0.114
0.082

After analysing overall cost overrun of pipeline projects, it is more important to identify
significant factors that influence pipeline projects cost overruns. The analyses of cost
overruns in terms of pipeline project size, pipeline capacity, diameter, length, location,
and completion time are carried out in the following sections.

Cost overrun in terms of pipeline project size

Here, the project size is measured by the pipelines actual total cost. The pipeline
total cost ranges from $33,576 to $1,933,839,076. According to the pipeline actual
total cost, the pipeline project size is classified into groups of small, medium and large.
185 pipelines with a total actual cost less than $10,000,000 are classified as small
projects, 192 pipelines with a total actual cost between $10,000,000 and $100,000,000
are classified as medium projects, and 33 pipelines with a total actual cost larger than
$100,000,000 are classified as large projects.
Table 3

Average cost overrun rate for different project size groups

Components
Material

Labour

Miscellaneous

ROW

Total

Project size

Average

SD

Skewness

Kurtosis

Small
Medium
Large
Small
Medium
Large
Small
Medium
Large
Small
Medium
Large
Small
Medium
Large

0.10
0.01
0.04
0.16
0.28
0.13
0.01
0.01
-0.04
0.18
0.30
0.23
0.04
0.08
0.12

0.70
0.42
0.13
0.47
0.76
0.41
0.46
0.46
0.46
1.20
1.39
0.54
0.36
0.32
0.24

4.55
7.34
1.22
1.31
5.19
-0.50
1.08
0.98
1.08
2.87
3.28
1.60
1.89
2.70
2.50

30.86
80.95
4.19
6.95
40.15
4.03
5.68
4.01
5.68
13.30
15.00
7.12
10.04
15.24
11.58

Descriptive statistical analysis of cost overrun in terms of project size is shown in

Table 3. As seen in Table 3, for the material, labour, miscellaneous cost and ROW cost,
there is no linear relationship between average cost overrun rates and project sizes.
However, for total cost, the average cost overrun rate increases as the projects size
increases. For the total cost, large projects have the highest cost overrun rates. A
plausible explanation is that a large pipeline project, normally bigger than 1 billion
dollars, can cause a huge demand that influences market price, such as steel price, and

38

Z. Rui et al.

further increases the cost of pipeline construction. Expectation of increased pipeline

construction costs induced an increase in the current unit construction cost (Rui et al.,
2011a). Suppliers would raise prices with expectation for more demand. In addition, a
large project limits the numbers of suppliers and contractors, reduces competition
and increases the cost (Bordat et al., 2004; RGL Forensics, 2009). However, for the
miscellaneous cost, large projects have the lowest cost overrun. It is possible that larger
projects have better management systems which coordinate different departments,
increase the efficiency of material utilisation and take advantage of economies of scale.
In order to determine if there is a strong relationship between project sizes and
cost overrun for different pipeline construction components, the non-parametric
Kruskal-Wallis (KW) test is used to test the null hypothesis that the project size has no
effect on cost overrun of pipelines. The KW test is chosen because the value of skewness
and kurtosis shows that the cost overrun of each diameter group is not a normal
distribution. Therefore, the KW test will be used in this part and following parts when the
data does not produce normal distributions.
For total cost, the result of the KW test shows that cost overrun for different project
size groups are significantly different (p < 0.05). However, such a significant difference
is not found for other cost components (p > 0.05). Therefore, it is concluded that the
project size significantly influences cost overrun for total cost, but not for other
individual cost components.
Table 4

Average cost overrun rate for different diameter groups

Components
Material

Labour

Miscellaneous

ROW

Total

Diameter groups

Average

SD

Skewness

420 inches
2230 inches
3448 inches
420 inches
2230 inches
3448 inches
420 inches
2230 inches
3448 inches
420 inches
2230 inches
3448 inches
420 inches
2230 inches
3448 inches

0.13
0.03
0.00
0.39
0.21
0.09
0.17
0.16
0.02
0.43
0.24
0.11
0.17
0.03
0.02

0.68
0.42
0.52
0.95
0.42
0.33
0.99
0.35
0.48
1.57
1.38
0.81
0.48
0.24
0.23

3.70
5.62
8.56
3.85
1.14
0.87
4.11
0.93
0.92
2.61
3.31
2.71
1.72
0.65
1.39

Kurtosis Num. of pipelines

21.37
51.28
92.67
23.97
5.79
7.18
24.64
4.39
4.38
10.01
15.53
15.52
6.96
6.55
9.59

124
131
155
126
131
155
123
131
152
115
122
153
124
131
155

Cost overrun in terms of pipeline diameter

The range in pipeline diameter is between 4 and 48 inches. The pipeline projects are
categorised into three diameter groups: 420 inch, 2230 inches and 3448 inches.
Pipeline construction component cost overruns for three different pipeline diameter
groups are shown in Table 4.

39

An analysis of inaccuracy in pipeline construction cost estimation

For material, labour, ROW and total costs, 420 inch pipelines have the highest
average cost overrun rate, followed by 2230 inches pipelines and 3448 inches
pipelines. For miscellaneous cost, 420 inches pipelines have the highest average cost
overrun, but 2230 inches pipelines have the lowest average cost overrun of 16%. 420
inches groups have the highest average cost overrun rate for all construction components
costs. It appears that small diameter pipelines are prone to cost overrun.
Therefore, the non-parametric KW test is used to test the null hypothesis that type of
pipeline diameter has no effect on cost overrun of pipelines construction component cost.
For material, ROW and total cost, the result of the KW test shows the cost overrun is not
significantly different for different diameter groups (p > 0.5). For labour and
miscellaneous costs, the result of the KW test shows the cost overrun for types of
diameter groups is significantly different (p < 0.01). Therefore, it is concluded that types
of diameter groups influence cost overrun of pipelines for labour and miscellaneous cost,
and not for other components costs.

Cost overrun in terms of pipeline length

The cost overrun in terms of pipeline length is tested in this section. The range of pipeline
length is between 0.1 and 713 miles. The length group is divided into two groups:
020 miles and 20713 miles. About 78% of pipelines are shorter than 20 miles, and the
rest of the pipelines are between 20 and 713 miles. Pipeline construction component cost
overruns for two different pipeline length groups are shown in Table 5.
Table 5

Average cost overrun rate for different length groups

Components

Length groups

Average

SD

Skewness

Kurtosis

Num. of pipelines

Material

020 miles
20713 miles
020 miles
20713 miles
020 miles
20713 miles
020 miles
20713 miles
020 miles
20713 miles

0.05
0.04
0.21
0.26
0.17
0.03
0.23
0.30
0.06
0.10

0.56
0.51
0.60
0.70
0.72
0.40
1.28
1.18
0.35
0.30

5.25
8.14
5.37
3.46
4.71
0.82
3.11
3.89
2.12
2.80

44.21
73.36
56.39
20.41
38.60
4.74
14.53
21.62
11.85
14.57

321
89
323
89
319
87
303
87
321
89

Labour
Miscellaneous
ROW
Total

For material, miscellaneous and ROW costs, the 020 miles group has the highest
average cost overrun rate, followed by the 20713 miles inches pipelines. For labour cost
and total cost, the 20713 miles pipelines have incurred the highest average cost overrun,
followed by 020 miles pipelines. It appears that different construction component costs
have different cost overrun rate patterns.
The KW test is used to test the null hypothesis that type of pipeline length has no
effect on cost overrun. For all construction cost components, the results of the KW tests
show the cost overrun rate difference between types of length groups are not significant
at the 5% significance level (p > 0.1). Therefore, cost overrun rates of all construction
cost components are not significantly influenced by types of pipeline length.

40

Z. Rui et al.

Cost overrun in terms of pipeline capacity

In this paper, the pipeline volume (capacity) is calculated with formula (Zhao, 2000):

V = S *L

D
where S = , V is the pipeline volume (ft3), S is the pipeline cross-sectional area
2
(ft2), L is the pipeline length (ft), and D is the pipeline diameter (ft). In the data set for
this study, the smallest pipeline capacity is 92 ft3, and the largest is 36,220,080 ft3. In this
section, all pipelines are divided into three different groups of pipeline capacities to test
whether cost overrun rate is significantly different for different pipeline capacity.
135 pipelines with a capacity between less than 75,000 ft3 are classified as small projects,
136 pipelines with a capacity between 75, 000 ft3 and 284,768 ft3 are classified as
medium projects, and 139 pipelines with a capacity larger than 284,768 are classified as
large projects.
Descriptive statistical analysis of cost overrun in terms of pipeline capacity is shown
in Table 6. A noticeable observation is that the small pipeline capacity group has the
highest average cost overrun rates for all construction cost components. Pipelines with
small capacity appear to be particularly prone to cost overrun. Projects with large
capacity may take more advantage of economies of scale.
2

Table 6

Average cost overrun rates for different capacity groups

Components
Material

Labour

Miscellaneous

ROW

Total

Capacity groups

Average

SD

Skewness

Kurtosis

Num. of pipelines

Small
Medium
Large
Small
Medium
Large
Small
Medium
Large
Small
Medium
Large
Small
Medium
Large

0.19
0.03
0.05
0.24
0.25
0.16
0.13
0.08
0.03
0.34
0.19
0.20
0.12
0.03
0.05

0.80
0.24
0.43
0.57
0.84
0.38
0.97
0.43
0.43
1.50
1.19
1.05
0.46
0.29
0.21

3.81
0.97
8.75
1.54
5.37
0.47
4.14
1.11
0.94
2.50
4.00
3.54
1.72
2.45
0.95

22.63
4.47
93.69
7.35
38.99
5.10
25.36
4.25
4.79
9.29
23.95
19.34
7.77
13.17
7.96

135
136
139
135
137
140
133
135
138
128
130
132
135
136
139

The KW test is used to verify that the pipeline capacity has no effect on cost overrun for
construction cost components. For material cost, the result of KW test rejects the null
hypothesis (p < 0.001), indicating that pipeline capacity influences material cost overrun,
and projects with small pipeline capacity have large positive cost overrun rates. Pipeline
projects with large capacity mean that more material is consumed. Therefore, projects
with a large capacity take advantage of economies of scale in purchasing materials,
resulting in lower costs for materials as pipeline capacity increases. It may be that the

41

An analysis of inaccuracy in pipeline construction cost estimation

estimator of pipeline projects did not estimate unit price with capacity changing
accurately or did not consider economies of scale in material cost. This may result in
pipeline projects with small capacity that have large cost overrun. For labour,
miscellaneous, ROW and total costs, the results fail to reject the null hypothesis that
pipeline capacity has no effects on the cost overrun rates (p > 0.05). Therefore, the cost
overrun differences in the labour, miscellaneous, ROW and total costs are not statistically
significant for different types of pipeline capacities.
Table 7

Average cost overrun rates for different regions

Components
Material

Labour

Miscellaneous

ROW

Total

Region groups

Average

SD

Skewness

Kurtosis

Num. of pipelines

Midwest
Northeast
Southwest
Canada
Central
Southeast
Western
Midwest
Northeast
Southwest
Canada
Central
Southeast
Western
Midwest
Northeast
Southwest
Canada
Central
Southeast
Western
Midwest
Northeast
Southwest
Canada
Central
Southeast
Western
Midwest
Northeast
Southwest
Canada
Central
Southeast
Western

0.02
0.02
0.02
0.18
0.06
0.26
0.09
0.12
0.12
0.28
0.02
0.20
0.33
0.55
0.06
0.07
0.05
1.32
0.02
0.04
0.08
0.34
0.10
0.12
1.59
0.26
0.08
1.01
0.01
0.00
0.84
0.14
0.11
0.13
0.19

0.29
0.56
0.37
0.26
0.28
0.92
0.50
0.38
0.34
0.60
0.33
0.49
0.85
1.14
0.43
0.45
0.52
2.25
0.37
0.55
0.54
0.99
0.76
1.14
2.18
1.11
0.65
2.35
0.24
0.26
0.34
0.31
0.29
0.45
0.48

0.03
7.33
0.32
0.80
1.58
3.63
3.22
1.19
0.87
1.04
1.04
0.31
3.01
4.20
1.72
1.14
0.62
1.56
0.84
1.60
1.73
3.42
2.31
3.66
0.76
2.74
1.18
1.84
0.77
1.72
0.60
0.86
1.35
1.93
2.76

4.81
72.15
5.35
2.75
8.24
15.69
16.22
8.36
5.91
3.30
3.95
2.38
14.70
23.28
7.74
5.97
2.62
4.03
3.97
5.93
6.28
20.21
12.10
17.27
2.01
12.51
4.90
5.14
5.72
10.97
3.68
4.11
6.69
6.80
10.77

55
156
30
14
52
55
48
55
157
30
15
52
55
48
54
155
30
14
51
55
47
53
150
27
14
50
52
44
55
155
30
15
52
55
48

42

Z. Rui et al.

Cost overrun in terms of different regions

As we know, pipeline cost is significantly different for different regions (Rui et al.,
2011b). This section discusses whether cost overrun of pipeline construction cost
components is different for different regions.
As seen from Table 7, it is noticeable that cost overrun rate of the pipelines in the
Northeast regions is the lowest in the USA as compared to the other regions, even though
the Northeast has a relatively high cost of living. In addition, the total cost overrun rate of
pipelines in the Northeast regions is a perfect 0. A possible explanation is that 155 out of
412 pipelines in the data set are located in the Northeast regions, which provides more
practical experience and historical information for new pipeline cost estimating in this
region. A few negative cost overrun rates also appear in some regions for different
construction component cost.
The result of KW tests shows that the cost overruns of difference for different regions
are highly significant for all construction cost components (p < 0.001). Weather
condition, soil property, population density, cost of living, terrain condition, and distance
from supplies are variable for different regions and make pipeline project cost estimation
more difficult (Rui et al., 2011b; Zhao, 2000). More detailed information on pipeline
routes is needed to explain cost overrun difference among different regions.
Therefore, it is concluded that the cost overrun rates of all cost components show
significant difference for different regions and the pipelines location matters to cost
overrun in all cost components.

Cost overrun over time

Forty-seven megaprojects between the mid 1960s and 1984 were reported with a cost
overrun rate of 88% (Merrow, 1998). Over 1,000 World Bank projects between 1947 and
1987 had cost estimated errors (Pohl and Mihaljek, 1992). 55% of all Indiana Department
of Transportations projects between 1996 and 2001 experienced cost overruns (Bordat
et al., 2004). Cost overrun is constant for more than a 70-year period between 1910 and
1998 for 208 transportation projects in 14 nations on five continents (Flyvbjerg et al.,
2003). All the literature show that the cost estimated error persists over time in many
different types of projects. But is there any improvement in pipeline compressor station
projects over time? This section tries to discover whether the cost estimating performance
has improved over time. Improved performance of cost estimating is normally expected.
The average cost overrun rate of compressor station construction components between
1992 and 2008 are displayed in Figure 7. The cost overrun rate of ROW cost fluctuates
widely with a declining trend. The cost overrun rate of labour cost shows a decrease
before 2004 and then a significant increase after 2004. But cost overrun rate of material,
miscellaneous and total costs change more gradually over time.
The length of the construction phase influences cost overrun rate. Therefore, it is
better to use the year of planning to build as the time measurement (Flyvbjerg et al.,
2003), but the available data does not provide the year of building and construction
period. Therefore, the year of completion is used to as a measure of the time, which may
cause bias. The non-parametric Nptrend test is conducted to test whether there is a trend
of cost overrun rate over years. All results of the Nptrend test show only cost overrun
rate of ROW decreases over time (p < 0.05). Therefore, based on available data, it is

An analysis of inaccuracy in pipeline construction cost estimation

43

concluded that cost estimating of ROW cost has improved over time, not for other
components.
Figure 7

Annual average cost overrun rate of pipeline construction cost components (see online
version for colours)

10 Conclusions and future work

This paper statistically analyses the cost estimating performance of individual pipeline
construction cost components by using 412 pipeline projects. The trend and distribution
of all 412 pipelines construction cost components cost estimation over the 19922008
periods are analysed. Overall average cost overrun rates of the material cost, labour cost,
miscellaneous cost, ROW cost and total cost are 4.9% (SD = 54.8%), 22.4%
(SD = 61.8%), 0.9% (SD = 56.2%), 9.1% (SD = 80.9%) and 6.5% (SD = 33.5%)
respectively. The labour and ROW costs have the largest cost overrun compared to the
other cost components. The statistical test results show that cost estimating in all cost
components is biased except in the total cost. And the magnitude of cost underestimating
error is generally larger than the overestimating error except for total cost. Furthermore,
cost overrun rates of pipeline construction cost components are analysed in terms of
pipeline project size groups, capacity groups, diameter groups, length groups, location
groups, and the year of completion to investigate the relationship between cost overruns
and different groups. The cost overrun rate for the total cost shows a significant
difference for different project size groups, and the cost overrun rate increases with
project size. An expected large demand, limited supplies and contractors for large-size
projects cause big cost overruns (Bordat et al., 2004; RGL Forensics, 2009; Rui et al.,
2011a). The cost overrun rates of the labour and miscellaneous costs show significant
differences for diameter groups, and the small diameter group has the highest average
cost overrun rate. The cost overrun rates of all construction cost components are not
significantly influenced by pipeline length. The cost overrun rate of the material cost is
significant for different pipeline capacity groups, and projects with small pipeline
capacities appear to be particularly prone to cost overrun. Large capacity pipeline
projects may purchase material at low price due to large scale. The planners or estimator

44

Z. Rui et al.

may not estimate the material unit price changing with scale accurately or may even fail
to consider the economies of scale factors. The cost overruns of all construction cost
components are significantly different for different regions. The weather, soil, terrain,
terrain condition, population density and experience are suggested as causes for making it
difficult to estimate cost accurately. Cost estimating accuracy of pipeline projects have
not improved over the 19922008 time period.
Based on the analysis of historical pipeline cost estimated errors, Table 8 provides
some proposed guidelines for project estimators conducting pipeline cost estimation. It is
considered that individual cost components should receive varying degree of attention
under different conditions in order to make cost estimation efficient and reliable. A four
level scale: maximum attention, moderate attention, less attention, and minimum
attention, is applied for the amount of attention and effort paid to individual cost
component cost analysis, depending on the project size, pipe diameter, pipeline length,
pipeline capacity, and region of construction, as given in Table 8.
Table 8

Proposed guidelines for pipeline cost estimators

Category

Sub-category

Material

Labour

Miscellaneous

ROW

Total

Project size

Small
Medium
Large
420 inches
2230 inches
3448 inches
020 miles
20713 miles
Small
Medium
Large
Midwest
Northeast
Southwest
Canada
Central
Southeast
Western

C
D
D
B
D
D
D
D
B
D
D
D
D
D
B
D
D
B

B
A
B
A
A
C
A
A
A
A
B
B
B
A
D
B
A
A

D
D
D
B
B
D
B
D
B
C
D
C
C
D
A
D
D
C

B
A
A
A
A
B
A
A
A
B
B
A
C
B
A
A
C
A

D
C
B
B
D
D
C
C
B
D
D
D
D
A
B
B
B
B

Diameter

Length
Capacity

Region

Notes: A = maximum attention; B = moderate attention;

C = less attention; D = minimum attention

To the best of the authors knowledge, this paper is the first in-depth analysis of pipeline
construction component cost overruns. Suggested future work may include the following
list:

Different reasons for cost overrun for other types of projects are proposed by
different researchers, and many of the proposed causes did not have hard data
support. The same situation applies to pipeline projects; lack of good quality
projects data is a major difficulty in investigating more in-depth causes of pipeline
cost overrun. Therefore, collecting more accurate information on the pipeline

An analysis of inaccuracy in pipeline construction cost estimation

45

construction period, the ownership of projects, the material of pipeline, and the
thickness of pipeline wall is a major part of future work. Furthermore, quantity
analysis of collecting data should be conducted to investigate the causes of cost
overrun.
More application with analysis results will be used in the future pipeline projects,
such as pipeline cost overrun distribution and average cost overrun rate.
Develop a set of recommendations to help mangers and engineers to better estimate
pipeline project costs and minimise the cost estimating errors.

References
Bertisen, J. and Davis, G.A. (2008) Bias and error in mine project capital cost estimation, The
Engineering Economist, Vol. 53, No. 2, pp.118139.
Bordat, C., McCullouch, B., Sinba, K. and Labi, S. (2004) An Analysis of Cost Overruns and Time
Delays of INDOT Projects, Joint Transportation Research Program, Indiana Department of
Transportation and Purdue University, West Lafayette, Indiana.
Chemical Engineering (2011) Chemical Engineerings Plant Cost Index, available at
http://www.che.com/pci (accessed on May 2011).
Energy Information Administration (EIA) (2010) U.S. Natural Gas Pipeline Regional Definitions
Map, available at http://www.eia.doe.gov (accessed on July 2010).
Flyvbjerg, B. (2007) Policy and planning for large infrastructure projects: problems, causes,
cures, Environment and Planning B: Planning and Design, Vol. 34, No. 4, pp.578597.
Flyvbjerg, B., Skamris, M. and Buhl, S. (2003) How common and how large are cost overrun in
transport infrastructure projects?, Transport Reviews, Vol. 23, No. 1, pp.7188.
Hill, R.C., Griffiths, W.E. and Lim, G.C. (2007) Principle of Econometrics, 3rd ed., John Wiley
and Sons, Inc., New York.
Infrastructure Partnerships Australia (2008) Available at http://www.infrastructure.org.au (accessed
on May 2011).
Jacoby, C. (2001) Report on Supplemental Agreement Reasons, AASHTO-FHWA Project Cost
Overrun Study, Federal Highway Administration, US Department of Transportation,
Washington, D.C.
Jahren, C. and Ashe, A. (1990) Predictors of cost-overrun rates, ASCE Journal of Construction
Engineering and Management, Vol. 116, No. 3, pp.548551, American Society of Civil
Engineers, Reston, VA.
Merrow, E.W. (1998) Understanding the Outcomes of Megaprojects: A Quantitative Analysis of
Very Large Civilian Projects, R-3560-PSSP, Rand Corporation, CA.
Odeck, J. (2004) Cost overruns in road construction-what are their sizes and determinants?,
Transport Policy, Vol. 11, No. 1, pp.4353.
Penn Well Corporation (19922009) Oil & Gas Journal Databook, Tulsa, Oklahoma.
Pindyck, R.S. and Rubinfeld, D.L. (1995) Microeconomics, 3rd ed., Prentice-Hall, Englewood
Cliffs, N.J.
Pohl, G. and Mihaljek, D. (1992) Project evaluation and uncertainty in practice: a statistical
analysis of rate-of-return divergences of 1015 world bank projects, The World Bank
Economic Review, Vol. 6, No. 2, pp.255277.
RGL Forensics (2009) Ex Post Evaluation of Cohesion Policy Programmes 20002006, Work
Package 10, European Commission, Brussels, BE.
Rowland, H. (1981) The Causes and Effects of Change Orders on the Construction Process, PhD
Thesis, Georgia Institute of Technology, Atlanta, GA.

46

Z. Rui et al.

Rui, Z., Metz, P.A., Reynolds, D.B., Chen, G. and Zhou, X. (2011a) Historical pipeline
construction cost analysis, International Journal of Oil, Gas and Coal Technology, Vol. 4,
No. 3, pp.244263.
Rui, Z., Metz, A.P., Reynolds, B.D., Chen, G. and Zhou, X. (2011b) Regression models estimate
pipeline construction costs, Oil & Gas Journal, Vol. 109, No. 14, pp.120127.
Zhao, J. (2000) Diffusion, costs and learning in the development of international gas transmission
lines, Working paper IR-00-054, International Institute for Applied Systems Analysis,
Austria.