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Analyzing Cost Overruns: The Case of the Rideau Canal, 1826 - 1832 Merridee Bujaki, PhD, CPA, CA Sprott School of Business, Carleton University, Ottawa, Canada World Canals Conference Inverness, Scotland September 22, 2016 

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Rideau Canal Between Ottawa River and Lake Ontario in Ontario, Canada – 202 km (19 km of artificial channels); 45 locks at 23 lock stations Integral part of strategy for defense of British colonies in North America against the United States; recommended following the War of 1812 Built 1826 – 1832 by civilian contractors superintended by the Royal Engineers (Lieutenant-Colonel John By) & Ordnance Office Continuously operated from 1832 to present, largely unchanged (military, commercial, recreational phases) Designated a World Heritage Site in 2007 

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Research Motivation & Contribution Lieutenant-Colonel John By was recalled to England in May 1832 to answer for overspending on the Rideau Canal My own prior research suggests that By seemed to be cost conscious By was not successful in clearing his name before his death in February 1836 Seems to have been a ‘victim of circumstance’ Geographic, political, and unclear accountabilities Contribution Examination of By’s reports from an explicit accounting perspective and consideration of the reasons underlying ‘overspending’ Exploration of how concepts of ‘justification’ and ‘legitimation’ can be applied to understand By’s reports and how they were received 

Context - Political Britain had retained its colonies in the Canadas following the War of 1812 with the United States, however the war had revealed Canada’s vulnerability to invasion from the U.S. “Memorandum on the Defence of the Canadas” written by Lieutenant Colonel John Harvey in 1818 Expanded upon by the Master General of the Board of Ordnance, the Duke of Wellington, in March 1819 • both included plans for an ‘inland waterway’ to facilitate the movement of troops and supplies at some distance from the Canada – U.S. border Duke of Wellington served as Tory Prime Minister January 22 1828 – November 22 1830 Replaced by Whig Earl Grey during a period of social unrest leading to political reforms and questioning of spending on British colonies 

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Context – Accounting & Reporting Little distinction between engineering and accounting professions in early 1800s Lieutenant-Colonel John By responsible for both during the construction of the Rideau Canal Reported regularly to Board of Ordnance and Inspector General of Fortifications; reports forwarded regularly to Colonial Department and Treasury. Accountability relationship was unclear. By prepared detailed reports of spending and comparison to budget, usually every six months Detailed explanations of variances between actual spending and budget Over/underspending 

Anticipated Cost of the Canal Original estimates – Samuel Clowes • 7 feet deep, stone locks 100 x 22 feet - £230,785 • 5 feet deep, stone locks 80 x 15 feet - £145,802 • 4 feet deep, wood locks 75 x 10 feet - £62,258 – Smyth Commission • 5 feet deep, stone locks 108 x 20 feet - £165,802 • Later increased to £169,000 – Lieutenant-Colonel By • Initial guess - £400,000 (1826 – before seeing site) • First detailed estimate, locks 100 x 22 feet - £474,000 (December 1827) • Estimate for final size 5 feet deep, stone locks 134 x 33 feet - £576,757 • Final estimate – February 1832 - £776,023 Final cost - £822,000+ Key question – why did the canal cost so much more than originally expected? 

Lieutenant-Colonel By’s View “...from the general knowledge I had of the country, having previously served nine years in Canada, I was so aware of the magnitude of the undertaking...that when Major-General Sir J. C. Smyth...informed me that the sum allowed for the Rideau Canal,...was £169,000, I remonstrated against the smallness of the sum... (CCC, By to Durnford, 30 December 1829, p. 110-111). 

Theoretical Perspective Justification • A technical / expert process used to account for or explain choices • Justification presumes an agreed upon set of cultural values and demonstrates allocations in accordance with those values • ‘Justification pressure’ arises when decision maker needs to justify their choice(s) (Huber and Seiser, 2001) • Two types of decision processes – “the decision process and the process of preparing the justification” (Huber and Seiser, 2001, p.73) • Justifications can be of two types: • ‘Accounting’ – why an alternative was chosen • ‘Convincing’ – why an alternative is the best one • Variance analysis can serve as a form of justification • Justifications may be subject to impression management 

Theoretical Perspective Legitimation • “congruence between acts and social values” (Richardson, 1985) – thus is context dependent • Range of strategies are used to establish/maintain legitimacy • Logos – rational arguments (so variance analysis may fit here) • Pathos – emotional claims • Ethos – appeal to ethics “Accounting may be seen as a legitimating institution to the extent that it mediates the mapping between actions and values” (Richardson, 1987, p. 343) Legitimacy management “involves targeted and even manipulative rhetoric aimed at presenting issues in a way that promotes the interests and protects the power position of specific actors” (Erkama and Vaara, 2010) 

Method Transcription of hand written report by Lieutenant Colonel By MG-13-War Office 44 B-1294 Vol 18 pages 217-347 (total 130 pages) February 1829 Summarization of all variances (quantitative – both over and underspending) Classification of explanations of variances by type Analysis of explanations for evidence of legitimation versus justification strategies 

Source: MG-13-War Office 44 B-1294 Vol 18 pages 217-347 Sample Page – 1829 Report 

First Eight Locks Removing Boulders £85”15’0 ¾ There were more Boulders in the Excavation than were anticipated. As the Excavations are now mostly completed it is supposed this Sum will cover all Expenses. The Extra Boulders which would necessarily be met with inconsequence of the Increase in the Permissions of the Locks, were not specifically provided for in the Estimate given to the Committee, it being considered that their re- moval was a Contingent Expense, but the Estimate for- warded to England in the Spring of 1830 being also a [Progress] Report, it was therefore considered correct to state in the same, the probable Cost of this Service. 3[Breast] Work at No. 1 £1369’18’0 The waters in the Ottawa not subsiding so soon the Summer of 1828, as general experience had led to expect it was necessary in order not to lose the Season to raise the Dam and increase its whole volume and an under eddy rendered it also necessary to keep constantly thickening the same to supply the of Material so carried away and this must still be the case until the Works are completed. This is considered a Contingent Expense and therefore not Estimated as the Lower Lock is not nearly completed. It is supposed this expense will be trifling . 

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MPG1-511 5th February 1829 

Findings • Variance analysis reveals the following broad categories of variances: • Reliance on inaccurate planning information • Higher than anticipated materials costs • Higher than anticipated labour costs • Additional costs to enhance the serviceability and durability of the canal • Land and building acquisition costs • Costs to minimize/treat illness • Costs associated with military establishment 

Illustrative Remarks Reliance on inaccurate planning information • “Increase of Expense occasioned by meeting with a Bed of Rock not anticipated, under a Strata of Gravel but above the level required to carry off the Water from the Works and Consequently indispensably necessary to be removed…” (p.224) • “It was originally intended to have left the Banks in a rough state but finding that the frost had in that state a great effect upon them, I considered it indispensably necessary to dress them off in order to prevent their crumbling into the Canal…the necessary of the service was not foreseen when forming the Estimate of Works given to the Committee.” (p. 225) • “The levels from which the original Estimate was formed proved, upon a more minute examination of the ground, very erroneous, the rise to be overcome being above fifteen feet….” (p. 265) 

Illustrative Remarks Higher than anticipated materials costs • “Increase of Expense arises chiefly from the difference between the Estimated and Contract Prices…The Increase in the Price arose from the necessary of having the Puddle required at a distance from the Dam which circumstances was not foreseen at the period of forming the Estimate approved for by the Committee.” (page 272) • “It was supposed and stated to the Contractors that good Building Stone could be found in the immediate Vicinity…an Agreement was made that the Contractors should be allowed Carriage for all Stone…” (18K Chaffeys Mills) Higher than anticipated labour costs • “Increase of Expense arises from…the Contract price exceeding the Estimated one arising from the high rate of Wages demanded by Artificers and labourers in Consequence of the great Sickness which prevails in the Vicinity of Kingston Mills.” (page 332) 

Illustrative Remarks Additional costs to enhance the serviceability and durability of the canal – “These Piers and the Waste Weir necessary to prevent the Water flow over the Dam…Indispensibly necessary to form good abatements for the Dam, in Consequence of the Nature of the Banks of the River, there being a great probability that unless Piers were built, the Water might in time wash away the Banks and work its way round the ends of the Dam.” (p. 263) – “Excess from using Crabs and Chains in place of Rack and Pinions and Cast Iron Valves for Wood” (p.267) Land and building acquisition costs – “It having been ascertained that a greater quantity of Land would be Drowned than stated in the Estimate approved by the Committee the deficiency was provided for….” (p.255) – “The Building Stands on the line of the canal and its removal in Consequence necessary” (21K Brewer’s Upper Mill Section 19) 

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Illustrative Remarks Costs to minimize/treat illness – “Clearing enlarged to promote circulative of air and prevent sickness…” (p.270) – “On Commencing the Works in the Snie, the effluvia arising from disturbing the Soil was so offensive, and of such a Malignant Nature as to occasion great sickness so much so that the Labourers refused to Continue the necessary Clearing and Grubbing” (p.278) Costs associated with military establishment – “A Log House was required to serve as an office for the overseer in charge of the Work, and for the security of the Stores one was purchased accordingly (14K Smiths Falls Section No. 10) – “A Block House is here proposed to serve as Lock Masters House not yet Estimated.” (16K Narrows Section No. 13) 

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Impact of Changing Social and Political Context Post War of 1812, construction of the Rideau Canal to ensure security of Canada and continued access to Canada’s resources was legitimate Values included security, functionality, durability, permanence By 1830 there are calls for significant social reforms in Britain (voting rights, abolishing slavery, improving child labour laws) and questioning of spending on British colonies when poverty and hunger (worsened by poor harvests) were widespread in Britain and the remedies under the existing Poor Law were seen as inadequate and expensive Spending on the Rideau Canal (and other colonial projects) was no longer seen as legitimate as the focus was on ‘peace, retrenchment (of government spending) and reform’ Lieutenant-Colonel By continued to justify his choices, which was no longer sufficient in this new context 

Conclusions - Lieutenant-Colonel By focused on justifying his actions/decisions from a technical and operational perspective - By was not equipped to respond to challenges regarding the canal’s legitimacy as these challenges came from changes in the broader social and political context - By’s military context may have made him better equipped to justify, rather than legitimate, his choices on the Rideau Canal - Variance analysis can support justification of decisions and choices - On its own variance analysis is inadequate to the task of legitimating decisions and choices as legitimation is value and context dependent - Changes in institutionalized values may be used as bases for sanctioning activities and individuals related to actions deemed acceptable under previous values/contexts - Passage of time makes it easier to see these changes in context 

Overall Cost-Benefit “When these extensive works are compared with the sums expended, I am confident that the Rideau Canal will be considered one of the cheapest and most durable works of the kind that has hitherto been constructed” (P.P. 1830-31 (135) IX, 15, Canada Canal Communication,” p.113, Report relative to the Estimate for the Rideau Canal, from By to Durnford, Dec. 30, 1829). 

Limitations & Future Research Limitations • Examined expenditures only up to 1829 • Some overlap in theoretical concepts of ‘justification’ and ‘legitimation’ Future Research • Update analysis to canal’s completion • Discourse analysis to examine rhetorical strategies used by Lieutenant- Colonel By in his variance analysis report • Consideration of possible impression management strategies in canal correspondence