PROVIDENCE -- The cost of Rhode Island's biggest highway project, the Route 195 relocation, has ballooned since the plan was announced more than a decade ago, outrunning state predictions, inflation and the state's ability to pay for it without unprecedented and expensive borrowing.

The project remains largely on schedule and retains the major elements it was designed with in the early 1990s. But its cost has forced the state to mortgage its future federal highway aid, and officials say it could cause future projects to be curtailed or postponed.

James R. Capaldi, director of the state Department of Transportation, said that if the DOT and the Carcieri administration had not proceeded as they did, the project could have been halted or delayed at great expense to the state. DOT officials argue that by building now, the state will avoid future construction cost inflation and should come out ahead in the long run.

Capaldi conceded that the cost increases have exceeded the inflation rate, but said that "I think that's not bad. Show me another state that can do better."

"The public's getting a good deal on 195," Capaldi said.

The project's estimated construction cost has grown to $577 million, more than 90 percent above the $299 million the DOT quoted when it announced the project in September 1993.

Adding the cost of borrowing will bring the total cost to $776 million, according to the DOT's most recent financial report on the project.

Now in the midst of construction, the project involves building a new Route 95-Route 195 interchange about 2,000 feet south of the current one, moving and widening a section of Route 195 east of the interchange, rebuilding about a mile and a half of Route 95 and replacing a number of crumbling bridges.

It is intended to significantly improve the safety and flow of traffic between Route 95 and the Washington Bridge, a sharply curved section that is a major source of traffic jams.

Involving 16 separate contracts, it is the DOT's flagship project -- the biggest, most expensive and most visible. In August, the DOT accomplished its most spectacular construction feat in memory, perhaps ever, when its contractors towed the 400-foot-long, 80-foot-high main arch for the new Providence River Bridge up Narragansett Bay on two barges and installed it in the project's center the next morning.

The most visible signs of the work are the blue-green arch of the new bridge, just south of the Fox Point Hurricane Barrier, and the concrete piers and steel beams that will compose the Route 195 interchange with Route 95.

So far, most of the work is on schedule. The DOT predicts that the eastbound lanes of the new 195 will open to traffic next year and the westbound lanes the year after. But the Point Street overpass over Route 95, which was supposed to have been completed in November2003, is still not open.

Big construction projects are enormously complicated, and so are the forces that affect their costs, ranging from the market price of materials such as steel and concrete to the fluctuations of the financial markets that govern the cost of borrowing to construction setbacks.

In 1998, five years after the $299-million estimate, the DOT put the figure at $310 million in a report to the Federal Highway Administration. This August, the DOT estimated the cost at $577 million. There are still six years to go, assuming the work stays on schedule.

The DOT's second in command, Chief Engineer Edmund T. Parker, said that comparing those numbers is "an oversimplification of a very complicated problem" because the early figures did not include important costs that had to be accounted for later. Among them were estimates of the cost of change orders and of state supervision of the project, extra design work, removing and disposing of contaminated soil, upgrading to higher-grade steel and rust-proofing.

Many of those costs were customarily omitted from estimates before a change in federal reporting rules in 2001, Parker said.

The project also encountered less-predictable costs. When Cardi Corp., the general contractor on the key contract that includes the arch bridge, was drilling into the Providence River bottom to build one of the bridge piers, it hit steel sheeting left behind after the construction of the nearby Fox Point Hurricane Barrier. The result was twisted steel, $1.4 million in extra costs and a four-month delay.

A low estimate for retaining walls added millions more to the costs.

The project also ran into what Capaldi called "unprecedented increases" in construction material costs that he said no one could have predicted.

Demand from as far away as Asia contributed to sharp increases in the prices of steel, concrete and other construction-related materials that began in 2004. Steel figures heavily in road and bridge construction. Along with the steel visible in the arch bridge and the beams that will hold up the roadway, the concrete bridge piers now rising in the construction area are full of steel reinforcing rods.

Part of the materials cost increase was caused by demand from developing countries building their own highway systems. "China is big, and India's right behind it," said FHWA spokesman Doug Hecox.

Hecox said that transportation agencies across the country have suffered large cost increases, forcing them to reassess their projects and decide "which ones they're going to have to wait on."

The contractors who bid on the Route 195 contracts were committed to building them at the bid price. But Capaldi said the contractors refused to continue if they were held to the contract terms because costs had jumped so much. If the state tried to enforce the contracts, Capaldi said, "We wouldn't get the jobs built."

"We would have lost a year and a half to two years," he said.

Capaldi said the Federal Highway Administration wouldn't make up the difference, so he went to the General Assembly leadership and Governor Carcieri, who agreed in 2004 that the state would pay for some of the increases. Capaldi estimated that the state has spent up to $4.5 million to cover the contractors' increased steel costs.

The DOT had estimated a 3-percent inflation rate in 1998. But in 2001, although inflation had averaged 2.7 percent for the previous decade, the agency dropped its prediction to 2 percent.

The DOT used a 2.5-percent figure in its 2003 financial report and stayed with that prediction through a spike that reached more than 6 percent in 2004, according to the index the DOT prefers, that of Engineering News-Record.

Capaldi and other officials said their estimates were reasonable under the circumstances. Parker said in response to a question that the agency wasn't trying to understate future cost increases. He said the agency relied on broader inflation measures and on estimates by other state officials that turned out to be poor predictors of construction costs.

The cost estimate, which was supposed to have taken inflation into account, went from $446 million in 2001 to $483 million in 2003 to $577 million this August.

DOT officials say they can't be blamed for failing to predict construction cost inflation. However, their claim that borrowing to build now will pay off by avoiding future inflation relies on making that same prediction, a conflict Parker acknowledged in an interview.

The biggest increase in the project's overall cost, however, wasn't in steel or concrete, but rather the cost of borrowing to keep construction moving.

The DOT had predicted financial trouble as early as 2001, when a report to the FHWA referred to "short-term cash flow shortages during the peak of construction." The agency urged the use of Grant Anticipation Revenue Vehicles, or GARVEE bonds, to get more money for the project and avoid delays. That new mechanism let the state borrow against its future federal highway aid by promising to pay back the principal and interest from that aid. In previous projects, the state had borrowed only the 20-percent local share of costs.

The GARVEE borrowing, authorized by the legislature in 2003, added $203.9 million in debt-service costs to the project, according to the FHWA.

Meanwhile, DOT reports referred repeatedly to a need to control costs. "Cost containment efforts will be increased," said a 2004 report. Major change orders were to be reviewed by federal officials, it said, and two full-time auditors had been hired to oversee cost control on that and other GARVEE-financed projects.

The state's construction projects move ahead as financing permits. Extra money spent on one project means less money available for later ones, causing them to be put off or curtailed, said Robert Shawver, the DOT's assistant director for policy and planning. "We'll be taking money out of our program to fund the rising cost" of present projects like 195, he said. "That money could have been used for something else. Other projects won't be there because these projects will."

Similarly, the FHWA's Office of Program Administration has said that "The unfortunate impact of these price increases may be the deferral or cancellation of projects in a contracting agency's long-term construction program."

The DOT, meanwhile, has hopes of recouping some money, in part through a lawsuit the state has filed against Maguire Group, the engineering firm responsible for designing the Point Street overpass. The state says faulty design forced it to pay a $3-million settlement to the contractor, Shire Corp.

Another source of money, though not stemming from construction, is millions of dollars in profits DOT officials expect from increases in the value of land under the existing highway, available for sale after the project is complete, and land purchased for the new highway but not used.

Some of that property, including the former Shooters restaurant on the waterfront at Fox Point, will be available when construction is complete, Parker said. The land under the existing Route 195 isn't due to be available until 2012, after the highway and embankment are removed.

He said the DOT owns the property and that his agency, the city government and the state Economic Development Corporation will handle its disposition.

blandis@projo.com / (401) 277-7487