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At the time of London's bid to host the Olympic and Paralympic Games in 2012 the cost of the Games was estimated to be just over £4 billion.

The costs were to be met by public sector funding of £3.4 billion, with a further £738 million from the private sector.

Contingency provision 

After London was awarded the Games, the Department for Culture, Media and Sport and the Olympic Delivery Authority reviewed the cost estimates and in March 2007 announced a budget of £9.325 billion.

The Department has said that public sector funding will not exceed this figure.

The March 2007 budget included contingency provision of £2.747 billion. This sum was not included at the time of the bid despite Treasury guidance that budgets for major projects should allow for the tendency to underestimate costs.

Since March 2007, £500 million of the programme contingency has been allocated to the Olympic Delivery Authority to cope with early financial pressures.

Clarification over the delivery structures for the Games means that the Olympic Delivery Authority incurs tax liabilities in the normal way, and this has added a further £836 million to the earlier cost estimates.

Significantly lower expectations for pirivate sector funding 

The March 2007 budget also included a preliminary estimate of £600 million for policing and wider security, over and above the cost of site security during construction.

No estimate for the cost of policing and wider security was included at the time of the bid.

In addition, the Olympic Delivery Authority's programme delivery budget has risen to £570 million, compared with an original estimate of just £16 million.

Whilst the cost estimates have increased by £5.3 billion, the public funding required to meet these costs has increased by £5.9 billion due to significantly lower expectations for private sector funding.

Some £4.9 billion of this increase is to be met by the Exchequer and £675 million by the National Lottery, bringing the total Lottery contribution to £2.175 billion.

The final cost to the public sector will depend on proceeds arising from the disposal of assets after the Games, in particular, the sale of land on the Olympic Park, as well as the share of profits expected once the Village is converted into housing and sold.

Difficulty in achieving competition between bidders for contracts 

The estimate of £738 million private sector funding towards the cost of venues and infrastructure at the time of the bid was revised to £165 million (less than 2 per cent of the total funding) in the March budget.

In addition, whilst the Olympic Village had been expected to be fully funded by the private sector, the March budget included a £175 million public sector contribution to the Village.

Private sector construction firms have a vital role in delivering the Olympic programme, but the Olympic Delivery Authority has had difficulty in achieving competition between bidders for contracts to deliver the main venues, with only one bidder emerging for the Main Stadium.

The prospect of longer term benefits from hosting the Games was central to London's bid.

The Government has set out five high level legacy promises but more detailed plans have not yet been finalised. It intended to publish a 'Legacy Action Plan' early in 2008, and the Olympic Delivery Authority will be working with the London Development Agency during 2008 to set out arrangements for use of the Olympic Park after the Games.

Unrealistic picture of the expected costs 

On the basis of a report by the Comptroller and Auditor General, the Public Accounts Select Committee examined the Department for Culture, Media and Sport and the Olympic Delivery Authority on the budget for the London 2012 Olympic and Paralympic Games.

The Committee concluded that foreseeable requirements for public sector funding were excluded from the estimates at the time of the bid to host the Games, giving an unrealistic picture of the expected costs.

It said that contrary to good practice the Department did not include programme contingency, now £2.7 billion, because the scale and complexity of the undertaking were not appreciated at the time of the bid.

The costs of tax and security, now estimated at over £1.4 billion, were also excluded from the estimates as they were uncertain.

Yet £738 million of funding from the private sector was included, despite not being supported by robust analysis.

Revised funding package

The Public Accounts Select Committee (PASC) said that all costs and revenues should have been included from the outset, with the uncertainties explained and a contingency provided.

The revised public sector funding package of £9.325 billion does not include all of the activities on which delivery of the Games and its legacy depends.

The acquisition of land for the Olympic Park, the costs of government departments working on Games preparations and legacy planning, as well as the costs of improving wider transport links are all outside the budget.

PASC warned that any assessment of the costs and benefits of the Games should reflect all of the additional costs incurred.

The Department has confirmed that the public sector funding of £9.325 billion will not be exceeded and the Committee said it would hold the Department to account against this figure.