Abstract: Adverse geology, local problems, variation orders, design issues, forest clearance, etc. have long been identified as the causes of cost and time overruns of projects. These are visible factors. There is another tacit factor i.e., the psychological factor, which would give rise to the time and cost overruns and benefit shortfalls in projects, is introduced here. This aspect is normally not discussed among the engineers or project planners.
Project cost and time overruns: A fate of life?
We have experienced that almost all projects we see are plagued by the phenomenon of cost and time overruns. It is so pervasive that pictures of overruns automatically come to our mind if we talk of any project. Whether the project is a hydropower project or transmission or distribution lines project; be it a road project or a bridge project; be it an irrigation project or a water supply project; be it a health-post construction project or school building project or an IT project, the saga is the same: project cost and completion times increased many times as compared to the original or initial estimates and the benefit declined. The topic of project cost and time overruns has become a topic of household discussion such that people get surprised if a project gets completed within the initially forecasted cost and times.
Project execution: Prevailing experience
A project germinates as a vision triggered by some rationale such as a community or country requirement. After that, it follows the path of studies and planning and preconstruction activities. This is followed by financial arrangement and subsequently enters the construction stage. This is the first phase.
The second phase of the project management is the delivery or execution. This phase begins after the contract is signed and a notice to commence is issued to the contractor. After the commencement, one expects the contractor to mobilise the resources, execute the construction works as scheduled, and complete the works within the agreed time frame and price, and with the specified quality. At the same time, it is expected that the employer too reciprocates by fulfilling its obligations and creating an environment for smooth execution of construction works. However, most of the time, construction contracts do not follow such straight path and would encounter several hindering complexities and issues attributable to both employer and contractor. Gradually, letter war and blame games start taking place giving rise to claims. The rate of work-progress slows down and becomes stagnant. Both the parties try to impart pressures on one another and try to take strategic moves. This scenario causes the agreed project schedule to lag seriously behind and ultimately jeopardises the project. By this time, a considerable amount of money will have been incurred and a substantial amount of time will have elapsed since the commencement.
Now the parties, especially the employer in the case of government sector projects, run here and there panickily to fix the problems, negotiate with the contractor to give impetus to the project in an effort to keep it ongoing and get completed. In the meantime, new problems emerge, things slow further and more running around and negotiations take place. It is because a lot of time and money would have been spent by then and the parties would have reached the point of no return abandoning the project. Finally, the dragged-on project gets completed in a stressful situation with the cost and time exploded (typically 2-3 times the original estimates). This is, of course, accompanied by heavily downsised benefit because of blown up cost and too delayed delivery.
Though we try to estimate the cost and time precisely and try to execute the project with full enthusiasm, the above fate repeats. We feel helpless and find ourselves succumbed to the above situation. Projects start in a rush of excitement but almost 90 per cent of projects’ fate has been as described above. We feel as if there is no way to get rid of these vicissitudes but to go with them. Some projects even ruin the careers of project leaders.
Is it the trend in Nepal only?
The answer is the resounding no. The story of time and cost overruns and benefit shortfalls is found almost everywhere and in many areas of development. Be it a hydropower project or dams; a bridge project or a tunnel project; an IT project or mining project; nuclear project or oil or gas projects; airport project or building project all are affected, as noted by the renowned Danish planning expert and scholar Bent Flyvbjerg [1]. Based upon his vast database of more than 16,000 projects from 20 plus different fields in 136 countries, he has statistically analysed that 91.5 per cent of projects go over budget, over schedule, under benefits or some combination of these. Only 8.5 per cent of projects meet the time and cost estimates, of which only 0.5 per cent of projects are within budget, on schedule and meet the benefit forecast. That’s why he has coined a metaphorical term “the Iron Law of Megaprojects: over budget, over time, under benefit, over and over again [2].”
Cause and root causes of time and cost overruns
We have long been experiencing the common litany of project problems that cause time and cost overruns such as local problems, adverse geology, adverse weather conditions, law and order issue, strikes, labour shortages, fuel shortages, shortage of construction materials, variation orders, missing items, unprecedented flood in the river, the contractor’s non-performance, delay in getting permits, delay in forest clearance, etc.; and the laundry-list goes on and on.
Time and cost overruns and benefit shortfalls are in fact the discrepancy between the final outcomes of project cost, project completion time and project benefit and the corresponding initial estimates. Overruns and shortfalls are measured as percentage increase or decrease with respect to the initial forecasts. The discrepancies will be large if the time and cost are heavily underestimated, and the project benefits are heavily overestimated.
The pattern of cost and time overruns we are experiencing as well as the above stated metaphoric Iron Law of Megaprojects suggest that there have been serious inaccuracies in the initial forecasts (estimates) of project cost, time and benefits. If it was not the case, then the issue of overruns would not have been so common and pervasive as to affect almost 90 per cent of the projects. In other words, if the issue of overruns is the results only of the issues surfaced during project implementation phase, then the phenomena of cost and time overruns would not have been so systematic as to affect 90 per cent of projects. Thus, the above list of problems is only of the causes. So, what are the root causes for such inaccuracies?
Though they are quite uncommon in general discussions and consideration, research suggests that psychology and political-economic factors are at play at the root of the said inaccuracies. The psychological aspect includes the role of human biases, also called cognitive biases, whereas political-economic factor is manifested as what the scholars call “strategic misrepresentation”. There are many biases identified by psychologists. Some biases relevant to project planning and management are as follows [3]. Studies and research on the role of psychology in project planning and management is founded on the works of scholars including the Nobel Prize winner Daniel Kahneman, the renowned Danish planner Bent Flyvbjerg and others.
Optimism and overconfidence bias
Optimism is the tendency for individuals to be overly confident and assured about the outcomes of planned actions. It is a cognitive predisposition found in most people to judge future events in a more positive light than is warranted by actual experience. Under its grip, individuals make decisions based on an ideal vision of the future rather than on a rational weighting of gains, losses and probabilities [4]. They make forecasts considering the best-case scenario thinking that everything would go normally. Likewise, overconfidence bias is the tendency to have excessive confidence in one’s answer to questions and to not fully recognise the uncertainty of the world and one’s ignorance of it. These biases cause them to overestimate benefits and underestimate costs and completion times.
Inside-view and uniqueness bias
Making an inside-view is the tendency of the planners to focus on the specific circumstances and components of the project in hand and to seek evidence on their own experience only. The inside-view makes the planners treat the project in hand to be unique and singular such that it has nothing to learn from the experience of earlier projects. Or in other words, under the grip of inside view and uniqueness bias, people think that the problems that had occurred in earlier projects would not occur in the project being planned because this project is separate and unique from earlier ones.
Planning fallacy
The term Planning Fallacy was originally coined by the Nobel Prize winner Daniel Kahneman (and his co-author Amos Tversky) to describe the tendency for people to underestimate task completion times. This bias is the sub-category of optimism bias. The planning fallacy has its roots on the human assumption that everything goes according to the plan. Under the grip of planning fallacy, the project planners focus on the constituents of the specific problem of the project under consideration rather than on the distribution of outcomes in similar cases. These factors give rise to a tendency for planners to underestimate costs, schedules and risks for planned actions and overestimate the benefits and opportunities for these actions [3]. It has further been found that the people in power demonstrate a higher degree of planning fallacy [4][5].
Strategic misrepresentation
The term strategic misrepresentation has been used to define the tendency to deliberately and systematically distort or misstate information for strategic purposes. When biased with strategic misrepresentation, project planners and forecasters deliberately and strategically overstate project benefits and underestimate costs. The strategy, for example, would be to get their projects approved for funding or get their project to look feasible and better to be implemented. We might have come across obvious omission of some scope of works in projects in the bid preparation phase which would, during actual implementation phase, needs to be undertaken with additional budget and time. Many a times, such an omission is made to bring the initial project cost within the budget ceiling set by political level or organisational level. Because of such a strategy the initial cost or schedule estimate will be low leading to cost and schedule overruns later. Strategic misrepresentation, therefore, produces a systematic (deliberate) and not cognitive (judgmental) bias in outcomes.
How to minimise the root causes of time and cost overruns
We appreciate that cost and time overruns in projects are the cumulative effect of various causes such as project scope changes, poor and unpredictable geology, labour and material shortages, etc., as listed above. According to the behavioral science, the root cause i.e., the driving force for such causes, is because project planners and managers keep undermining these causes because of biases such uniqueness bias, strategic misrepresentation, etc., as mentioned above. But because the causes such as scope changes, adverse geology etc., are more visible than the underlying root causes, they are often mistaken for the causes of outcomes. Following suggestions have been recommended to minimise the root causes of cost and time overruns.
Taking the “outside-view” to reduce the effect of planning fallacy
Taking an outside-view (instead of focusing on inside-view only) is to look at a project as part of a class of similar projects already done and as “one of those” projects and basing estimates for the planned project on the actual outcomes of these past projects. Outside view uses the statistical data from the class about cost, time, benefit, etc. that we want to forecast for our new project and adjust up or down, if necessary, to reflect how our specific project differs from the mean of the class. Using such distributional information from other projects similar to that being planned is called taking an outside view [4].
Because the outside view is based upon statistical data, it bypasses the human bias such as optimism bias and strategic misrepresentation etc., and hence, reduces the chances of inaccuracies in cost, time and benefit estimation. Thus, it cures for planning fallacy. The tool introduced to take the outside view is popularly known as “reference class forecasting”. Bent Flyvbjerg developed the tool for real cases (complicated projects) based upon the theoretical insights proposed by behavioral psychologists.
Adopting ‘reference class forecasting’
Reference Class Forecasting (RCF) is a method for systematically taking an outside-view of planned actions. RCF basically tries to utilise all the distributional information (that is relevant statistical data on a large number of past similar projects). RCF encompasses the following three steps [4] [6]:
- Identifying a reference class of analogous past projects whose outcomes are known
- Establishing a probability distribution for the selected reference class with regard to time and cost overruns and benefit overestimation. This requires access to data from a sufficiently large number of projects
- Placing or comparing the project being considered at an appropriate point along the distribution
Thus, RCF does not try to forecast the specific uncertain event that will affect the particular project, but instead places the project in a statistical distribution of outcomes from a class of reference projects. The basic concept is that the data for the projects in the reference class reflect everything that happened to the projects.
Practical usage of RCF
First time application of RCF was in the transportation (rail) project in the UK by Bent Flyvbjerg and later to the transportation projects in other countries. Later, the technique was applied to projects in other fields including roads, dams, etc.
Like everywhere, major projects in the UK were also having problems of routinely blowing past their expected time and cost estimates such that the government had lost its confidence in its own forecasts. It was where Bent Flyvbjerg was involved, and he developed the RCF technique. After, the UK government used it to forecast the time and cost of major projects and subsequently made the process mandatory. Today, the RCF technique is being used in public and private sectors in many countries like Denmark, China, the USA, Australia, South Africa, Ireland, etc. In this context, it would be appropriate to make the following quote by American Association of Planning [7]:
“AAP encourages planners to use reference class forecasting in addition to traditional methods as a way to improve accuracy. The reference class forecasting method is beneficial for non-routine projects…. Planners should never rely solely on civil engineering technology as a way to generate project forecasts.”
Bent’s suggestion: Think slow, Act fast
Apart from the above, a forceful suggestion is offered by Bent Flyvbjerg to prevent a project from being a failure: Think Slow, Act Fast [1]. Based on his involvement in hundreds of big projects around the world he suggests that plenty of time and enormous care and effort should be invested during the planning phase so that the implementation would be smooth and swift. He suggests that let planning be slow to do the in-depth studies of every minute detail. However, most of the projects are found to follow the opposite: Think Fast, Act Slow, meaning that people rush to start a project (i.e., thinking or planning fast) only to be engulfed into the problems and taking typically two to three times the originally estimated time schedule (i.e., implementation or action is slow).
Conclusion
The ubiquitous phenomenon of project time and cost overruns is well known to us. We generally present more or less a standard list of issues and problems for such overruns such as adverse geology, adverse weather conditions, labour shortages, variation orders, etc., and think that the projects have to pass past these problems. No way to escape from these enemies, so we think. And we desperately run around to try to fix these problems, the project drags, we run around further and at last complete it and forget the past vicissitudes. The final cost doubles and time triples as compared to the initial forecasts (some projects even do not get completed!). This goes project after project.
We normally do not think beyond the above list of problems and try to find solutions only for these problems. We know that it’s the people who conceive the project, make plans, prepare time, cost and benefit estimates (forecasts), arrange for fund and deliver the project. While doing these activities, people think, make several judgements and make a lot of decisions. But we generally do not think that where there is thinking, judgement and decisions, psychology is at play. This means, many of our cognitive judgement and decisions are behind the above-listed problems that a particular project faces. This fact is not considered during project planning and delivery, or so to say is not commonly discussed among engineers or planners. However, it is interesting to learn that there are a lot of studies and research that have demonstrated that human psychology plays an important role in shaping a project in the form of biases such as optimism bias, availability bias, planning fallacy, overconfidence, uniqueness bias, strategic misrepresentation, etc. We, the project planners and executers, should take this fact into account in order to make our project successful instead of making it drag on and on or making it a fiasco.
References:
- Flyvbjerg, B. and Dan Gardner, “How Big Things Get Done”,Macmillan Publishers, 2023.
- Flyvbjerg, B., “Introduction: The Iron Law of Megaproject Management,” The Oxford Handbook of Megaproject Management, ed. Bent Flyvbjerg, 2017.
- Flyvbjerg, B., “Top Ten Behavioral Biases in Project Management: An Overview”, Project Management Journal, 2021.
- Kahneman, D, “Thinking Fast and Slow,” Penguin Books, 2011.
- Guinote, A, “How power affects people: Activating, wanting and goal seeking,” Annual Review of Psychology, 2017.
- Luecke, R., “Harvard Business Essentials: Decision Making, 5 Steps to Better Results”, Harvard Business School Press, 2006.
- Flyvbjerg, B., “From Nobel Prize to Project Management: Getting Risks Right”, Project Management Journal, 2006.
Er. Subhash Kumar Mishra
CEO, Chilime Hydropower Company
This article has been published in the Annual Journal of Urja Sanchar 2081
