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Project Plans – Optimism or Deception?

April 25, 2014

Bent Flyvbjerg is one of the world’s leading academic researchers in the field of large scale projects, and reasons for project failure.  In the current (April/May 2014) issue of the Project Management Journal, Dr. Flyvbjerg discusses the topic of megaprojects, which he defines as projects costing more than $1 billion. As Flyvbjerg points out, projects of this size are occurring more frequently and are failing spectacularly – “over budget, over time, over and over again”.  Projects of this size are highly complex, often impacting millions of people and involving large numbers of stakeholders.  Examples of these projects include the Olympic Games, high speed rail and major bridge construction project.  There are also information technology projects that fall into the megaproject category--telecommunications, logistics, and major federal government IT projects.  90% of megaprojects are over budget, 50% cost overruns are common, and some are significantly more than that.  Boston’s Big Dig had a 220% cost overrun, and the Sydney Opera House famously was 1,400% over budget.  One in six large scale IT projects has an average cost overrun of 200%.  In addition to costing significantly more than projected, many of these projects also experience major benefit shortfalls, failing to attract customers or meet other objectives.  Cost benefit analyses on these projects are so unreliable that you might wonder why organizations spend so much time and effort developing them.

A project is a success if it is completed on time, on budget, and meeting the intended objectives of scope, quality and outcome.  Most projects fail on at least one of these criteria, and some fail on all of them.  Projects can be considered technological successes and financial failures, or vice versa.  While there have been attempts to study and learn from the successes, in the megaproject category there are so few successes that there is not a large enough sample to study.  The Guggenheim in Bilbao is often mentioned as an all-round success, but there are surprisingly few other examples.

Flyvbjerg believes the major reason for these project “failures” is that the initial cost and schedule estimates are either overly-optimistic or estimates are manipulated.  Decisions are made based on these faulty or deceptive cost benefit analyses.  Reality invariably catches up, at which point the project is re-organized, inquiries are conducted, revised estimates are developed, resulting in further delay and additional costs – what Flyvbjerg calls the “break-fix cycle”.  There is an argument that if the stakeholders knew the real costs of a project, nothing would ever get developed or built.  As Willie Brown famously said “Start digging a hole, and make it so big, there’s no alternative to coming up with the money to fill it in.”  Referring back to the Sydney Opera House as an example, at 1,400% over budget, it is does not meet the criteria for a successful project.  However, how many people would now consider it to be a failure?  It is one of the most iconic buildings of the 20th century—do any Australians or visitors regret it was built?  One of the telling quotes, “…did we all agree to accept the deception and engage in wishful thinking in order to make something that we really wanted happen?”.

One of the inevitable outcomes of unreliable cost benefit analyses is that the best projects may not be selected.  Resources are misallocated to projects with inflated ROI’s and potentially successful projects are never funded.  Flyvbjerg refers to this as the “survival of the unfittest”.

Viewpoint:  While optimism and outright deception are often considered two separate causes of unreliable cost and benefit estimates, I think there is major grey area in the middle.  This applies to projects of all sizes, not only those in the megaproject category.  In my experience, there are usually a group of individuals in every project who have a realistic idea of what the project will probably cost, how long it will take, what kind of contingency is realistic, what type of benefits can be expected, resulting in an estimated return on investment.  There are also individuals who need to see a certain return on investment in order to fund the project.  There are project supporters who believe in the project and want to make sure it gets approved.  There is a negotiation process to find an acceptable project budget that everyone can live with.  This internal negotiation process is always interesting to observe in terms of human behavior.  People engage in optimistic and erroneous thinking – at some level, they know that there are risks, and that the original estimates may be accurate, but they go along with the process.  It has become such an accepted part of the project budget cycle that no-one questions it.  The analysis provides a realistic estimate, the estimate isn’t acceptable, numbers get tweaked, contingencies are cut, and risks are overlooked.  Initial estimates might be over-inflated in anticipation of the inevitable cuts that will be requested.  At some level, everyone is complicit in this process.  Occasionally someone will take a firm stand on the original estimates, often putting the future of the project, their role, and their future in the organization at risk.  It takes exceptional organizational and project leadership to break this cycle and try to get the most accurate estimates to form the basis for decision making and project execution.

Reference

Flyvbjerg, B. (2014). What You Should Know About Megaprojects and Why: An Overview. Project Management Journal, April/May 2014.

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