Shedding Light on Reality: A Guide to Reducing Optimism Bias in Construction Project Planning
The number of nation building projects has steadily increased so too have the reports of cost overruns and delays increased. Recent discourse is focussed on construction low-productivity, inflation, COVID-19, La Nina and the Ukraine war for these delays and cost blow-outs. However the issues predate most of these events with a 2015 McKinsey article reporting that 98% of megaprojects experience budget overruns of 30% and 77% of megaprojects were over 40% late (based on data from 2013). These findings are supported by numerous other research papers and publications.
Why Do Overruns and Delays Happen?
The actual causes of these delays and overruns are numerous but can be broadly grouped into 2 categories:
- Design and Planning issues arising from the optimism bias which tends to underestimate project duration and costs and overestimate the realisation of project benefits.
- Construction and Delivery issues such as scope changes, contractual disputes between principals, contractors and subcontractors, labour and material cost inflation, poor forecasting, inclement weather
The Ripple Effect: Impact of Overruns and Delays
Projects running significantly late and over-budget has numerous knock-on effects for the construction industry and wider society. These include:
- Smaller but greater yield projects are shelfed due to additional funds being needed for to complete in flight projects.
- Saturated construction market with more projects to deliver than the industry can handle. With projects failing to finish and new projects continuing to come to market. This leads to an increase in project pricing as competition is less intense, and also leads to impacts on project quality with the entrance of new less qualified firms to the market.
- Loss of public and stakeholder confidence in project estimates and reports.
Overcoming Optimism Bias: A Path to More Accurate Planning
While much of the discourse focussed on construction phase issues it is important that opportunities to improve estimates in the design stage are also considered. Solutions for overcoming optimism bias and improving design decision making at the front end of the project include:
- Clearly define the project benefits – Build only what is needed to deliver on those benefits. The addition of peripheral and extraneous benefits through the design phase adds risk, cost and time to the project. These added risks are often not quantified until tender or worse late into the delivery phase.
- Sensitive analysis in feasibility studies – Conduct thorough analysis on the budget and time estimates sensitivity to changes in the operating environment such as price inflation, lower productivity, supply chain disruption, delays in utility relocation, skills shortages due to saturated markets.
- Overcome groupthink – Ensure that there is an independent reviewer or advisor to the team with a devil’s advocate. It is this person(s) job to scrutinise assumptions and assertions so that project decision making is made based on sound recommendations.
- Seek input from people with actual on the ground deliver experience – These advisors will have seen what goes wrong, how long things take, the extra effort or work required to deliver in certain operating environments. These inputs will help overcome overly optimistic estimates.
- Use benchmarking of comparable projects – This will give a very clear yardstick for budget and time estimates. If all comparable projects are 50% over budget and 40% late is it reasonable to expect this project to be any different?
These solutions will improve the reliability of the estimate and program during the planning phase. Which will allow for more informed decisions by project sponsors. With this greater clarity comes the opportunity for review of benefits, scope changes and changes in delivery strategy timeframes at time when making changes can yield the greatest benefit to the project.
Concluding, cost overruns and delays in project management are significant issues that have been persisted over many decades. While there has been much focus on the construction and delivery issues, optimism bias in the planning and design stages often plays a major role. With the focus of measures to address the overestimate of benefits and underestimation of cost, duration and risks during the design and planning stages the accuracy of estimates and programs can be improved. More accurate information in the planning stage will allow more informed decisions and improve outcomes for all project stakeholders.
