There are some phenomena that have no cultural bounds such as maternal love and a healthy fear of large predators. We can add to this list the fact that, across the globe, large infrastructure projects almost invariably arrive late, over-budget, and fail to perform up to expectations. Cost overruns and benefit shortfalls of 50 percent are common; cost overruns above 100 percent are not uncommon. For example, in one study of major projects in 20 countries, nine out of ten projects had cost overruns.4 Similarly, a study of 44 urban rail projects—in North America, Europe, and developing nations, including London’s Tube and the metros in Washington, D.C., and Mexico City—found that the average construction cost overrun in constant prices was 45 percent; for a quarter of the projects, cost overruns were at least 60 percent. In addition, passenger ridership was, on average, 50 percent lower than forecast. Furthermore, for a quarter of the projects, ridership was at least 70 percent lower than estimated. An appropriate slogan seems to be “over budget, over time, over and over again.”The causes are straightforward:
The underlying reasons for all forecasting errors can usefully be grouped into three categories: delusions or honest mistakes; deceptions or strategic manipulation of information or processes; or bad luck. Bad luck or the unfortunate resolution of one of the major project uncertainties is the attribution typically given by management for a poor outcome. . . .
. . . Both delusion and deception see the high failure rates for ventures as a consequence of flawed decision making. According to the first explanation— delusion—the flaw consists in executives falling victim to what psychologists
call the planning fallacy. In its grip, managers make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs and time. They involuntarily spin scenarios of success and overlook the potential for mistakes and miscalculations. As a result, managers pursue initiatives that are unlikely to come in on budget or on time, or to ever deliver the expected returns.
According to the second explanation—deception—decision making is flawed by strategic misrepresentation or the presence of what economists refer to as principal-agent problems. Whereas the first explanation is psychological, the second is due to the different preferences and incentives of the actors in the system. In this situation, politicians, planners, or project champions deliberately and strategically overestimate benefits and underestimate costs in order to increase the likelihood that their projects, and not their competition’s, gain approval and funding. These actors purposely spin scenarios of success and gloss over the potential for failure. This results in managers promoting ventures that are unlikely to come in on budget or on time, or to deliver the promised benefits.
|This figure from the report highlights the importance of delusion and deception in large infrastructure projects, especially rail projects.|
The authors detail various specific causes falling within these three categories and move on to some recommendations about how to limit delusion and deception in large infrastructure projects from both inside and outside perspectives. Within the latter category, the authors highlight the importance of reference class forecasting. In brief, this process involves comparing the current proposal with the experience of a group of completed projects of similar size, complexity, etc. Typically, such a review shows not only the weaknesses in cost and schedule forecasting, but the many specific sources of error that can lead to budget and schedule overruns. The article notes that the American Planning Association has recommended this procedure for large infrastructure projects.
Why is this important?
Underestimating the costs and overestimating the benefits of a given project results in an artificially high benefit-cost ratio, which in turn leads to two problems. First, the project may be started despite the fact that it is not economically viable. Second, a project may be started instead of another project that would have yielded higher returns had the actual costs and benefits of both projects been known.To read the full article, click here.