Riskier than you think?

by | May 9, 2016 | insights

There are four root causes of cost overruns, schedule overruns and benefits shortfall:

Technical Error (estimating errors) – could be classed as incompetence in scope definition and estimating. It is argued that if technical errors were the root cause of inaccuracy there would have been improvement in cost inaccuracy over the preceding decades; which has not been the case. However, if technical error is overall statistically neutral individual projects would still be impacted by technical errors which would either reduce or enlarge the overall error.

Optimism Bias (psychological) – the cognitive predisposition to judging future events positively. There is much literature to support the case for optimism bias (Daniel Kahneman’s excellent book “Thinking, Fast and Slow”) which has been applied to the field of major projects. Optimism bias should be referred to as self-deception and it has been shown that this psychological impairment exists even when someone is fully aware of the phenomenon.

Strategic Misrepresentation (political/economic) – the desire of actors within the programme seeking to portray the programme in its best light in order to secure the necessary funding set against competing programmes. Strategic misrepresentation of cost programme and benefits is a form of deception sometimes justified by the “if people knew the real cost from the start, nothing would ever be approved” statement!

Extreme Events (Black Swans) – unavoidable reasons why estimates are inaccurate which stem from extreme events outside the control of the programme whose impact is made more severe by people ignoring the possibility of the events occurring. These extreme events are at the outer extremities of probability but however small the probability the event will occur at some time; this may be seen as bad luck but this should not mean that we should ignore the possibility and understand the potential impact on the programme.

Improved management of projects should include putting in place robust organisational structures, governance, processes and an assurance structure as a means to improve transparency and accountability:

 

  • Ensure that sufficient competent resources are deployed to produce the robust business case for the programme. The bottom-up estimates for the business case should be produced without any predetermined solutions or influence from the programme promoters. Sufficient time should be set aside to make these initial estimates as robust as possible.
  • Employ an outside view using Reference Class Forecasting to statistically predict the probability of estimating error and use this to refine the business case for the programme.
  • Within the governance structure of the programme and related funding/commissioning organisations establish accountability for disclosure and ethical behaviour for those presenting the business case and promoting the programme. Stakeholder engagement should be established from the outset in order to prevent anchoring of solutions and lock-in prior to wider consultation.
  • Business cases for programmes should consider the possibility of extreme events and the consequences of those events on the viability of the programme in order to seek to mitigate or minimise the impact through preplanning of scenarios and stress testing the business case.
  • It is imperative that the programme is robustly managed to avoid common delivery pitfalls such as scope creep, poor performance, and financial mismanagement. Establishing robust contracts, governance and financial controls will assist in this aim.
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