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Managing the Planning Fallacy in Large, Complex Infrastructure Programs

FEATURED PAPER

By Bob Prieto

USA
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Daniel Kahneman’s recent book, “Thinking, Fast and Slow” returned his concept of the “planning fallacy” to the project management center stage when considering large, complex projects and programs. First coined by Kahneman and Amos Tversky in a 1979 paper, the planning fallacy is the tendency of people and organizations to underestimate how long a task will take even when they have experience of similar tasks over running.

Perhaps the poster children for the planning fallacy are large scale public works projects. In a 2006 paper in the Project Management Journal, Bent Flyvbjerg describes transportation projects “inaccuracy in cost forecasts in constant prices is on average 44.7% for rail, 33.8% for bridges and tunnels, and 20.4% for roads.”

Work by Kahneman, Tversky, Flyvbjerg and others shows that errors of judgment are:

–          systematic and predictable

–          reflect bias

–          persist even when we are aware of, and

–          require corrective measures  that reflect recognition of this bias

These natural tendencies are further exacerbated when “motivated” individuals frame questions in such a way as to constrain the range of possible answers.

Consider these two situations. In the first, a manager is given responsibility to come up with a budget and schedule for a large project. He engages outside help, conducts a thorough risk analysis and looks at comparable other projects. In the second a manager is asked by the politically appointed Chairman of the Authority if he can do the same project for $ XX. Which answer are you more comfortable with?

Reference class forecasting is one method for suspending one’s impressions and providing a more critical evaluation of the task at hand. It addresses the natural tendency to underestimate costs, completion times and risks while at the same time overestimating benefits. It squeezes out biases while considering the inevitable “improbable” risks that all projects face. The risks that inhabit the “white space” between elements of a program and possibly even the odd “Black Swan” that shows up from time to time.

The Association for the Advancement of Cost Engineering (AACE) has recognized the value of estimate validation using separate empirical-based evaluations to benchmark the base estimate, the equivalent of reference based forecasting. This estimate benchmarking process is widely used in the process industries but need not be constrained to them.

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To read entire paper (click here)


About the Author

flag-usabob prietoBob Prieto

Senior Vice President

Fluor

Bob Prieto is a senior vice president of Fluor, one of the largest, publicly traded engineering and construction companies in the world. He is responsible for strategy for the firm’s Industrial & Infrastructure group which focuses on the development and delivery of large, complex projects worldwide. The group encompasses three major business lines including Infrastructure, with an emphasis on Public Private Partnerships; Mining; and Manufacturing and Life Sciences. Bob consults with owners of large engineering & construction capital construction programs across all market sectors in the development of programmatic delivery strategies encompassing planning, engineering, procurement, construction and financing. He is author of “Strategic Program Management”, “The Giga Factor: Program Management in the Engineering and Construction Industry” and “Application of Life Cycle Analysis in the Capital Assets Industry” published by the Construction Management Association of America (CMAA) and “Topics in Strategic Program Management” as well as over 450 other papers and presentations.

Bob is a member of the ASCE Industry Leaders Council, National Academy of Construction and a Fellow of the Construction Management Association of America. Bob served until 2006 as one of three U.S. presidential appointees to the Asia Pacific Economic Cooperation (APEC) Business Advisory Council (ABAC), working with U.S. and Asia-Pacific business leaders to shape the framework for trade and economic growth and had previously served as both as Chairman of the Engineering and Construction Governors of the World Economic Forum and co-chair of the infrastructure task force formed after September 11th by the New York City Chamber of Commerce.

Previously, he established a 20-year record of building and sustaining global revenue and earnings growth as Chairman at Parsons Brinckerhoff (PB), one of the world’s leading engineering companies.  Bob Prieto can be contacted at [email protected].