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Successful Control of Major Project Budgets

SECOND EDITION

Dr. Steen Lichtenberg

Lichtenberg and Partners

Denmark


Abstract

This paper differs from scientific papers describing current research. In line with the theme of this special issue, it challenges conventional risk management practice against the background of former research results successfully finished decades ago. It is well-known that conventional practice frequently results in budget overruns of large projects. International reviews document that. Severe delays of schedules are also well-known. This paper describes successful research results from almost three decades ago, which successfully challenges this severe problem and has led to new practices. The research involved is an unusual mix: Scandinavian researchers from psychology, statistical theory and engineering economy. The resulting procedure has been widely used since around 1990 and challenges conventional procedures. The procedure is documented to be able to yield statistically correct prognoses, when the “rules of the game” have been correctly followed. After a short summary of the basic situation, this paper summarizes the research, followed by some resulting experiences, focusing on two recent studies each of 40 infrastructures and other major projects. In both sets, the actual final cost largely equaled the expected project cost. This result is a marked change from international past and present experience. Finally, the need for further research and progress is discussed.

Keywords: budget quality assurance; cost estimation; estimation methodology; major projects; risk management; scheduling; Successive Principle

  1. Introduction

Severe budget overruns and delays are still common while using conventional procedures and principles, especially among larger projects, despite the fact that Project Management and Cost Engineering have made tremendous advances in recent decades. Some reasons behind this are discussed below as a brief overview. This as a background to a presentation of Scandinavian research results that challenges conventional practice, as it has documented to yield correct statistical prognoses of costs and/or duration of large projects, inclusive of IT projects.

One of the most referred sources for describing project cost overruns is the Standish Group “Chaos” report [1]. It presents depressing results from a large sample of IT projects. This source is not alone in claiming that most projects go wrong. Other sources include Flyvbjerg, Holm, Buhl [2,3], and their conclusions from an analysis of many infrastructure projects was that 90% had cost overruns, generally of a significant size. They showed that the situation has not improved for decades. Merrow [4] documents that the situation is not much better in the private sector: 65–75% of industrial megaprojects fail on business targets. These projects are generally large and complex. However, does size matter? Odeck [5] studied this and his results indicate that small projects can have even worse results than large projects—cost overruns were even more frequent and relatively larger in small projects. To summarize, historically, we know for a fact that projects still have a strong tendency for cost overruns—large and small, private and public, when using conventional procedures.

The reasons behind cost overruns have also been thoroughly examined and discussed. Flyvbjerg et al. [2,3] argued that the main problem is that planners and promoters often deliberately underestimate costs and risks and overestimate the benefits in order to increase the likelihood that their project gets approval and funding. This view is supported by other studies—i.e., that there are political or strategic reasons for cost overrun. Similar reasons are identified by Merrow [4] in business projects.

These reasons need to be understood and handled in order to improve project execution performance. A key requirement is to have good quality, independent analysis of the project budget prior to go-ahead. A humoristic version of the story is illustrated in Figure 1 below.

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Figure 1.
“The figures I have given are wrong. That is because I don’t have the right figures” (unknown source).

Another set of reasons for cost overruns are known to stem from human judgment, as recently documented in practical applications by the international Futuraone group of consultants [6], and excellently explained by Kahneman in 2011 [7]. In 1985, Lange [8] disclosed the reasons for this in a master’s thesis. He identified more than twenty pitfalls when making subjective quantitative evaluations. A considerable part of the total project results, total cost or duration, necessarily stems from such expert evaluations. It is documented that these pitfalls may twist the evaluations severely, and thus the total result. This research was an eye-opener in Scandinavia, and it initiated a different way of thinking about how cost estimation should be carried out.

More…

To read entire paper, click here

 

Editor’s note: Second Editions are previously published papers that have continued relevance in today’s project management world, or which were originally published in conference proceedings or in a language other than English. Original publication acknowledged; authors retain copyright. This paper was originally published in the Journal of Administrative Sciences, MDPI (Multidisciplinary Digital Publishing Institute, Zürich), Special Issue: Project Risk Management: Challenge Established Practice, July 2016, Academic Editor: Ole Jonny Klakegg; NTNU, Norway.  It is republished here with the author’s permission.


About the Author

pmwj49-Aug2016-Archibald-PHOTO2 STEEN
Dr. Steen Lichtenberg

Denmark

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Dr. Steen Lichtenberg,
 PMI mb. no. 661, hon mb. & former president of IPMA. As an international management and risk management consultant, Steen is recognized as a leading researcher and expert practitioner in risk management. He consults, writes and speaks widely on the topic and has made an innovative contribution to the field, the Successive Principle, today internationally widespread.

Steen Lichtenberg has 40 years’ experience in research and risk management consulting providing support to public and private clients in many major industry sectors, including construction, telecommunications, transport, energy, IT, defense and government. Steen´s input includes in depth project analyses including accurate statistical prognoses of the end results as well as further possibilities of optimization and provisions against risks. He works both on ad hoc tasks or on implementation.

Steen’s contributions to the management discipline over many years have been recognized by a National Gold medal, and honorary membership of IPMA. His work has led to establishment of a governmental sponsored research program, Concept, in Norway which since 2002 aims to follow and further improve the basis for large public decisions.

Dr. Lichtenberg can be contacted at [email protected]