managing project costs are an integral part of project management. I've handled projects which are fairly large, up to 2bn in size and yes, you may expect costs to be straight forward.
but when you are talking about multi year horizons, zillions of factors, tons of unknown unknowns and known unknowns and even bad estimation of known knowns (nod to rumsfeld), you usually go off piste very easily. the first estimate usually is low to get it approved and then the snowball happens..typical..people expect me to have a crystal ball to know costs exactly. when i talk about estimated costs for projected benefits, they turn around and say, deliver the same benefit for 20% of the costs. No, you only get 20% of the benefits for 20% of the costs but lets start..
so when I read this article, I wasnt surprised. I quote the conclusion
Large infrastructure investments are a vital component of any public or private
institution. Unfortunately, cost overruns, delays and exaggerated benefits are the norm
rather than the exception for roads, bridges, stadiums, concert halls, new plants, etc.
Although large infrastructure projects occur frequently across the globe, any
individual project is often a once in a career decision for a public or private executive.
Thus it is difficult for executives to learn from their own prior mistakes. It is rare for
executives to deliberately learn from similar projects other have attempted. Typically
executives to adopt an inside view of any particular problem – where they focus on the
specifics of the case at hand. Without the opportunity to learn from rapid and
unambiguous feedback regarding their estimates of costs and benefits, executives can
hardly learn from these unique decisions and avoid making similar mistakes in future
projects. In such situations, inside view thinking leads to numerous cognitive biases that
result in optimistic delusions.
These, often individual, optimistic delusions are confounded, sometimes even
dwarfed, by the magnitude of strategic deceptions among the different actors in the
system. On several occasions, however, decision makers have attempted to justify their
deceptive behavior by arguing that the decision was in the public interest. On one hand, it
can be argued that public-sector executives may decide to deliberately underestimate
costs in order to provide public officials with an incentive to cut costs and thereby to save
the public’s money. According to thistype of explanation, higher cost estimates would be
an incentive for wasteful contractors to spend more of the taxpayer’s money. Empirical
studies have identified executives and planners who say they deliberately underestimate
costsin this manner to save public money.67 Merewitz endorsed and summarized this
viewpoint as “keeping costs low is more important than estimating costs correctly”
On the other hand, a second explanation in terms of public interest covers the not
uncommon situation where project promoters believe their venture will benefit society
and posterity. They feel that they should do anything possible to make the project happen,
including cooking forecasts of costs and benefits. Both types of public-interest
explanations see the end (project approval) as justifying the means (estimates of costs and
benefits that show the project should be approved).69
However, these arguments overlook an important fact. Underestimating the costs
and overestimating the benefits of a given project results in 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. Thus, for reasons of economic efficiency alone, the argument that
cost underestimation saves money must be rejected.70 As a case in point, an ex post
benefit-cost analysis of the Channel tunnel between France and the UK showed that the
actual net present value of the project to the British economy was minus US$17.8 billion
and the actual internal rate of return minus 14.45 percent. The study concluded that “The
British Economy would have been better off had the Tunnel never been constructed”.71
Because delusion is often accompanied by strategic deception, this study’s
prescriptive advice has been broken into two parts. First, we focused on best practices to
diminish strategic deceptions (e.g. P-A issues) in the specific context of infrastructure
projects. Next, we examined how executives can adopt an “outside view” of problems by
using reference class forecasting. This statistical procedure uses both a forecaster’s
intuition and historical data to mitigate the two types of errors and arrive at a more
accurate estimate. The American Planning Association has recommended this procedure
for large infrastructure projects. Its widespread use would surely produce more accurate
estimates of large infrastructure projects and projects like Toll Collect and the Channel tunnel would be profitably and happily foregone by the vast majority of the public. Ultimately, accurate reference class forecasting, proper incentives and budgets are the way to go.
All I can say to this article is, hahahahahahahahah
Also see this rather interesting paper on planning of large infrastructure projects.