Graham Winch

Understanding Major Project Escalation

Graham M Winch Centre for Infrastructure Development Manchester Business School Jubilee Professor Chalmers University

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Understanding escalation on major projects

• What is a major project?

• Four perspectives on escalation on major projects – Future-perfect thinking

– Strategic misrepresentation

– Escalation of commitment

– Contractor scapegoating

• Towards a model of escalation

• Policies for de-escalation

• Concluding thoughts

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What is a major project?

• Size matters – > $1bn US

• The heroic definition – “master builders”

• A proposed definition

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What is a major project: a definition

• The synergistic elements of a major project or programme – They are organisational endeavours producing complex

product systems

– They combine bespoke elements with different technological trajectories

– They mobilise large human and financial resources

– They shape their environment, spatially and organisationally

– They are managed as a single or closely coupled entity

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Future-perfect strategies

• Sydney waste water project case – Experiment in alliancing

• Designer culture – Representations of the completed project – CAD fly-thrus – Artists impressions – Virtual reality

• Endgaming – Orientating action around completion dates

• Tinker Bell effect (Tim Smit) – Projects only exist if you believe in them

(Clegg and colleagues)

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Strategic misrepresentation (Flyvbjerg and colleagues) • 258 transportation projects (1927-1998)

– Mean budget escalation 28% – Systematic tendency to underperform estimates – Cannot be explained by chance alone – If based on incompetence would expect secular improvement

• Most plausibly explained by “lying” about costs and benefits – This is a client-side phenomenon by project promoters.

• Strategic misrepresentation – Socio-economic struggle for resources under uncertainty – Perverse incentives in investment policies e.g. 10 cent dollar

• Optimism bias – Psychological tendency to give the benefit of the doubt under uncertainty

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Strategic misrepresentation: explanations

• Technical explanations – Forecasting errors – Exogenous events

• Economic explanations – Stakeholder self-interest – Strategic misrepresentation

• Psychological explanations – Optimism bias

• Political explanations – Local elites and national funds – Urban transit projects the classic case

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Escalation of commitment (Staw and colleagues) • Social-psychological experiments

– Post-hoc justification of selected courses of action – Attribution of negative outcomes to exogenous events – A retrospective, not prospective rationality – The tendency to throw good money after bad – Cultural norms of consistency in leadership

• Hindsight case studies – Expo 86 and Shoreham nuclear power station – A dynamic interplay of determinants through time – Psychological determinants predominate earlier in life-cycle – Project determinants predominate later in life-cycle

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Escalation of commitment: determinants

• Project determinants – Expected returns – Salvage value – Alternative courses of action

• Psychological determinants – Visibility – Self-justification

• Social determinants – Cultural norms of consistency in leadership

• Structural determinants – Political support – Symbolic aspects

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Contractor scapegoating

• Contractors obliged to provide bids complying with promoters expectations or project cancelled

• Competitive bidding generates further “low-balling” by contractors – Reliance on claims then drives escalation

• Escalation inevitable during delivery as costs exceed estimates

• Contractors set up to fail by their clients

• They thereby provide a convenient scapegoat for project promoters.

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Complementarities and differences

• The expected utility (EU) paradigm dominates investment appraisal and risk management – Net present value

– Cost-benefit analysis

– Probability/impact matrix

– A heroic model in terms of information requirements

• In practice the EU norms are not applied – Strategic misrepresentation and bad faith

– Escalation of commitment and good faith

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Complementarities and differences

• What enables strategic misrepresentation? – Not personal gain

– Not masochism

– Rather future-perfect thinking

• What enables escalation of commitment? – Norms of leadership supported by future perfect thinking

– Availability of exogenous actor (scapegoat)

– “getting the concrete on the table”

• A proposed model

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A model of escalation on major projects

ContractorScapegoating

ProjectOutcome

Escalation of

Commitment

StrategicMisrepresent-

ation

Future PerfectState

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Policies for de-escalation

• Develop rigorous project assurance

• Ensure an external view

• Invest in front end definition

• Mitigate optimism bias

• Develop client capabilities

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Project assurance

• Stage-gates provide clear points of reflection and decision in the project process – They provide formal opportunities for the “outside view” – They break the momentum of strategic misrepresentation – Gates review progress to date and plan next phase – Gates provide opportunities for peer review – Gates provide opportunities for senior management review

• For example – UK Office of Government Commerce Gateway Process – Norwegian Government Quality at Entry Process

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A basic stage gate process

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appraise select define execute operate opportunity

Gate 1

Is the business case

sound?

Gate 3

Are we ready to execute the

project?

Gate 2

Is scope complete?

(full funds authorisation)

1%-2% 3%-4% 95%

Developed from Merrow (2011)

An external view

• Industry cost indices – e.g. Building Cost Information Service

– But very context-specific

• Inter-client process benchmarking – e.g. Independent Project Analysis (IPA)

– High quality processes should achieve good outcomes

• Peer review – The input of independent experts is invaluable

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Front end definition

• excellent project definition work brings multiple returns – Treat it as an investment in the success of the project

• Economising on high impact/ low proportion of total cost services is a false economy – e.g. engineering services

• Projects go wrong from the head – Just like fish!!

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t

low

high

Actual project outcome

Ability to

influence project

outcome

appraise select define execute operate opportunity

high

low

Front end definition

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Develop client capabilities

• The outsourcing trend – Projects and engineering capability

• The emergence of the ignorant client

• Clients need to understand the implications of what their suppliers are telling them

• The key issue is oversight – Do too little and you get unpleasant surprises

– Do too much and you generate costs and restrict innovation

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The client capability sine wave (Railtrack effect)

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OUTTURNS

Engineeringis Core

SeniorManagement

Attitude

All engineering can be

outsourced

excellent

Project Success

disasterous

SMATTITUDE

Source: Prof Bernard Kelly, UoM

Concluding thoughts

• Major projects need leadership and vision – Future-perfect thinking is vital but needs tempering

• Quality of front-end work is crucial – Stakeholder management – Investment in dispassionate analysis

• Avoid perverse incentives in investment policies – e.g. UK Private Finance Initiative

• Be prepared to cancel projects at gates – A cancelled project is testimony to good project assurance

• Invest in client capabilities – High quality front end work requires client-side engineering and

project management competencies – It requires own-employees committed to the organisation’s goals

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Thank- you for your attention

Let’s discuss!! [email protected]

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