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Being too optimistic can spell disaster

Research on project performance proves that being too positive can affect project planning. By Graham Winch

Optimism bias affects the way we view the future – it is defined as having unrealistic expectations about future events, or the ‘it won’t happen to me syndrome’.

Psychological research has shown that we all tend to ignore the odds when assessing our chances of catching a disease and assume that data applies to someone else, even if we claim expert knowledge in the field.

In research on the ‘planning fallacy’ it has been shown that we chronically underestimate completion times – even if we overran last time, we naively assume this time it will be better.

And extensive research on project performance by a Danish team has shown that optimism bias affects construction project planning as well.

Little improvement

Projects continually overrun schedule and budget, and there is little improvement in performance over time – this applies in the UK and abroad. While reasons are always found during execution why the last project went wrong, we tend to ignore the universal experience that something else will probably go wrong while planning the next project.

For this reason HM Treasury now mandates that during the investment appraisal process all calculations should be corrected for optimism bias, and it provides a table of correction factors.

The best known example of the application of this new policy is the major increase in the budget for the London 2012 Olympics which resulted from the application of these corrections factors at the programme level.

Contingency is key

The wisdom of this correction is how being demonstrated by the release of this contingency to cover the failure of the private sector to invest in the project as expected due to the credit crunch.

In essence, correction for optimism bias comes down to contingency. There is a strong tendency in project planning to assume that the central estimate is what will happen, but in half of projects it will inevitably be exceeded. ‘Most likely’ does not mean ‘will happen’. The history of construction projects is littered with disasters where this simple truth has either been ignored or deliberately suppressed.

While it is the client’s responsibility to ensure that estimates are accurate and that appropriate contingencies are included, optimism bias matters to contractors too. They can be tempted to put in lower estimates in the hope of something turning up to put the project in the black as Multiplex did on Wembley Stadium.

Perfectly competent contractors can easily get the blame for non-delivery when the client’s estimates were flawed in the first place. In both cases, pressures are generated along the supply chain as the inevitable implications of optimism bias in estimates become apparent.

We need to acknowledge that this bias exists if we are to improve project performance. Just like government promises of efficiency savings, estimates are often made to fit the budget, rather than the budget to fit the estimates. Optimism bias is one of the ways in which we convince ourselves of the merits of such an approach.

Any project estimate needs to include appropriate contingencies and attempts to fit the budget by cutting contingencies mean that it ‘will happen to you’ in the shape of a project disaster.

By Graham Winch, professor of project management at Manchester Business School

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