Projects are recognized as key building blocks in the growth of organizations. Research into the connection between projects, project strategy, and corporate strategy is growing as a field of study. But corporate strategy will only be successful if it is supported by successful projects. The challenge for many organizations is achieving such success, given that the historical performance of many projects, especially major projects, has not been good.
In fact, the failure rate on major projects, especially large engineering projects (LEPs), threatens to bring the whole concept of major projects, and project management, into disrepute at a time when more major projects than ever are being conceived and built. While research on project performance has focused extensively on improving project management practices, perhaps there are other factors at play that contribute to the failure of major projects. It may be that the seeds for project failure are sown when projects are initially estimated and approved.
Initial underestimation, through the use of optimistic estimates, and continued delay in acknowledging true costs until projects reach a point of no return, likely contribute in a significant manner to project cost overruns, and thereby real or perceived project failure. This paper will look at the players involved in estimate development, describe potential drivers for the use of optimistic estimates, and examine the interaction between project sponsors and other players involved in project development. It will investigate the role senior management plays, review the relationship between optimistic estimates and cost overruns, outline a series of actions which support the continued underestimation of costs as projects are executed, and explore the perception of project success based on adherence to estimated budgets. The paper will also provide details on the planned research work that the author intends to pursue in the coming years through participation in a PhD program.
Understanding cost overruns
In looking at major projects worldwide, there are several studies that highlight poor performance on larger and more difficult projects. Overruns on cost and schedule continue to persist. Morris and Hough (1987, 7-12) provided ample examples of project overruns around the world that ranged from 40% to 200%. While inflation played a part in many overruns, other causes of going over budget included underestimating and scope changes. A recent study by Aalborg University of 258 major international transport infrastructure projects between 1927 and 1998 found that actual costs were, on average, 28% higher than estimated costs, and that in nine out of ten of these projects, costs were underestimated, resulting in cost overrun (Flyvbjerg, Holm, & Buhl, 2002). The results from an IMEC (International Program in the Management of Engineering and Construction) study of 60 large engineering projects (LEPs) found that 18% of the projects incurred extensive cost overruns (Miller & Lessard, 2000, p. 14).
In trying to understand the potential connection between optimistic estimates and cost overruns, attention will be focused on a number of questions relevant to the estimation process, namely:
- Who is involved in the development of project estimates?
- What are the drivers for optimistic project estimates?
- How do project sponsors and other key project players interact in developing estimates?
- What role should senior management play?
- How are optimistic project estimates and cost overruns related?
- Why are underestimated projects allowed to continue?
- Does an overrun on a project constitute failure?
The following sections cover the questions raised above and help frame the proposed area of research.
Who is involved in estimate development on projects?
Although projects can sometimes be performed entirely using an organizations’ own internal resources, it is rare in today’s downsized world to find significant projects that are being completed totally in-house. Outsourcing or contracting significant segments of project work to other companies is commonplace (Gray & Larson, 2000, p. 331). Large engineering projects take time to develop and generally involve the use of external resources. Early on, project sponsors enlist key partners to help them shape the project. Four principal groups are usually involved in the development of a major project: the owner/sponsor, the project team, the consultants, and the contractors. Each has their own project goals to achieve and responsibilities to perform in contributing to the development of project estimates.
The owner/sponsor group is the individual or committee who has organizational responsibility for the project and is charged with promoting and supporting the project as it develops. The project sponsor is someone who believes in the project and is committed to its success (Hartley, 1998, p. 234). In most cases, the sponsor is a senior manager or executive within the organization. He/she plays a key role in the early stages of potential projects. He is responsible for integrating the strategic role and direction of the project with the normal operation of the organization and is often the name associated with the project, and subsequently with its success or failure. The sponsor’s focus is often on project economics and trying to get the best project for the lowest cost in a timely manner. As a rule, most sponsors tend to be occasional participants in the development of projects, that is, projects are not a routine occurrence for them. “Most industrial sponsors are ill-equipped to handle large engineering projects, as executives involved in prior projects have moved on. Experience is often lacking and corporate memory about LEPs is shallow”(Miller & Lessard, 2000, p. 36).
The project team is usually an extension of the owner group. Members of the project team can be drawn from one or more of the support groups from within the parent organization promoting the project. Their role is to develop the framework of the project and to work out the details and costs of the project. However, team members are often borrowed and may have only the briefest exposure to the project effort (Frame, 1987, p. 80). In many cases, they do not possess all of the necessary technical or project management skills or cost databases required for developing a project and have to employ external resources for assistance.
The role of consultants is often filled by engineering firms on facilities projects. Consultants, whose main “game is selling man hours” (Mackie, 1984, p. 53), are long-time players in the development of projects. They usually provide the technical skills for designing a new project, and also provide the cost estimation experts and databases necessary to come up with the project estimates. They walk a fine line between responding to an owner’s needs, with whom they may have a long-standing alliance or relationship, and advising owners of the possible technical and economic choices, costs, and challenges associated with a potential project, while still offering encouragement for the project to proceed.
The last principal participant is the general contractor. He is one of the main players in the project development game, since the costs associated with the construction effort are often the biggest variable during the execution phase of a project. A contractor can provide estimates or expected unit rates for the identified or planned scope of work, based on his past experience or in-house databases. In providing pricing, a contractor must balance his desire to secure a contract with the risk of underbidding (Mackie, 1984, p. 137). The contractor’s input in the early stages of the project development is often limited, not by choice, but because assumptions are often made by the other three principal participants as to what will likely transpire during the execution phase. Also, the project execution strategy chosen may dictate that contractors do not play a role in project development until awarded a contract.
Where major capital projects are concerned, the line between consultants and contractors can sometimes be blurred as there are several large consultant/engineering companies that have or are associated with significant contracting organizations. This duality can create a conflict of interest and result in a project being promoted by the consulting arm to support the construction arm of the organization. Recognition of this fact has to be taken into consideration when dealing with organizations that propose to perform both the consultant and contractor role on a project.
In addition to these four main participants, there are usually several other participants who may play smaller roles in the development of project estimates. Players such as the owner’s operations staff and regulatory authorities, among others, can influence the estimated costs associated with projects by demanding adjustments in project design to meet safety, operational, environmental, and other requirements.
Having defined the four principal participants and their goals around project development, it is time to look at the drivers for optimistic estimates and the interaction between those participants in developing such estimates.
What are the drivers for optimistic estimates?
According to Merriam Webster’s Collegiate Dictionary (1996), optimistic means “an inclination to put the most favorable construction upon actions or events or to anticipate the best possible outcome.” Companies using optimistic project estimates expect that everything will work out in their favor, that the project will yield no upsets or surprises. Yet, Miller and Lessard (2000, p. 22) noted that the sixty projects reviewed in a detailed IMEC study were exposed to an average of five unexpected events during shaping, construction, and ramp-up.
The drivers for optimistic estimates can be many. Optimistic estimates may occur because the project sponsors/supporters believe that everything will go right (naivety), the project sponsors/supporters have a lack of knowledge of past project performance (ignorance), or the project sponsors/supporters need to be optimistic to make a project viable (deception). Given the track record of major projects, it is better to be conservative in developing project estimates, yet such conservatism could spell inflated estimates, thereby rendering many projects uneconomical based on organizational required minimum returns.
Another major driver for optimistic estimates is the fact that the actions of senior management may dictate that estimates end up being optimistic. According to Gagnon (1982), the further one moves up the organizational chart away from immediate responsibility for doing the work, the easier, faster, and cheaper the project looks to the senior manager than to the one who has to do it. Secondly, wishful thinking leads the senior manager to underestimate cost (and time), because the senior manager has a stake in representing the project to senior management as a profitable venture.
Underestimation is the placing of too low a value on size, quantity, or number. The notion that projects have been underestimated is not new. For the most part, underestimations have been explained away by claiming that the original estimates were optimistic, or contained errors, or that the scope of work changed. Underestimation has a variety of causes. Rosenau (1998, p. 20) identified several:
- The liars contest, which often occurs during contract negotiation. During negotiations one is told that unless they lower their price, the contract will be awarded to another company. When one makes this kind of price reduction without fundamental work reductions, they have created a cost overrun at the very beginning of a project.
- This liars contest also happens inside an organization. In this case, the project has to be sold to upper management, and one is competing with other organization managers for authorization.
- Cost difficulties arise because many of the initial cost estimates are simply too optimistic. These estimates do not reflect the inefficiencies that will occur in scheduling resources to perform the work or the fact that less qualified people may be assigned to do the work.
- Occasionally mistakes are made in the cost estimating. Like design mistakes, these are unfortunate, and careful scrutiny and review can minimize this occurrence.
- Cost problems are simply an inadequate cost consciousness on the part of the project management or a failure to have an adequate cost management system.
- Funding may not occur according to plan and this may produce problems. Timing of resource availability and planned activities may be disrupted because of funding availability, resulting in a less efficient operation.
- Finally, defining a project in its entirety at the beginning of a project may be impossible. Rather than going with an open-ended project, a prudent approach would be to define an agreed partial scope and complete it prior to going forward with the rest of the project.
All the above reasons are valid causes of underestimation. Many arise because of the real, or perceived, need to develop projects to meet organizational strategy. On the flipside of optimistic estimates, or the underestimation of costs and schedule, is the overestimation of potential project benefits. Flyvbjerg, Bruzelius, and Rothengatter (2003) noted multiple instances where project sponsors used exceedingly optimistic estimates of potential benefits to secure project approvals. Examples in capital investment-engineering projects might be the exaggeration of capacity throughput or output, on-stream factors, etc.
Most of the drivers for optimistic estimates noted above flow from the sponsor’s desire or need to make projects happen. For their part, the other three main players previously identified—project team, consultants and contractors—possess their own drivers to generate or go along with optimistic estimates. The project team’s essential purpose, and reason for existence, is the project, and their belief and optimism in the early stages of a project, when all things seem possible, “is calculated to gain support” for the project (Baker, 1998, p. 228). They are, therefore, strongly motivated to see the project approved. Likewise consultants have everything to gain through continued involvement in projects. Contractors put out their best efforts to be selected, often by making extensive promises on performance and capability (Rosenau, 1998, p. 20). The successful contractor is very often the one who has made the biggest promises.
While the advantage may appear to belong to the owner/sponsor in that they could choose any one of a number of consultants or contractors for large projects, in reality the number of suitable consultant and contractor companies, based on technical expertise and project capability, may be small. Therefore, areas of potential conflict may be knowingly submerged during project development and contractual discussion, with the view of getting a deal done, and then renegotiating down the road.
How do project sponsors and other key project players interact in developing estimates?
Projects can be looked upon as the change efforts of society (Webster, 1993, p. 5) and LEPs—such as airports, urban-transport systems, oil fields, and power systems—constitute one of the most important business sectors in the world (Miller & Lessard, 2000, p. 1). “Projects are an essential building block in an enterprise strategy” (Cleland & King, 1988, p. 174), a position supported by Hartman (2000, p. 38). Projects are conceived, by sponsors or management, in support of operational or growth strategies within organizations. “Successful sponsors start with project ideas that have the possibility of becoming viable” and then embark on shaping them (Miller & Lessard, 2000, p. 93). Usually a project has to pass a set of economic hurdles or meet defined timelines to be approved. Sometimes the initial cost and schedule estimates developed for projects do not meet the specified economic targets required for approval. The sponsors or supporters of the project are then faced with a dilemma—either they adjust the scope of the project, or enhance the cost and schedule projections to improve its economics; otherwise, the project will be dropped from consideration.
Project sponsors champion the project and use their influence to gain approval for the project. Their reputation is tied to the success of the project. They defend the project when it comes under attack and are a key project ally (Gray & Larson, 2000, p. 265). The sponsor(s) must convince multiple parties that a project is viable. So, the sponsor has to be an individual or group that can draw or retain interest in a vague notion of a project. The sponsor has to convince the organization’s internal management that the project is viable, then has to do the same with the external resources, such as consultants and contractors. Such external resources can sometimes be reluctant to commit unless they understand that a project has a real chance of being approved. After all, such a commitment may tie up resources that could be used elsewhere or on other, alternative opportunities.
If the sponsors of a project want to see it selected, they can either reduce the scope, tighten the initial estimates, or both. Business managers are suspicious of work estimates and have a tendency to believe they are excessive, even though for years, business projects have overrun their effort and duration estimates (Scotto, 1998, p. 223). Sponsors often perceive the initial project estimates to be on the generous side, recognizing that project teams like to have some padding in their estimates (Mackie, 1984, p. 211). They can arbitrarily reduce the time and cost estimates to suit their preferences (Meredith & Mantel, 2000, p. 95), by applying pressure or coercing the project team to accept optimistic projections (Lewis, 1995, p. 89), asking consultants to go with minimum designs, and encouraging potential contractors to give discount quotes (Rosenau, 1998, p. 20).
The project team, representing the owner/sponsor’s interests, could offer an optimistic schedule for execution of the work. Often, project estimates and schedules are prepared independently (Hartman, 2000, p. 296), with the estimates based on a utopian schedule and the schedule based on an unlimited budget, a combination that will inevitably lead to optimistic expectations.
For their part, consultants are inclined to pay attention to an owner/sponsor’s desires. The consultants might include factored estimates of equipment or indirect costs that are on the low side of normal. Estimates are produced primarily by consultants, who use historical data on productivity levels, current labor, equipment rental rates, and supplier quotations on materials and plant equipment, among other factors. Their motivation in developing an estimate is to produce an appropriate level of accuracy commensurate with the known project scope.
Contractors need projects to survive. To assist in making a project economically viable, the contractors might quote low unit rates or pricing to get a job, expecting to make their costs later through changes (Cleland, 1990, p. 251; Morris & Hough, 1987, p. 14). However, aside from the owner/sponsor, the contractor can be the party with the most at risk on a project, depending on the eventual contractual terms involved. Therefore, in the development of major projects, a lot of interaction can occur between these two players in determining who will carry the cost of risk. If the owner asks the contractor to carry the risk, then the contractor will adjust his prices upward, which can ruin any opportunity to develop optimistic estimates to gain project approval. The owner usually has to initially retain the cost of risk if there is to be any possibility of getting the desired estimate.
Collaboration between sponsors, consultants, and contractors makes a lot of inherent sense. Innovative ideas about bringing costs down, raising revenues, and gaining consent for the project can then be better articulated. The central issue is to maintain a perspective that avoids blindness to risks. Sponsors sometimes believe their own overly optimistic assumptions and yield to the temptations of unreasonable commitments, accepting risks and hoping that the downside never materializes (Miller & Lessard, 2000, p. 104).
What role should senior management play?
If optimistic estimates can be successfully used to secure approval of projects, then the likely result is that projects will continue to experience cost overruns and “too many projects proceed that should not have done” (Morris and Hough, 1987, p. 214). But given the poor track record of performance on major projects, senior management in companies considering such projects should be extra diligent in ensuring that valid estimates are used. What really carries optimistic estimates over the approval hurdle? And are senior management adequately protecting shareholder interests?
Projects develop and grow to maturity because they are fortunate enough to have sponsors that stand up to their commitments and coordinate their efforts with others in a coherent manner (Miller & Lessard, 2000, p. 8). But project sponsors cannot stand alone. They need the support of the owner’s senior management, and often the chief executive officer (CEO), in making projects happen.
Senior management recognize that projects are necessary for the continued growth and survival of a company. They also recognize that most LEPs suffer cost overruns. So why should they support such projects? On a purely rational basis, senior executives might prefer to shy away from such projects. But frequently, on large projects, corporate executives operate on gut instinct. They—by virtue of the overall perspective that they have of a company's strategy, capabilities, and resources—know which projects are right, and approve projects based on that feeling.
However, gut feelings are not auditable and a CEO has to be able to defend his actions. Therefore, control mechanisms—such as budget estimates, stage gate processes, and financial reviews—are conducted to reassure all involved interests that everything is in order and to show that the CEO and senior management are performing due diligence and protecting shareholder interests. This need to demonstrate awareness of company activities has been highlighted by recent scandals in the business world, such as that involving the Enron Corporation. Legislation such as the Sarbanes-Oxley Act is forcing companies and executives to show that they are efficiently and effectively using resources, preparing reliable financial statements, and complying with the appropriate laws and regulations. Will these changes affect the likelihood that projects with optimistic estimates will be approved? Based on history, things are unlikely to change.
How are optimistic estimates and cost overruns related?
On the face of it, the connection between optimistic estimates and cost overruns would seem to be obvious. After all, if the most beneficial opinion is taken of likely actions or events or the best possible outcome is expected, there is a better than average chance that things will not turn out as planned. Baker, Fisher, and Murphy (1988, p. 925) found that the top two determinants of cost and schedule overruns were cost underestimates and the use of buy-in strategies. But the consequences are much worse than any obvious one-for-one linear inaccuracy in the planning for budget and schedule (Cooper, 1998, p. 400).
Flyvbjerg et al. (2003, p. 12) believe that a main cause of cost overruns is a lack of realism in initial cost estimates. The length and cost of delays are underestimated, contingencies are set too low, changes in project specifications and designs are not sufficiently taken into account, and changes in exchange rates between currencies are underestimated or ignored, among other factors. Many major projects also contain a large element of technological innovation with high risk, which can translate into cost increases not adequately considered in initial cost estimates.
Most cost estimators, when developing estimates, will start with the most likely forecast or estimate for known activities. After a check on the validity of such estimates, they will also estimate the most optimistic and pessimistic values for each activity (i.e., range estimates), and then run a simulation to come up with a weighted estimate. But if the range estimates are not wide enough, or if there is a bias towards the most optimistic estimates, then it is very likely that the estimator will arrive at an optimistic estimate. Estimating, taken on its own, involves a potential major project risk. Estimators need to make assumptions about what they are estimating and how the project will be delivered. Gaps in their knowledge include information about future events, assumptions about people’s productivity, and continuity of work, among other factors (Hartman, 2000, p. 298). Ideally, Estimators must consider planning, estimating, and scheduling, in tandem and iteratively, to arrive at a realistic project budget.
Project cost control is designed to keep projects in check and to make project owners/sponsors aware of cost changes. In practice, as the design and then the construction phases commence and proceed, the final cost of a project is continuously re-appraised; revised estimates are established, usually from month to month. Stallworthy and Kharbanda (1983, p. 164) believed it was a matter of experience that, during the early stages of a project, the estimate of final cost falls compared to the amount authorized. Then, only at the later stages, will the final cost come back to, and more often than not exceed, the amount authorized. Stallworthy and Kharbanda were of the opinion that an estimate is not a statement of scientific fact, but rather a political gesture.
It is widely recognized that the biggest influences on a project’s cost occur during the project’s initial stages. Costs are always controlled by the scope of a project, which is initially determined by the process design and its further development into engineering design. The parameters in this context are most firmly fixed in the early stages of a project. Once established, all subsequent effort can only have a marginal influence on the ultimate cost (Stallworthy & Kharbanda, 1983, p. 24). Therefore, later efforts during project execution, to overcome the handicap of optimistic estimates, are unlikely to be successful.
Why are underestimated projects allowed to continue?
As previously stated, underestimation is the placing of too low a value on size, quantity, or number. Even if an underestimated project is approved, it could still be cancelled if the magnitude of underestimation became known early enough. Stallworthy and Kharbanda (1983) say that the estimate used for project approval is:
[an] estimate of greatest importance because once the commitment to spend the money has been made, there is no going back. Indeed, even if it becomes apparent as the project develops that the expenditure is going to be substantially greater than was at first envisaged, it will be extremely difficult to avoid that extra expenditure. If the money is not spent, there is a real danger of being left with a partly completed installation, of no value to anybody. (p. 138)
However, if a project is approved with an optimistic budget, then the likelihood that the estimate of final costs would fall is remote. Rather, the effort would be focused on maintaining the budget estimate as long as possible. In reality, it is only after a project reaches the point of no return, where it would be more expensive and embarrassing to cancel than complete, that such a project can be assured of execution. How does a project reach that point? It does so in stages, through a process called the Project Game, a term developed by Dr. Francis Hartman.
Having outlined how a project can be underestimated, or how an initial estimate can be reduced through the interaction between owner/sponsor, project team, consultant, and contractor, it is helpful to use the graph below (Figure 1) to describe subsequent efforts to conceal or contain the upward pressure on the project budget that naturally arises when an optimistic estimate is used as a budget figure.
Point A is representative of the initial estimate produced for a project, which the owner/sponsor might reject as making the project uneconomical when measured against pre-set organizational targets. Such a number is sometimes generated using an outline scope of work, historical cost data, and information from similar projects, among other things, on a top-down basis. Or it may have been generated using a bottom-up method, where the project is divided into work packages small enough to allow accurate estimation. While such an estimate process may be preferred, it is not always possible. Regardless, if all the players want the project to proceed, then the process of finding the preferred number, as described previously, starts and the game begins.
Once the reduced estimate, often recognized as a stretch target, has been generated, as shown by point B in Figure 1, then the project is approved. The project team, normally a combination of the owner personnel and external specialists, then sets about refining the project scope and making the project a reality. However, the project team often find that costs start rising, for example, as the engineering consultant adds detail to the design, the operational priorities are identified and incorporated into the design, the factored estimates provided on equipment cannot be supported, and the contractor’s pricing increases due to location or availability factors. A significant projected rise in costs would pressure the project team to perform an estimate review. Often they come back to the owner/sponsor with a number that exceeds the upper limits of the original approved estimate, point C in Figure 1. The project team often justifies this higher number by identifying higher facility operating efficiencies or enhanced throughput. At this point, additional scope cuts become difficult to identify because the exercise was performed before approval of the stretch target number was obtained; further attempts to reduce the number would only delay the project. If the owner/sponsor accepts this revised number, which is often at the threshold of the project’s economics, then everything proceeds uneventfully for some time.
Invariably upward cost pressures, due to the original optimistic estimates, eat away at the cushion afforded by the contingency included in the revised approved budget (point D in Figure 1). Depending on the level of project control, and the types of project controls being used, real project costs may not be captured in a timely manner (Forsberg, Mooz, & Cotterman, 1996, p. 193). Sometimes the real costs are not apparent because contractors are late in their billing practices, the value of the work invoiced has to be certified, the project team is holding approval of invoices in dispute, the revised value of contracts due to changes is not entered into the estimate projections or trends, or the completion costs are not being trended.
Eventually, the contractor or the project team has to confront the reality of runaway costs and impending schedule extensions. At the stage where there is open recognition of a runaway project, it often happens that the project has reached the point of no return (point E in Figure 1). This is where the losses in cancelling a project outweigh the benefits in completing the project. It is usually at this point that the number of people working on the project is at a maximum and it would be difficult and expensive to shut the work effort down. Frequently, coalitions between owners, consultants, and contractors formed to develop projects unravel at this point (Floricel & Miller, 2001) causing tremendous upheaval.
The owners and project team are now faced with the choice of either cancelling or continuing the project. If they cancel they will look bad. Factors such as personal “motivation, social pressures, and organizational pushes and pulls” (Cleland 1990, p. 233) and limited “salvage value and high closing costs” (Meredith & Mantel, 2000, p. 564) can combine to convince the owners and project team to continue to provide support for the project. If they provide the additional funds to complete the project, owners want assurances that the amount requested is indeed the final figure. If there is a lack of faith in the original project team, then this is the point (F on Figure 1) when senior members of the project team are replaced by external hires or owner’s representatives.
The project continues and invariably costs continue to rise. Any blame for continued cost increases is placed on the original project team by the replacement project team and the increases are explained as a legacy of prior mismanagement. A common face-saving strategy is to increase the budget by continually announcing scope changes (Mackie, 1984, p. 212), and then announcing that the completion figure is only a slight variation of the last approved budget and therefore, the project is a success.
Eventually, the project is completed (point G in Figure 1), often at a level of 200% or more of the original estimate. When the large increase in costs is highlighted, publicly the blame is often cast towards low productivity, scarcity of resources, unanticipated scope changes, and other scapegoats, but rarely on underestimation. The replacement project team professes to be more knowledgeable based on lessons learned, and usually are placed in charge of the next project. But they missed the process where the original estimate was developed and are often doomed to repeat this scenario again.
Such are the proposed stages of the Project Game. The root of the game lies in the generation and acceptance of stretched cost and schedule targets, all for the sake of obtaining approvals for projects that realistically might never proceed if the true end costs and completion dates were known.
Does an overrun on a project constitute failure?
The presence of a numerical overrun is only indicative of the possibility of project failure (Morris & Hough, 1987, p. 14). It is not in itself a proof of incompetence, imprudence, or other problems (Fox, 1984). Some overruns occur because the scope of work was changed or exchange rates or inflationary pressures caused a significant change in equipment or resources costs. Often overruns occur because of unanticipated regulatory changes or the manner in which contingency accounts are treated.
For project sponsors, overruns are not necessarily even the best measure of project success (Morris & Hough, 1987, p. 13). Market conditions can change, causing a project to still be profitable even though it exceeds its original budget or is completed later than expected. This is often the case in resource projects, where commodity pricing can make many potential disasters look like visionary projects. Of course, the opposite can also occur.
Flyvbjerg et al. (2003, p. 4) noted “some may argue that in the long term, cost overruns do not really matter and that many monumental projects that excite the world’s imagination had large overruns.” But Merrow, McDonwell, & Arguden (1988) pointed out, in a RAND Corporation study of mega projects, that:
Such enormous sums of money ride on the success of mega projects that company balance sheets and even government balance-of payments accounts can be affected by years by the outcomes…. The success of these projects is so important to their sponsors that firms and even governments can collapse when they fail. (p. 2)
For most large projects, overruns are a leading indicator that there were problems. Many large projects are complex and often very demanding and difficult to manage. Project management is postulated as the means to provide the processes through which major projects can be effectively managed. But if major projects continue to surpass the estimated budget and breach the set schedule, will this downgrade the real or perceived value of project management?
The idea that the four principal players in the development of projects—owner/sponsor, project team, consultant, and contractor—act in an interdependent manner to generate optimistic project estimates for the purpose of securing project approval may appear far-fetched. But it is impossible to ignore the fact that each player benefits if major projects are approved. And it is easier to receive approval for a project if its estimates fall in line with an owner organization’s budgetary targets. There is recurring evidence that the development of LEPs is not performing as well as expected. Several studies on major projects have shown that LEPs are prone to cost and schedule overruns.
But is there concerted cooperation between the principal players in generating optimistic project estimates? And how big a role does that play in project cost overruns? We propose the following hypothesis:
Many project cost and schedule overruns on large-scale projects are precipitated as a result of the interdependence between project participants in promoting and approving unrealistic and unachievable targets.
The rationale behind research in this area is to determine if the cost and schedule overruns are directly related to the use of optimistic initial estimates or deliberate underestimating. The research also seeks to ascertain if the principal project participants act interdependently in deliberately generating optimistic estimates. The research also attempts to validate the concept of the Project Game and to determine what impact, if any, the elements of the Project Game have on the success or failure of major projects.
To gain some understanding as to why the interaction or interdependence of the major project players can play a part in project underestimation, it is useful to consider game theory as a starting point. Game theory is “a formal way to analyze interaction among a group of rational agents who behave strategically” (Dutta, 1999, p. 4). Game theory can be used when the actions of several parties are interdependent. It provides a language to analyze and understand the strategies that various participants might use in their dealings or games with each other. The value of game theory lies in its uses for explanation, prediction, and advice.
Game theory is the analysis, or science, of interactive decision-making. The rules, or objects, of any game, according to Dixit and Skeath (1999), consist of:
(1) the list of players, (2) the strategies available to each player, (3) the payoffs of each player for all possible combinations of strategies pursued by all the players, and (4) the assumption that each player is a rational maximizer.” (p. 29)
All theory should relate to reality in two ways. First, reality should help structure the theory; second, reality should help provide a check on the results of the theory. The use of game theory is well documented in economics, business, and political science, among other fields. For the management of projects, the first three rules, or objects, of game theory are fairly straightforward. However, in many decision-making and strategic settings people do not behave like the self-interested rational actor in neoclassical economics and classical game theory (Gintis, 2000, p. 237). The likely reality is that individuals are not rational, and that emotions play a significant part in decision-making. Recent studies in the nascent field of neuroeconomics (Sanfey, Rilling, Aronson, Nystrom, & Cohen, 2003) using the Ultimatum Game, where two players are given an opportunity to split a sum of money and only benefit if an agreeable split is achieved, showed that there were strong emotional responses to unfair offers, suggesting an important role for emotions in decision-making.
Gintis (2000, p. 251) proposed that individuals come to strategic interactions with a propensity to cooperate, respond to cooperative behavior by maintaining or increasing their level of cooperation, and respond to non-cooperative behavior by retaliation, even at a cost to themselves. This type of behavior is clearly indicative of what happens in achieving project approval through the use of optimistic estimates and the elements of the Project Game previously described.
The concept of the players involved in the development of major projects interacting in using underestimation, or optimistic estimates, as a means to secure approval of projects could have a significant effect on how projects overruns are viewed. If it can be shown that the concept is real, then steps to counter or amend such practices could be incorporated into the project approval process.
The purpose of the proposed research is to determine the existence or level of interdependence between project participants, to examine each players awareness of how underestimation occurs in various types of projects, and to identify the extent that such underestimation—and elements of the Project Game—influences the outcome of large-scale projects. The research will be focused on major resource and infrastructure projects in Alberta, Canada, and elements of qualitative, quantitative, and case study formats will be used to obtain evidence on what and how underestimation and Project Game practices were utilized on those projects in order to show the effect these formats had. The research will attempt to access existing studies on LEPs worldwide and will examine significant projects executed throughout Canada.
To facilitate a better understanding of the underestimation and Project Game concept, and its influence on the development of projects, a conceptual framework differentiating between the sizes of major projects (say greater than or less than US$500 million) and players who engage in repeated projects (versus those who engage in one-off projects) is proposed for use. We hope that by analyzing a series of projects of varying sizes, where significant cost or schedule overruns have occurred, evidence of underestimation and the Project Game can be recognized. A major challenge will be ascertaining a series of major projects where the same players were involved in repeated projects. A common fallout of projects which have suffered cost or schedule overruns is that disagreement and finger-pointing can occur amongst the players involved (Floricel & Miller, 2001), leading to the search for new partners or approaches on new projects. The people who work on these projects are rarely those who have worked on previous projects (Rosenau, 1998, p. 2).
To reach the expected research results for this project, a triangulation approach using qualitative and quantitative methods in sequence is proposed. This is expected to add benefit to the issue of validity and reliability; it also uses the results from one phase of the research to plan the next phase. The proposed research could be divided into three main phases that parallel the literature review and would likely include both quantitative and qualitative components. The three phases under consideration are: phase one (semi-qualitative—Delphi), phase two (quantitative—mail survey), and phase three (qualitative—comparison to theory).
In the first phase, a semi-qualitative (Delphi Method) approach could be used to develop an outline of current underestimation and Project Game practices, the level of awareness that exists of such practices and the degree of influence they have on the outcomes of major projects. A select group of individuals—from the owner and consultants (usually engineering, procurement and construction, or construction management) to construction contractor companies who have participated in major projects—would be consulted with. From these consultations, and using available data, a questionnaire would be developed with the intent of collecting additional data on the above issues from a larger, relevant population base.
In the second phase (the quantitative), the questionnaire will likely be sent out to individuals in owner, consultant, and contractor companies who are known to have or have had involvement in the development of major projects with values greater than and less than US$500 million. This quantitative approach would provide validation of the responses obtained during the first phase from a larger sample base regarding the use of underestimation and Project Game practices and the influence of such practices on the outcome of projects.
In the final phase, a qualitative approach (comparison to theory) could be used for validating and prioritizing the questionnaire results, understanding and uncovering the current phenomenon related to the use of underestimating and Project Game practices, and producing a model or a theory for improvement, validation, or substitution of such practices. As part of this final phase, case studies of completed and in-progress projects will probably be conducted by combining data collection methods such as archives, interviews, and observations.
To support the authors’ arguments, we propose conducting a case study involving several of the oil sand mega-projects that are underway, or have been completed within the past decade, in Alberta, Canada. Oil companies normally focus on identifying and finding new sources of hydrocarbons, and spend large amounts of money doing so. In the northern Alberta tar sands, the resource is clearly evident; instead, significant amounts of money are expended in capital development (i.e., building the extraction facilities). Government support and encouragement for the development of these projects is provided through a reduced royalty structure. So the biggest threat to the continued development of these projects is the high capital costs involved, making them ideal capital investment-engineering projects to study.
The data gathered from interviews, questionnaires, and the validation process will be compared to archival data gathered from existing studies on LEPs. We hope that this information will result in the development of a model or theory, tying project performance to the concepts of initial underestimation and the Project Game. This model or theory will help project managers better understand the dynamics of the players involved in project development prior to project approval and during the project’s execution. Such a model or theory may help reduce the total cost of specific projects, add to the project management body of knowledge, and above all, positively affect the management of future projects.
As a result of the expected findings, the researcher expects to be able to demonstrate proof that initial project underestimation is practiced and that the steps detailed in the Project Game are valid.
Potential contribution to knowledge
This research, based on the three methodological phases, should provide the following insights:
- Information on the phenomenon of underestimation and how it happens;
- Identify some critical gaps in the literature review;
- Provide results that could potentially be generalized to LEPs;
- Identify the drivers for underestimation and the Project Game;
- Identify the need to increase the level of awareness among project players regarding the use of the Project Game on LEPs;
- Show the relationship between underestimation, the Project Game, economic development and theory, and project management theory and practice;
- Provide the potential to identify and build a model or theory to develop a foundation for improved collaboration and a resulting project cost saving;
- Add to the body of knowledge for project management.