Pulling the Plug
Having One Person Oversee Funding from Start to Finish Can Help Reduce Cost Overruns
Cost overruns can be a death sentence for capital projects. To ensure hard decisions are made as soon as possible, organizations often have someone other than the original project sponsor make funding decisions during the execution phase. It seems like common sense: The person who originally gave the green light will be more attached—and therefore less likely to kill project funding when things go awry.
But new research discredits this line of reasoning. A study published in the May issue of The Accounting Review suggests that if teams know the same person will be at the helm from start to finish, they're less likely to provide cost underestimates during the planning phase.
If teams know the same person will be at the helm from start to finish, they're less likely to provide cost underestimates during the planning phase.
“The prospect of a new, noncommitted, critical superior making the continuation decision could decrease subordinates’ expectations of continuation funding and/or increase their uncertainty about this funding. As a result, subordinates … focus primarily on gaining initial funding by understating costs,” wrote the authors, Alexander Brüggen of Maastricht University and Joan L. Luft of Michigan State University.
During the study, participants were told to propose an initial cost estimate for a capital project to their superior. Half the group was told that midproject funding decisions would be made by the original superior, while the other half was told these choices would be made by a new superior. The results? The biggest cost understatements occurred among participants who believed a new noncommitted executive would make the continued funding decision. —Kelsey O'Connor
JANUARY 2017 PM NETWORK
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