Managing the Planning Fallacy in Large, Complex Infrastructure Programs Daniel Kahneman’s recent book, “Thinking, Fast and Slow” 1 returned his concept of the “planning fallacy” to the project management center stage when considering large, complex projects and programs. First coined by Kahneman and Amos Tversky in a 1979 paper2, the planning fallacy is the tendency of people and organizations to underestimate how long a task will take even when they have experience of similar tasks over running. Perhaps the poster children for the planning fallacy are large scale public works projects. Reference class forecasting is one method for suspending one’s impressions and providing a more critical evaluation of the task at hand. It addresses the natural tendency to underestimate costs, completion times and risks while at the same time overestimating benefits. It squeezes out biases while considering the inevitable “improbable” risks that all projects face. The risks that inhabit the “white space” between elements of a program and possibly even the odd “Black Swan” that shows up from time to time. The paper looks at an example at how reference class forecasting can be used not only to provide a basis for checking planned execution approaches and associated project timelines but also to identify how the execution methodology and, in this case, even the contracting strategy will need to be modified.
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Managing the Planning Fallacy in Large, Complex Infrastructure Programs
by Bob Prieto
Daniel Kahneman’s recent book, “Thinking, Fast and Slow” 1 returned his concept of the “planning fallacy” to the project management center stage when considering large, complex projects and programs. First coined by Kahneman and Amos Tversky in a 1979 paper2, the planning fallacy is the tendency of people and organizations to underestimate how long a task will take even when they have experience of similar tasks over running.
Perhaps the poster children for the planning fallacy are large scale public works projects. In a 2006 paper in the Project Management Journal3, Bent Flyvbjerg describes transportation projects “inaccuracy in cost forecasts in constant prices is on average 44.7% for rail, 33.8% for bridges and tunnels, and 20.4% for roads.”
Work by Kahneman, Tversky, Flyvbjerg and others shows that errors of judgment are:
- systematic and predictable - reflect bias - persist even when we are aware of, and - require corrective measures that reflect recognition of this bias
These natural tendencies are further exacerbated when “motivated” individuals frame questions in such a way as to constrain the range of possible answers.
Consider these two situations. In the first, a manager is given responsibility to come up with a budget and schedule for a large project. He engages outside help, conducts a thorough risk analysis and looks at comparable other projects. In the second a manager is asked by the politically appointed Chairman of the Authority if he can do the same project for $ XX. Which answer are you more comfortable with?
Reference class forecasting is one method for suspending one’s impressions and providing a more critical evaluation of the task at hand. It addresses the natural tendency to underestimate costs, completion times and risks while at the same time overestimating benefits. It squeezes out biases while considering the inevitable “improbable” risks that all projects face. The risks
1 Thinking, Fast and Slow; Daniel Kahneman; ISBN:9780374275631; 2011
2 "Prospect theory: An analysis of decisions under risk". Econometrica; Kahneman and Tversky; 1979
3 From Nobel Prize To Project Management: Getting Risks Right; Bent Flyvbjerg; Aalborg University, Denmark; Project Management Journal; August, 2006.
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
that inhabit the “white space” between elements of a program and possibly even the odd “Black Swan” that shows up from time to time.
The Association for the Advancement of Cost Engineering (AACE) has recognized the value of estimate validation using separate empirical-based evaluations to benchmark the base estimate, the equivalent of reference based forecasting. This estimate benchmarking process is widely used in the process industries but need not be constrained to them.
Reference Class Forecasting
Let’s look at an example at how reference class forecasting can be used not only to provide a basis for checking planned execution approaches and associated project timelines but also to identify how the execution methodology and, in this case, even the contracting strategy will need to be modified.
The particular project of interest was the pacing element of a larger program. The methodology described below was also extended to the complete program and identified several added changes to the program methodology which would be required.
The reference class forecast began by identifying a comparable scale similar type project for which there was a good information database and performance was well documented. That project was in the later stages of completion and actual schedule performance through the majority of the project was already known. The schedule for this reference project is reflected in Figure 1. Project activities and dates have been generalized for purposes of this paper.
While the design of the new project clearly will be different, it was judged that in terms of supply chain, complexity and scale those differences were not significant and that the reference class forecast undertaken would provide a good initial indicator of project durations and contract delivery strategies.
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Activity 2.3 Specialized Construction Technology Mobilization
3 Enabling Works
Activity 3.1 Enabling Works
Activity 3.2 Temporary Construction – Land Based
Activity 3.3 Temporary Construction – Marine Based
Activity 3.4 Temporary Steel #1
Activity 3.5 Temporary Steel #2
4 Long Lead Procurement
Activity 4.1 Group #1
Activity 4.2 Group #2
Activity 4.3 Group #3
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
The next step in developing a reference case based forecast was to overlay the project schedule against the then “current” calendar so that likely end dates could be forecast. This is shown in Figure 2. Initial activities pacing the schedule are related to design activities which in the reference case were completed before construction was started.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1 Design
Activity 1.1 Design
Activity 1.2 Construction Tender
2 Construction Mobilization
Activity 2.1 Contract Award
Activity 2.2 Mobilization
Activity 2.3 Specialized Construction Technology Mobilization
3 Enabling Works
Activity 3.1 Enabling Works
Activity 3.2 Temporary Construction – Land Based
Activity 3.3 Temporary Construction – Marine Based
Activity 3.4 Temporary Steel #1
Activity 3.5 Temporary Steel #2
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
As can be seen in Figure 3, construction was anticipated to be complete at the end of the first quarter of 2019 if a comparable design development and contracting approach was utilized. The client’s target date of mid-2017, also reflected in Figure 3, was 21 months earlier. The initial project execution strategy envisioned engaging a singular design-build contractor, but this initial reference class forecasting step highlighted that this would not achieve the required 21 month schedule reduction.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1 Design
Activity 1.1 Design
Activity 1.2 Construction Tender
2 Construction Mobilization
Activity 2.1 Contract Award
Activity 2.2 Mobilization
Activity 2.3 Specialized Construction Technology Mobilization
3 Enabling Works
Activity 3.1 Enabling Works
Activity 3.2 Temporary Construction – Land Based
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
This set the stage for developing an alternative contracting and delivery approach that would provide a better founded basis for project delivery.
The development of the alternative approach began with sliding required construction activities forward such that the actual construction durations required could still be available to the program although it was clear that they would have to be contracted for in a very different manner. This is reflected in the Figure 4.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1 Design
Activity 1.1 Design
Activity 1.2 Construction Tender
2 Construction Mobilization
Activity 2.1 Contract Award
Activity 2.2 Mobilization
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Attention then turned to assessing how the project execution methodology would have to be modified. Initial modifications included pulling back the tendering for construction package activity (Figure 5) and recognizing that the project would not be in a position to begin any aspect of that activity until a later date (Figure 6).
Given the fast track nature of the program and the complexity of the project, we incorporated an extended industry comment and engagement period (Figure 7) and reflected a later mobilization of the main contractor consistent with this procurement and engagement process (Figure 8).
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
In parallel to the main contractor engagement and selection process, it was identified that engagement (Figure 9) of shop drawing activities and development of shop practices would have to begin (Figure 10) in order to support the overall schedule. It would be the intent to transfer these contracts to the main contractor when selected.
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Finally, an assessment would be made of shortlisted main contractor’s specialized construction equipment and technology capabilities and if necessary procurement (Figure 11) of such equipment to be treated as client furnished material made at the time of shortlisting.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
1 Design
Activity 1.1 Design
Activity 1.2 Construction Tender
2 Construction Mobilization
Activity 2.1 Contract Award
Activity 2.2 Mobilization
Activity 2.3 Specialized Construction Technology Mobilization
3 Enabling Works
Activity 3.1 Enabling Works
Activity 3.2 Temporary Construction – Land Based
Activity 3.3 Temporary Construction – Marine Based
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Optimism is a wonderful trait and a key attribute of the human condition. But in developing a sound planning basis for large, complex projects we must redouble our efforts to control this at times unavoidable bias. If we fail to recognize and limit the effects of “framing questions” and
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
the so-called planning fallacy we are doomed to an endless series of “Surprises” related to project cost and schedule.
Key to controlling this planning bias is:
assumption articulation and tracking – assumptions must be explicit, tested, confirmed and importantly monitored. In highly complex and long term projects assumption migration is a regular occurrence.
consideration of all risks, no matter how improbable, that could adversely impact the project or program plan ( Reference 2) – “framing questions” and an optimism bias often lead us to assume away risks leading to a failure of not only developing management strategies and contingencies, but even worse, failing to track them further.
directly addressing the bias through use of reference class forecasting that provides separate empirical-based evaluation – reference class forecasting provides a neutral ruler against which to measure our planning efforts.
References:
1. From Nobel Prize To Project Management: Getting Risks Right; Bent Flyvbjerg; Aalborg University, Denmark; Project Management Journal; August, 2006.
2. The GIGA Factor; Program Management in the Engineering & Construction Industry; CMAA; ISBN 978-1-938014-99-4; 2011
3. Thinking, Fast and Slow; Daniel Kahneman; ISBN:9780374275631; 2011 4. "Prospect theory: An analysis of decisions under risk". Econometrica; Kahneman and
Tversky; 1979
PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto
Bob Prieto is a senior vice president of Fluor, one of the largest, publicly traded engineering and construction companies in the world. He is responsible for strategy for the firm’s Industrial & Infrastructure group which focuses on the development and delivery of large, complex projects worldwide. The group encompasses three major business lines including Infrastructure, with an emphasis on Public Private Partnerships; Mining; and Manufacturing and Life Sciences. Bob consults with owners of large engineering & construction capital construction programs across all market sectors in the development of programmatic delivery strategies encompassing planning, engineering, procurement, construction and financing. He is author of “Strategic Program Management”, “The Giga Factor: Program Management in the Engineering and Construction Industry” and “Application of Life Cycle Analysis in the Capital Assets Industry” published by the Construction Management Association of America (CMAA) and “Topics in Strategic Program Management” as well as over 450 other papers and presentations.
Bob is a member of the ASCE Industry Leaders Council, National Academy of Construction and a Fellow of the Construction Management Association of America. Bob served until 2006 as one of three U.S. presidential appointees to the Asia Pacific Economic Cooperation (APEC) Business Advisory Council (ABAC), working with U.S. and Asia-Pacific business leaders to shape the framework for trade and economic growth and had previously served as both as Chairman of the Engineering and Construction Governors of the World Economic Forum and co-chair of the infrastructure task force formed after September 11th by the New York City Chamber of Commerce.
Previously, he established a 20-year record of building and sustaining global revenue and earnings growth as Chairman at Parsons Brinckerhoff (PB), one of the world’s leading engineering companies. Bob Prieto can be contacted at [email protected].
