Why Your Construction Project Estimates are Wrong

According to WSJ’s The Numbers Guy, most infrastructure projects end up with very large overruns.   Surprised?   Probably not.  This is one of those casual conversation topics where many of us can point to a project close to home that have “busted the budget”.   New Jersey’s rail tunnel to New York City, Boston’s Big Dig, Sydney Opera House, your local sports stadium, the highway project on the other side of town… what you have been suspecting (that these big projects become more expensive) is correct, at least according to people who study these things.

So why is this the case?   Like many complex situations, there are several elements at play.  Estimating is always a tricky task.  Even experts cannot estimate as well as they think they should.  In fact, having expertise often affects your estimates in two (bad) ways.  According to Professors Magne Jørgensen and Dale Griffin, there is a link between forward looking perspective and irrational optimism.  You are an expert, you are asked to provide an estimate, you feel optimistic about the future, and give a favorable estimate.  According to Nassim Nicholas Taleb, author of The Black Swan, expertise gives you an unwarranted sense of certainty in situations where such certainty cannot exist.

There are other factors at play.  For example, the larger the project, the more likely that there will be more stakeholders and more ideas.  The public may want better aesthetics.  Public projects expand as other smaller projects are folded into the original project.  Also, the longer the project, the larger the risk of labor and material cost increases.  Some projects also end up paying for “externalities cost” that may not have been originally planned.

If there are other bids involved, the winning project was more likely to be the most optimistic.  This is the so-called winner’s curse.  Yipee, we won the project… And we’ve also convinced the public, officials (and ourselves!) that our estimates are correct.

Finally, there could be misrepresentation and outright lying.  The articles acknowledge this, but does not go into research findings.  I suspect, as the article implies, that there is very little systemic large-scale lying in the industry.  It’s most likely the other factors described above.

Big estimates are big numbers, and we do not deal well with big numbers, experts included.  We remember numbers incorrectly.  For example, we may remember that a project was supposed to be $100MM, but forget that with the additional approved budget, the project eventually was set at $126MM.  It’s easier to remember something like “$100MM”.   Also, we don’t like to deal with ranges and uncertainty, and this is exacerbated with the large numbers we are dealing with.

So, is it wrong to be optimistic?   Are we just lying to ourselves?  Is it possible to have expertise and accuracy?

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