Minimising cost overruns - part 3
Sustainability, Strategy & Finance

Minimising cost overruns - part 3

Cost over runs not only destroy project economics, they also taint future similar projects with the cost 'blow out' brush. A technique known as Reference Classes can help, but we need to work together to make it useful.


While it might seem intuitively obvious that cost overruns are bad for investments, the scale of just how bad is frequently under estimated. Cost overruns not only destroy project economics, they also taint future similar projects with the cost 'blow out' brush. This could be a massive issue for the sustainability transitions. We know we need to invest a mind blowing amount of capital - $9.2 trillion pa is one fairly reasonable estimate. So, good project management will be critical.

Choosing the 'right' project is not just about what the spreadsheet tells us, or even what social/environmental outcomes the investment promises. Research tells us that certain types of projects are more prone to cost and time overruns.

There are techniques that we can use that help us make better estimates of project cost and timescale. In an earlier blog we talked about the approach used by (among others) the architect Frank Gehry.

Quick insight: minimising cost over runs - part 2
Making sure the cost estimates for a project are meaningful is essential, as is verifying the expected benefits. But, equally important is how you mange complex projects - we can learn some useful lessons from architect Frank Gehry

Today we want to talk about Reference Classes - or put simply, identifying which types of projects give us a good base line for how much our particular project might cost, and how long it might take to build.

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You might think that this is not an issue for sustainability professionals. It's something for engineers, architects, and project managers. But, it is a sustainability issue.

We want our sustainability projects to be financially and socially successful. So, we need to understand the reasons behind cost overruns. But we also need to contribute to the wider effort to build meaningful data sets - analysis that can help future sustainability professionals avoid the mistakes of the past.



The details

Summary of a research report published in ScienceDirect:

Planning and constructing large infrastructure projects, such as bridges, tunnels, public buildings, and power plants, are challenging tasks and often lead to cost and schedule overruns. Megaprojects are especially prone to these risks, as they are large in size, complex in nature, and highly unpredictable.

One of the key cognitive drivers behind poor cost estimation is 'strategic misrepresentation'. Under this, project promoters overestimate benefits and underestimate costs, with the goal of reaching project approval and funding. And once they have funding, it's hard for decision makers to reverse course.

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