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Level: Intermediate
TCM Section(s):
7.3. Cost Estimating and Budgeting
7.6. Risk Management
Venue: 2021 AACE International Conference & Expo
Abstract: AACE® International recommended practices (RPs) address empirically-based, risk-driven parametric modeling to quantify systemic risks. These RPs reflect the process industry’s embrace of phase-gate project systems and extensive research supporting the methods. While the cost overrun-prone transportation sector is catching up in applying phase-gate systems, it lags in benchmarking and research and has been detoured away from the RP methods. Research showing that fundamental practice failures (i.e., systemic risks) cause cost growth has been largely ignored. Instead, an unsupported hypothesis as to the cause of cost overruns called the planning fallacy (i.e., optimism bias or lying), and a pessimistic “de-biasing” practice called reference class forecasting (RCF) are being embraced by some in transportation. The danger is that RCF will institutionalize mediocrity of cost outcomes; a detour to an economic dead end.
A principle called the fifth hand, reflecting situational-specific, mixed causes of cost overrun, that aligns with research and AACE RPs, is reviewed. However, what is missing from the debate is the fact that too-narrow estimate accuracy range expectations are wired into owner phase-gate procedures. Estimators use subjective risk analysis that underestimates contingency because it meets these expectations; i.e., the planning fallacy is institutionalized. Those who benefit from low estimates need not lie; just announce a project early in perfect confidence that estimators have failed to put a price on poor scope definition. The paper subtitle should be “we have met the enemy and he is us”.
The paper reviews the cost overrun situation, the theories, the research and the various proposed and recommended methods. Despite all evidence to the contrary, the author is hopeful that empirically-valid risk quantification and contingency setting practices will become more widely used, putting an end to endemic cost overruns in the transportation industry.
Level: Intermediate
TCM Section(s):
7.3. Cost Estimating and Budgeting
7.6. Risk Management
Venue: 2021 AACE International Conference & Expo
Abstract: AACE® International recommended practices (RPs) address empirically-based, risk-driven parametric modeling to quantify systemic risks. These RPs reflect the process industry’s embrace of phase-gate project systems and extensive research supporting the methods. While the cost overrun-prone transportation sector is catching up in applying phase-gate systems, it lags in benchmarking and research and has been detoured away from the RP methods. Research showing that fundamental practice failures (i.e., systemic risks) cause cost growth has been largely ignored. Instead, an unsupported hypothesis as to the cause of cost overruns called the planning fallacy (i.e., optimism bias or lying), and a pessimistic “de-biasing” practice called reference class forecasting (RCF) are being embraced by some in transportation. The danger is that RCF will institutionalize mediocrity of cost outcomes; a detour to an economic dead end.
A principle called the fifth hand, reflecting situational-specific, mixed causes of cost overrun, that aligns with research and AACE RPs, is reviewed. However, what is missing from the debate is the fact that too-narrow estimate accuracy range expectations are wired into owner phase-gate procedures. Estimators use subjective risk analysis that underestimates contingency because it meets these expectations; i.e., the planning fallacy is institutionalized. Those who benefit from low estimates need not lie; just announce a project early in perfect confidence that estimators have failed to put a price on poor scope definition. The paper subtitle should be “we have met the enemy and he is us”.
The paper reviews the cost overrun situation, the theories, the research and the various proposed and recommended methods. Despite all evidence to the contrary, the author is hopeful that empirically-valid risk quantification and contingency setting practices will become more widely used, putting an end to endemic cost overruns in the transportation industry.