Front-end estimates of costs and benefits typically used to support decisions on projects are considerably inaccurate, Bent Flyvbjerg, an international expert in the management of major projects, says in a new paper.
“Estimates are commonly poor predictors of the actual value and viability of projects and cannot be trusted as the basis for informed decision making,” Flyvbjerg, a professor in the University of Oxford’s Saïd Business School, writes. “These forecasts frequently misinform decision makers on projects instead of informing them. Some of the inaccuracy comes from genuine forecasting mistakes arising from overoptimism, but some estimates are deliberately misleading, designed to secure financial or political support for a project.”
Flyvbjerg goes further, calling many forecasts “garbage”—moreover, expensive garbage, both in terms of the fees of the consultancy firms involved and the costs and risks to investors and other stakeholders arising from errors and misrepresentations.
Flyvbjerg says clients should ask for their money back when they receive reports that prove to be significantly inaccurate and misleading. In some cases, he urges clients to seek compensation and even pursue criminal action.
“Merely firing the forecaster may be letting them off too easily,” Flyvbjerg says. “Some forecasts are so grossly misrepresented and have such dire consequences that we need to consider suing them for the losses incurred as a result. In a few cases where forecasters foreseeably produce deceptive forecasts, criminal penalties may be warranted.”
Flyvbjerg calls upon professional organizations to use their codes of ethics to penalize and possibly exclude members who produce forecasts unethically and chastises associations for failing to address the issue adequately.
“This needs to be debated openly within the relevant professional organizations,” Flyvbjerg says. “Malpractice in project management should be taken as seriously as malpractice in other professions, like medicine and law.”
Flyvbjerg’s paper offers an eight-point due-diligence plan for those reviewing project forecasts.
“Whether forecasters are unwittingly or deliberately underestimating the costs, completion times, and risks of projects and overestimating their benefits, we need to have a systematic basis for evaluating their findings in order to make informed investment decisions,” Flyvbjerg says. “Given the high cost of major infrastructure projects, the irreversibility of decisions, and the limited availability of resources, this is clearly critical for both public-sector and private-sector projects. Significantly more accurate forecasts can be produced by looking at the evidence available from previous similar projects which have been already completed—what I call taking an ‘outside view.’ This seems so simple, but in practice, it is transformative and leads to much more accurate forecasting.”
The U.S. Government Accountability Office recently adopted Flyvbjerg’s methodology for a $98.5 billion high-speed rail system in California, the most expensive civil construction project in U.S. history.
To view an abstract of the paper—“Quality Control and Due Diligence in Project Management: Getting Decisions Right by Taking the Outside View”—and purchase a copy, click here.