By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

Project teams are typically measured on whether they meet their project objectives on budget, on time, and by the rules. However, as Danish scholar Bent Flyvbjerg observes, project teams can set themselves up for failure by setting unrealistic objectives. With highlights from some of Flyvbjerg’s recent studies, this discussion explains how delays, cost overruns, and performance failures are the rule, rather than the exception, in major public sector procurement projects, and explains how tainted cost-benefit analyses, optimism bias, and strategic misrepresentation all contribute to the poor planning decisions that lead to these project failures.

In his December 2005 World Bank policy research paper, Policy and Planning for Large Infrastructure Projects: Problems, Causes, Cures, Flyvbjerg attributed project failures in large infrastructure projects to the misinformation provided to government decision-makers during the initial project planning process. As Flyvbjerg explained, this misinformation comes in the form of flawed cost-benefit analyses. In the study, Flyvbjerg asserts that optimism bias and strategic misrepresentation are the main factors behind this misinformation and advises public institutions to address these problems through better incentive structures and improved planning methods. As Flyvbjerg noted, the widely documented failures in large infrastructure projects share similar characteristics that result in cost overruns and benefit shortfalls:

Large infrastructure projects, and planning for such projects, generally have the following characteristics (Flyvbjerg and Cowi, 2004):
  • Such projects are inherently risky due to long planning horizons and complex interfaces.
  • Technology is often not standard.
  • Decision making and planning are often multi-actor processes with conflicting interests.
  • Often the project scope or ambition level will change significantly over time.
  • Statistical evidence shows that such unplanned events are often unaccounted for, leaving budget contingencies sorely inadequate.
  • As a consequence, misinformation about costs, benefits, and risks is the norm.
  • The result is cost overruns and/or benefit shortfalls with a majority of projects.

Turning more specifically to transportation infrastructure projects, Flyvbjerg noted that cost overruns were the norm across multiple jurisdictions and over multiple decades, and that these trends were not improving:

The following key observations pertain to cost overruns in transportation infrastructure projects:
  • 9 out of 10 projects have cost overrun.
  • Overrun is found in the 20 nations and 5 continents covered by the study.
  • Overrun is constant for the 70-year period covered by the study, estimates have not improved over time.

As Flyvbjerg observed, “if techniques and skills for arriving at accurate cost and traffic forecasts have improved over time, these improvements have not resulted in an increase in the accuracy of forecasts”. He offered the following high-profile examples to illustrate how these major project failures are not limited to transportation projects:

The list of examples of projects with cost overruns and/or benefit shortfalls is seemingly endless (Flyvbjerg, 2005a). Boston’s Big Dig, otherwise known as the Central Artery/Tunnel Project, were 275 percent or US$11 billion over budget in constant dollars when it opened, and further overruns are accruing due to faulty construction. Actual costs for Denver’s $5 billion International Airport were close to 200 percent higher than estimated costs. The overrun on the San Francisco-Oakland Bay Bridge retrofit was $2.5 billion, or more than 100 percent, even before construction started. The Copenhagen metro and many other urban rail projects worldwide have had similar overruns. The Channel tunnel between the UK and France came in 80 percent over budget for construction and 140 percent over for financing. At the initial public offering, Eurotunnel, the private owner of the tunnel, lured investors by telling them that 10 percent “would be a reasonable allowance for the possible impact of unforeseen circumstances on construction costs.”
Outside of transportation, the $4 billion cost overrun for the Pentagon spy satellite program and the over $5 billion overrun on the International Space Station are typical of defense and aerospace projects. Our studies show that large infrastructure and technology projects tend statistically to follow a pattern of cost underestimation and overrun. Many such projects end up financial disasters. Unfortunately, the consequences are not always only financial, as is illustrated by the NASA space shuttle. Here, the cooking of budgets to make this under-performing project look good on paper has been linked with shortchanged safety upgrades related to the deaths of seven astronauts aboard the Columbia shuttle in 2003 (Flyvbjerg 2004).

Flyvbjerg observed that these chronic cost overruns and project delays are not isolated events, but instead, impact major projects across multiple jurisdictions:

Other projects with cost overruns and/or benefit shortfalls are, in North America: the F/A-22 fighter aircraft; FBI‘s Trilogy information system; Ontario‘s Pickering nuclear plant; subways in numerous cities, including Miami and Mexico City; convention centers in Houston, Los Angeles, and other cities; the Animas-La Plata water project; the Sacramento regional sewer system renewal; the Quebec Olympic stadium; Toronto‘s Sky Dome; the Washington Public Power Supply System; and the Iraq reconstruction effort. In Europe: the Eurofighter military jet, the new British Library, the Millennium Dome, the Nimrod maritime patrol plane, the UK West Coast rail upgrade and the related Railtrack fiscal collapse, the Astute attack submarine, the Humber Bridge, the Tyne metro system, the Scottish parliament building, the French Paris Nord TGV, the Berlin-Hamburg maglev train, Hanover‘s Expo 2000, Athens’ 2004 Olympics, Russia‘s Sakhalin-1 oil and gas project, Norway‘s Gardermo airport, the Øresund Bridge between Sweden and Denmark, and the Great Belt rail tunnel linking Scandinavia with continental Europe. In Australasia: Sydney’s Olympic stadiums, Japan’s Joetsu Shinkansen high-speed rail line, India‘s Sardar Sarovar dams, the Surat-Manor toll way project, Calcutta‘s metro, and Malaysia‘s Pergau dam. I end the list here only for reasons of space.

As Flyvbjerg noted, cost- and time-overruns impede the implementation of government programs, and the increasingly large scale of public sector procurement projects makes these overruns an increasingly significant public policy issue:

Cost overruns and benefit shortfalls of the frequency and size described above are a problem for the following reasons:
  • They lead to a Pareto-inefficient allocation of resources, i.e., waste.
  • They lead to delays and further cost overruns and benefit shortfalls.
  • They destabilize policy, planning, implementation, and operations of projects.
  • The problem is getting bigger, because projects get bigger.

To illustrate the scale of the problem, Flyvbjerg offered the Sydney Opera House as an archetypal example of the escalating drama that can unfold when projects go over budget:

…large cost overruns and benefit shortfalls tend to destabilize policy, planning, implementation, and operations. For example, after several overruns in the initial phase of the Sydney Opera House, the Parliament of New South Wales decided that every further 10 percent increase in the budget would need their approval. After this decision, the Opera House became a political football needing constant re-approval. Every overrun set off an increasingly menacing debate about the project, in Parliament and outside, with total cost overruns ending at 1,400 percent. The unrest drove the architect off the project, destroyed his career and oeuvre, and produced an Opera House unsuited for opera. Many other projects have experienced similar, if less spectacular, unrest, including the Channel Tunnel, Boston’s Big Dig, and Copenhagen’s metro.

Flyvbjerg warned that cost overruns on major projects can serve as a sinkhole that puts government budgets and even national economies in peril:

Finally, as projects grow bigger, the problems with cost overruns and benefit shortfalls also grow bigger and more consequential (Flyvbjerg, Holm, and Buhl, 2004: 12). Some megaprojects are becoming so large in relation to national economies that cost overruns and benefit shortfalls from even a single project may destabilize the finances of a whole country or region. This occurred when the billion-dollar cost overrun on the 2004 Athens Olympics affected the credit rating of Greece and when benefit shortfalls hit Hong Kong‘s new $20 billion Chek Lap Kok airport after it opened in 1998. The desire to avoid national fiscal distress has recently become an important driver in attempts at reforming the planning of large infrastructure projects, as we will see later.

Flyvbjerg observed how the widespread lack of reliability in procurement planning undermines confidence in public sector projects, since “lawmakers, investors, and the public cannot trust information about costs, benefits, and risks of large infrastructure projects produced by promoters and planners of such projects.” Further, he asserted that many of these planning flaws are not accidental, but instead are deliberate, strategic techniques used by project promoters who compete against other projects for approvals from government decision-makers.

To explain his findings, Flyvbjerg divided the potential causes of over-optimism into technical, psychological, and political-economic explanations, and ultimately found in favour of the political-economic explanations, which he referred to as “strategic misrepresentation”. He started this analysis by summarizing the technical explanations that are often advanced for over-optimism, which tend to focus on flaws in cost-forecasting techniques:

Technical explanations account for cost overruns and benefit shortfalls in terms of imperfect forecasting techniques, inadequate data, honest mistakes, inherent problems in predicting the future, lack of experience on the part of forecasters, etc. This is the most common type of explanation of inaccuracy in forecasts (Ascher, 1978; Flyvbjerg, Holm, and Buhl, 2002, 2005; Morris and Hough, 1987; Wachs, 1990). Technical error may be reduced or eliminated by developing better forecasting models, better data, and more experienced forecasters, according to this explanation.

However, Flyvbjerg was not convinced that technical causes offer a compelling explanation for the long-standing inability to properly forecast project costs:

Technical explanations have, as mentioned, gained widespread credence among forecasters and planners (Ascher, 1978; Flyvbjerg, Holm, and Buhl, 2002, 2005). It turns out, however, that such credence could mainly be upheld because until now samples have been too small to allow tests by statistical methods. The data presented above, which come from the first large-sample study in the field, lead us to reject technical explanations of forecasting inaccuracy. Such explanations do not fit the data well. First, if misleading forecasts were truly caused by technical inadequacies, simple mistakes, and inherent problems with predicting the future, we would expect a less biased distribution of errors in forecasts around zero. In fact, we have found with high statistical significance that for four out of five distributions of forecasting errors, the distributions have a mean statistically different from zero. Only the data for inaccuracy in road traffic forecasts have a statistical distribution that seem to fit with explanations in terms of technical forecasting error. Second, if imperfect techniques, inadequate data, and lack of experience were main explanations of inaccuracies, we would expect an improvement in accuracy over time, since in a professional setting errors and their sources would be recognized and addressed through the refinement of data collection, forecasting methods, etc. Substantial resources have in fact been spent over several decades on improving data and methods. Still our data show that this has had no effect on the accuracy of forecasts. Technical factors, therefore, do not appear to explain the data. It is not so-called forecasting “errors” or their causes that need explaining. It is the fact that in a large majority of cases, costs are underestimated and benefits overestimated. We may agree with proponents of technical explanations that it is, for example, impossible to predict for the individual project exactly which geological, environmental, or safety problems will appear and make costs soar. But we maintain that it is possible to predict the risk, based on experience from other projects, that some such problems will haunt a project and how this will affect costs. We also maintain that such risk can and should be accounted for in forecasts of costs, but typically is not. For technical explanations to be valid, they would have to explain why forecasts are so consistent in ignoring cost and benefit risks over time, location, and project type.

With respect to the psychological causes of over-optimism, Flyvbjerg identified an “optimism bias” that unconsciously permeates public sector project planning:

Psychological explanations account for cost overruns and benefit shortfalls in terms of what psychologists call the planning fallacy and optimism bias. Such explanations have been developed by Kahneman and Tversky (1979), Kahneman and Lovallo (1993), and Lovallo and Kahneman (2003). In the grip of the planning fallacy, planners and project promoters make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They involuntarily spin scenarios of success and overlook the potential for mistakes and miscalculations. As a result, planners and promoters pursue initiatives that are unlikely to come in on budget or on time, or to ever deliver the expected returns. Over optimism can be traced to cognitive biases, that is, errors in the way the mind processes information. These biases are thought to be ubiquitous, but their effects can be tempered by simple reality checks, thus reducing the odds that people and organizations will rush blindly into unprofitable investments of money and time.

However, while he concluded that unconscious “optimism bias” offers a partial explanation for over-optimism in inexperienced project teams, Flyvbjerg questioned whether this factor can account for the widespread and recurring instances of underestimated project costs amongst experienced advisors:

Psychological explanations better fit the data. The existence of optimism bias in planners and promoters would result in actual costs being higher and actual benefits being lower than those forecasted. Consequently, the existence of optimism bias would be able to account, in whole or in part, for the peculiar bias found in most of our data. Interestingly, however, when you ask forecasters about causes for forecasting inaccuracies in actual forecasts, they do not mention optimism bias as a main cause of inaccuracy (Flyvbjerg, Holm, and Buhl, 2005: 138-140). This could of course be because optimism bias is unconscious and thus not reflected by forecasters. After all, there is a large body of experimental evidence for the existence of optimism bias (Buehler et al., 1994; Buehler, Griffin, and MacDonald, 1997; Newby-Clark et al. 2000). However, the experimental data are mainly from simple, non-professional settings. This is a problem for psychological explanations, because it remains an open question whether they are general and apply beyond such simple settings. Optimism bias would be an important and credible explanation of underestimated costs and overestimated benefits in infrastructure forecasting if estimates were produced by inexperienced forecasters, i.e., persons who were estimating costs and benefits for the first or second time and who were thus unknowing about the realities of infrastructure building and were not drawing on the knowledge and skills of more experienced colleagues. Such situations may exist and may explain individual cases of inaccuracy.
But given the fact that in modern society it is a defining characteristic of professional expertise that it is constantly tested–through scientific analysis, critical assessment, and peer review–in order to root out bias and error, it seems unlikely that a whole profession of forecasting experts would continue to make the same mistakes decade after decade instead of learning from their actions. Learning would result in the reduction, if not elimination, of optimism bias, which would then result in estimates becoming more accurate over time. But our data clearly shows that this has not happened. The profession of forecasters would indeed have to be an optimistic–and non-professional–group to keep their optimism bias throughout the 70-year period our study covers for costs, and the 30-year period covered for patronage, and not learn that they were deceiving themselves and others by underestimating costs and overestimating benefits. This would account for the data, but is not a credible explanation. Therefore, on the basis of our data, we are led to reject optimism bias as a primary cause of cost underestimation and benefit overestimation.

After dismissing the technical and psychological causes of over-optimism, Flyvbjerg then offered his “political-economic” explanation, which he referred to as “strategic misrepresentation”:

Political-economic explanations see planners and promoters as deliberately and strategically overestimating benefits and underestimating costs when forecasting the outcomes of projects. They do this in order to increase the likelihood that it is their projects, and not the competition’s, that gain approval and funding. Political-economic explanations have been set forth by Flyvbjerg, Holm, and Buhl (2002, 2005) and Wachs (1989,1990). According to such explanations planners and promoters purposely spin scenarios of success and gloss over the potential for failure. Again, this results in the pursuit of ventures that are unlikely to come in on budget or on time, or to deliver the promised benefits. Strategic misrepresentation can be traced to political and organizational pressures, for instance competition for scarce funds or jockeying for position, and it is rational in this sense. If we now define a lie in the conventional fashion as making a statement intended to deceive others (Bok, 1979: 14; Cliffe et al., 2000: 3), we see that deliberate misrepresentation of costs and benefits is lying, and we arrive at one of the most basic explanations of lying that exists: Lying pays off, or at least political and economic agents believe it does. Where there is political pressure there is misrepresentation and lying, according to this explanation, but misrepresentation and lying can be moderated by measures of accountability.

Flyvbjerg ultimately concluded that strategic misrepresentation is the most credible cause behind the widespread underestimation of project costs and timeframes, and behind the recurring over-estimation of project benefits:

Political-economic explanations and strategic misrepresentation account well for the systematic underestimation of costs and overestimation of benefits found in the data. A strategic estimate of costs would be low, resulting in cost overrun, whereas a strategic estimate of benefits would be high, resulting in benefit shortfalls. A key question for explanations in terms of strategic misrepresentation is whether estimates of costs and benefits are intentionally biased to serve the interests of promoters in getting projects started. This question raises the difficult issue of lying. Questions of lying are notoriously hard to answer, because a lie is making a statement intended to deceive others, and in order to establish whether lying has taken place, one must therefore know the intentions of actors. For legal, economic, moral, and other reasons, if promoters and planners have intentionally cooked estimates of costs and benefits to get a project started, they are unlikely to formally tell researchers or others that this is the case.

Notwithstanding the inherent difficulties associated with getting project promoters to admit to deliberate strategic misrepresentation, Flyvbjerg offered a 2004 study from the United Kingdom and a 1990 study from the United States to support his conclusions:

Despite such problems, two studies exist that succeeded in getting forecasters to talk about strategic misrepresentation (Flyvbjerg and Cowi, 2004; Wachs 1990). Flyvbjerg and Cowi (2004) interviewed public officials, planners, and consultants who had been involved in the development of large UK transportation infrastructure projects. A planner with a local transportation authority is typical of how respondents explained the basic mechanism of cost underestimation:
“You will often as a planner know the real costs. You know that the budget is too low but it is difficult to pass such a message to the counsellors [politicians] and the private actors. They know that high costs reduce the chances of national funding.” Experienced professionals like the interviewee know that outturn costs will be higher than estimated costs, but because of political pressure to secure funding for projects they hold back this knowledge, which is seen as detrimental to the objective of obtaining funding.
Similarly, an interviewee explained the basic mechanism of benefit overestimation:
“The system encourages people to focus on the benefits–because until now there has not been much focus on the quality of risk analysis and the robustness [of projects]. It is therefore important for project promoters to demonstrate all the benefits, also because the project promoters know that their project is up against other projects and competing for scarce resources.”
Such a focus on benefits and disregard of risks and robustness may consist, for instance, in the discounting of spatial assimilation problems described by Priemus (forthcoming) elsewhere in this issue. Competition between projects and authorities creates political and organizational pressures that in turn create an incentive structure that makes it rational for project promoters to emphasize benefits and deemphasize costs and risks. A project that looks highly beneficial on paper is more likely to get funded than one that does not.
Specialized private consultancy companies are typically engaged to help develop project proposals. In general, the interviewees found that consultants showed high professional standards and integrity. But interviewees also found that consultants appeared to focus on justifying projects rather than critically scrutinizing them. A project manager explained:
“Most decent consultants will write off obviously bad projects but there is a grey zone and I think many consultants in reality have an incentive to try to prolong the life of projects which means to get them through the business case. It is in line with their need to make a profit.”
The consultants interviewed confirmed that appraisals often focused more on benefits than on costs. But they said this was at the request of clients and that for specific projects discussed “there was an incredible rush to see projects realized.” One typical interviewee saw project approval as “passing the test” and precisely summed up the rules of the game like this:
“It’s all about passing the test [of project approval]. You are in, when you are in. It means that there is so much focus on showing the project at its best at this stage.”

Flyvbjerg summarized the UK findings on strategic misrepresentation in project planning as follows:

In sum, the UK study shows that strong interests and strong incentives exist at the project approval stage to present projects as favorably as possible, that is, with benefits emphasized and costs and risks deemphasized. Local authorities, local developers and land owners, local labor unions, local politicians, local officials, local MPs, and consultants all stand to benefit from a project that looks favorable on paper and they have little incentive to actively avoid bias in estimates of benefits, costs, and risks. National bodies, like certain parts of the Department for Transport and the Ministry of Finance who fund and oversee projects, may have an interest in more realistic appraisals, but so far they have had little success in achieving such realism, although the situation may be changing with the initiatives to curb bias set out in HM Treasury (2003) and Flyvbjerg and Cowi (2004).

In further support of his strategic misrepresentation thesis, Flyvbjerg also referred to a 1986 United States study conducted by Martin Wachs:

The second study was carried out by Martin Wachs (1990, 1986). Wachs interviewed public officials, consultants, and planners who had been involved in transit planning cases in the US. He found that a pattern of highly misleading forecasts of costs and patronage could not be explained by technical errors, honest mistakes, or inadequate methods. In case after case, planners, engineers, and economists told Wachs that they had had to “revise” their forecasts many times because they failed to satisfy their superiors. The forecasts had to be cooked in order to produce numbers that were dramatic enough to gain federal support for the projects whether or not they could be fully justified on technical grounds. Wachs (1990: 144) recounts from his interviews:
“One young planner, tearfully explained to me that an elected county supervisor had asked her to estimate the patronage of a possible extension of a light-rail (streetcar) line to the downtown Amtrak station. When she carefully estimated that the route might carry two to three thousand passengers per day, the supervisor directed her to redo her calculations in order to show that the route would carry twelve to fifteen thousand riders per day because he thought that number necessary to justify a federal grant for system construction. When she refused, he asked her superior to remove her from the project, and to get someone else to ‘revise’ her estimates.”
In another typical case of cost underestimation and benefit overestimation, Wachs (1990: 144-145) gives the following account:
“a planner admitted to me that he had reluctantly but repeatedly adjusted the patronage figures upward, and the cost figures downward to satisfy a local elected official who wanted to compete successfully for a federal grant. Ironically, and to the chagrin of that planner, when the project was later built, and the patronage proved lower and the costs higher than the published estimates, the same local politician was asked by the press to explain the outcome. The official’s response was to say, ‘It’s not my fault; I had to rely on the forecasts made by our staff, and they seem to have made a big mistake here’.”
Like in the UK study above, Wachs specifically interviewed consultants. He found, as one consultant put it, that “success in the consulting business requires the forecaster to adjust results to conform with the wishes of the client,” and clients typically wish to see costs underestimated and benefits overestimated (1990: 151-152).

As Flyvbjerg explained, the US study concluded that cost-benefit forecasting was often used as an instrument to win project approval and budget allocations, as opposed to an instrument for proper project planning:

On the basis of his pioneering study, Wachs (1990: 145) concludes that forecasts of costs and benefits are presented to the public as instruments for deciding whether or not a project is to be undertaken, but they are actually instruments for getting public funds committed to a favored project. Wachs (1990: 146, 1986: 28) talks of “nearly universal abuse” of forecasting in this context, and he finds no indication that it takes place only in transit planning; it is common in all sectors of the economy where forecasting routinely plays an important role in policy debates, according to Wachs.

Flyvbjerg ultimately concluded that technical errors and unconscious optimism bias are not the main causes of overly optimistic planning, noting that the government planning and approval process systematically rewards deliberate misrepresentations that distort decision-making on government priorities:

In conclusion, the UK and US studies arrive at results that are basically similar. Both studies account well for existing data on cost underestimation and benefit overestimation. Both studies falsify the notion that in situations with high political and organizational pressure the lowballing of costs and highballing of benefits is caused by non-intentional technical error or optimism bias. Both studies support the view that in such situations promoters and forecasters intentionally use the following formula in order to secure approval and funding for their projects:
Underestimated costs + Overestimated benefits = Project approval
Using this formula, and thus “showing the project at its best” as one interviewee said above, results in an inverted Darwinism, i.e., the “survival of the unfittest.” It is not the best projects that get implemented, but the projects that look best on paper. And the projects that look best on paper are the projects with the largest cost underestimates and benefit overestimates, other things being equal. But these are the worst, or “unfittest,” projects in the sense that they are the very projects that will encounter most problems during construction and operations in terms of the largest cost overruns, benefit shortfalls, and risks of non-viability.
They have been designed like that.

Flyvbjerg’s strategic misrepresentation thesis has stark implications on the public sector procurement process. To the extent that such misrepresentations lie at the heart of the initial project planning process, project teams tasked with executing on these poorly planned projects are doomed to fail before they even begin.

In a follow-up paper released in 2009 by the California Management Review, Delusion and Deception in Large Infrastructure Projects: Two Models for Explaining and Preventing Executive Disaster, Bent Flyvbjerg, Massimo Garbuio, and Dan Lovallo embarked on a deeper analysis that considered whether endemic over-optimism in project planning should be attributed to delusional planning (inadvertent optimism bias) or deceptive planning (strategic misrepresentation). To underscore the significance of the associated risks, the authors noted the unprecedented amount of funds being allocated to major infrastructure projects and offered the following high-profile examples of project failures that illustrate the dismal track record of major projects in delivering promised objectives within budget:

The Economist recently reported that infrastructure spending is the largest it is ever been as a share of world GDP. With $22 trillion in projected investments over the next ten years in emerging economies alone, the magazine calls it the “biggest investment boom in history.” The efficiency of infrastructure planning and execution is therefore particularly important at present. Unfortunately, the private sector, the public sector and private/public sector partnerships have a dismal record of delivering on large infrastructure cost and performance promises. Consider the following typical examples.
In January 2003, Toll Collect – a consortium of DaimlerChrysler, Deutsche Telekom, and Cofiroute of France – was scheduled to start tolling heavy trucks on German motorways for the Federal government. The new tolling system was designed to be a showcase for public-private partnership in infrastructure management. A year later the project was falling apart. The developers had been too optimistic about the software that would run the system. The government was losing toll revenues of €156 million ($244m) a month, caused by delays, and estimated to total €6.5 billion before problems could be fixed. For lack of funds, all new road projects in Germany and related public works were put on hold, threatening 70,000 construction jobs. Politicians and members of the media were calling for prosecution of Toll Collect for deceiving the government. Finally, the German transport minister cancelled the contract with Toll Collect and gave the company two months to come up with a better plan, including how to fill the revenue shortfall. By the time tolling at last started, after further delays in 2005, “Toll Collect” had become a popular byword among Germans used to describe everything wrong with the national economy.
In 1987, Eurotunnel, the private company that operates the tunnel under the English Channel, went public to raise funds for the project. The Channel tunnel was prime minister Margaret Thatcher’s flagship project to show the world how private business could effectively provide public infrastructure. Eurotunnel told investors that building the tunnel–the longest of its kind in Europe–would be relatively straightforward and that 10% “would be a reasonable allowance for the possible impact of unforeseen circumstances on construction costs.” Once built, the real cost of the project was double the forecasted costs in constant dollars. Initially, the misinformation about costs and risks served the purpose of getting the project started. From the 1987 IPO until cost overruns hit the project one and a half years later, share prices more than tripled. Then they fell by two thirds and, when it became clear that revenue projections were as biased as cost forecasts, by another two-third. In 1995, Eurotunnel stopped interest payments on its loans and began a decade-long, tumultuous process of financial restructuring from which it did not recover until 2007. The intended flagship of privatization became a scare story for business and set back the process of infrastructure privatization by at least a decade.
In 1959, the construction of Sydney Opera House started before either drawings or funds were fully available. The initial budget of seven million Australian dollars was a political, low-balled budget designed for project approval before the coming elections. Eventually the Opera House was opened in 1973, 10 years later than the original planned completion date, at a cost of 102 million Australian dollars. It holds the world record for cost overrun at 1,400 percent and this was for a scaled-down version of the original design. This figure does not include 45 million dollars allocated in 2002 in part to bring the building more in agreement with the architect, Jørn Utzon’s original plans.

After illustrating how cost overruns and delays are standard operating procedure for major projects, the authors then considered whether over-optimism in project planning should be attributed to delusion (inadvertent optimism bias) or deception (strategic misrepresentation). With respect to delusional planning, the authors explain how an “inside view” bias can cause planners to be overly optimistic about the actual time required to achieve desired results since their planning occurs in an internal echo chamber that disregards any external evidence that could result in more realistic assessments of required timeframes:

When forecasting the outcomes of risky projects, executives often fall victim to the planning fallacy. Psychologists have defined it as the tendency to underestimate task completion times and costs, even knowing that the vast majority of similar tasks have run late or gone over budget. It is a well-established bias in the experimental literature. In one set of experiments, Buehler, Griffin and Ross assessed the accuracy of psychology students’ estimates of completion times for their year-long honors thesis project. In the experiments, the students’ “realistic” predictions were overly optimistic: 70% took longer than the predicted time, even though the question was asked toward the end of the year. On average, students took 55 days to complete their thesis, which was 22 days longer than predicted. Similar results have been found with various types of subjects and for a wide variety of tasks such as holiday shopping, filing taxes, and other routine chores.
These findings are not limited to the laboratory. Cost and time overruns in large infrastructure projects have been studied by considering numerous contractual arrangements. In the case of conventional procurement, in which the public entity separately engages with several private companies, each of them providing a specific part of the service, costs and times overruns have been systematically observed in a wide range of projects. In business, executives and entrepreneurs seem to be highly susceptible to this bias. Studies that compared the actual outcomes of capital investment projects, mergers and acquisitions, and market entries with managers’ original expectations for those ventures show a strong tendency towards over optimism. An analysis of start-up ventures in a wide range of industries found that more than 80% failed to achieve their market-share target.

The authors also warned that these unrealistic initial assumptions have the effect of “anchoring” final planning estimates, since subsequent adjustments fail to adequately correct for the flawed initial estimate:

Anchoring and adjustment is another consequence of the inside view thinking that leads to optimistic forecasts. Anchoring on plans is one of the most robust biases of judgment. The first number that is considered as a possible answer to a question serves as an “anchor”. Even when people know that the anchor is too high or too low, their adjustments away from it are almost always insufficient. A classic experiment revealed the power of anchoring and insufficient adjustment. People were asked to estimate various percentages, such as the percentage of African countries in the United Nations. For each quantity, a number was determined by spinning a wheel of fortune in the presence of the subject. The subjects were first asked to indicate whether the number was higher or lower than the percentage of African countries and then to estimate the percentage by moving upward or downward from the arbitrary number. The arbitrary number had a substantial effect on the estimates. For instance, the median estimate of the percentage of African countries in the United Nation was strongly related to the starting points: individuals who received 10, estimated 25% whereas those that received 65, estimated 45%. These subjects started from a random anchor and then insufficiently adjusted away from it.
Similar results have been found with experienced real estate brokers who were asked to assess the value of a property. These agents unanimously agreed that they did not factor a house’s listing price into their evaluation of its “true” value. Each of the agents was given a 10 page booklet on the house that was being sold, which included information specific to the house as well as information about the prices and characteristics of other houses in the area that had recently been sold. The only difference in the information that the various brokers received was the listing price of the house, which was randomly manipulated within a range of plus or minus 11% of the actual listing price. The agents then went out and visited the house that was being sold, as well as several other houses in the neighborhood. The listing price significantly affected these experienced agents’ evaluations. Furthermore, when told about the results, the agents maintained that the listing price anchor had no effect!

The authors ultimately concluded that the distortions caused by the optimism bias and anchoring effect are not adequately compensated for in final planning decisions in major procurement projects:

In the context of planning for a large infrastructure project there is always a plan, which is very likely to serve as an anchor. Furthermore, the plan that is developed is almost always seen as a “realistic” best or most likely case. Executives know that events may develop beyond the best or most likely case so they generally attempt to capture unforeseen costs by building in a contingency fund that is proportional to the size of the project (e.g. for cost overruns in capital investment projects). However, when compared with actual cost overruns, such adjustments are clearly and significantly inadequate. Furthermore, the initial estimate serves as an anchor for later stage estimates, which never sufficiently adjust to the reality of the project’s performance.

After exploring how unconscious optimism bias can lead to delusional planning decisions, the authors then considered the practice of strategic misrepresentation, which results in deliberately overly optimistic planning decisions. As the authors explain, deceptive planning practices are common within what they refer to as the “P-A relationship”, wherein the “Principal” (government) receives flawed advice from “Agents” (advisors) that is caused by the four factors of: (i) conflicting interest; (ii) asymmetrical information; (iii) different time-horizon risk preferences; and (iv) a lack of direct accountability:

Sources of strategic deception
There are certain conditions, however, that make strategic deception more likely within each P-A relationship. Self-interest, asymmetric information, differences in risk preferences and time horizons as well as the clarity of accountability are among the most cited causes.
A necessary condition for P-A conflicts is a difference in the actors’ self-interest. Executive ventures, public and private, are often multimillion- and sometimes even multibillion-dollar projects. When they go forward, many stakeholders (e.g. contractors, engineers, architects, bankers, landowners, construction workers, lawyers, accountants and developers) have widely divergent incentives. In addition, politicians and executives may use ventures to jockey for position and to build monuments, which allows administrators to get larger budgets, and cities to acquire investments in infrastructure that would otherwise go elsewhere. If these stakeholders are involved in, or indirectly influence, the forecasting of costs and benefits at the approval stage (the business case), this is liable to bias the entire subsequent process.
Political and economic self-interest also exists at the level of cities and states. Pickrell pointed out that transit capital investment projects in the US compete for discretionary grants from a limited federal budget each year, and that this creates an incentive for cities to make their projects look better, or else some other city may get the money. Flyvbjerg and Cowi found similar results for the UK.32 Altshuler and Luberoff, Delaney and Eckstein, and Morris and Hough found corresponding results for other project types, including major roads, tunnels and bridges, airports, stadiums, power stations, oil and gas extraction, and IT systems.
A second source of strategic deception is the presence of asymmetric information, which means the agent who champions a project (e.g. the local government in the example above) has information that the principal does not (e.g. the state government). Being unaware of all the relevant information, the principal and ultimate decision maker may be easy to deceive. In a recent study, Flyvbjerg and Cowi interviewed public officials, planners, and consultants who had been involved in the development of large UK transportation infrastructure projects. This study shows that strong interests and strong incentives exist at the project approval stage to present projects’ costs and benefits as favorably as possible. Local authorities, local politicians, local officials, and some consultants (as agent’s) all stand to benefit from a project that looks favorable on paper and have little incentive to actively avoid distorted estimates of benefits, costs, and risks.
National bodies, like the Department for Transport and the Treasury, act as a principal and usually fund and oversee projects. They usually have an interest in more balanced appraisals, but so far they have had little success in achieving such balance. This situation may be changing with recent schemes to curb the optimism bias, which were initiated by HM Treasury in order to gain better predictability and control in public budgeting.
A third relevant source of P-A issues is the presence of different risk preferences. For instance, if the principal is risk averse, the agent who submits a proposal for approval will have to downplay the possible risks of the venture in order to convince the principal.
Because of this, managers lower down in the organization may have to misrepresent, hide and manipulate information in order to get requests for funds approved. In addition to any inherent difference in risk preferences between decision makers and organizations or the public, another factor that comes into play is the vastly different time horizons the actors use to evaluate the decision. Typically, this is very long for taxpayers, but less than a decade for the individuals that are acting on their behalf. These agents may also be concerned with being remembered for initiating monumental infrastructure or, more prosaically, being re-elected. In fact, whereas a standard election term is 4 years, the average length of the time from the start of planning to start of operations for a large infrastructure project is commonly 10-15 years.
Finally, another condition that leads to strategic deception is diffuse or asymmetric accountability. When multiple people are responsible for the ultimate success or failure of a project, it can be difficult for any one agent to be held accountable for a bad outcome. If a new initiative fails, it is often hard to place the blame squarely on one or a few actors. This lack of accountability ex-post can cause the agent to promote ex-ante projects that protect them from being held accountable if it fails, which may not be the project that maximizes the principal’s total payoff. In addition, the lack of clear accountability can exacerbate the problem of asymmetric information and differences in risk preferences, causing the agent to take more risk than the principal would like.

The authors concluded this section by stating that “the lack of clear accountability can exacerbate the problem of asymmetric information and differences in risk preferences, causing the agent to take more risk than the principal would like.” The authors noted that these delusional and deceptive factors are not mutually exclusive, and that those factors often blend together as co-contributors to the underestimation of project costs and timeframes and to the overestimation of project benefits. The authors then highlight the distinct causes and cures that apply to delusional and deceptive planning:

Diagnosing the Relative Impact of Delusion and Deception
Delusion and deception are two complementary rather than alternative explanations of failure of large infrastructure projects due to cost underestimation and benefit overestimation. Although, in practice, it is often difficult clearly disentangle the two explanations. There are situations, however, where the explanatory power of one of the two models is relatively higher.
The relative strength of each explanation depends on different factors. The key to minimizing delusion is to have a good learning environment. Learning occurs “when closely similar problems are frequently encountered, especially if the outcomes of decisions are quickly known and provide unequivocal feedback”. Whereas, the problem of strategic deception occurs when incentives are mis-aligned. The underlying causes of these mis-alignments are differences in preferences, time horizons, incentives, and information between principals and agents.

While the authors observed that planning risks are most pronounced when delusional and deceptive planning practices have a concurrent impact on project planning, they also noted that projects that depend on discretionary budget approvals are more prone to deceptive planning practices than projects funded through fixed-funding portfolios:

The largest errors occur when delusions and deception operate simultaneously. Even within this section useful distinctions can be made. For example, in the private sphere, we consider the construction of process plants. These need to be distinguished between normal process plants and pioneer process plants. They both have similar incentives since they are owned by the same companies, but the former is relatively more frequent and therefore learning is improved and forecasts are more accurate.
In the public sphere, we consider the examples of rails and roads. Cost underestimation and overrun for rail are on average approximately twice that for roads. Similarly, average ridership overestimation for planned rail projects is around 100%, whereas such bias is not found for road projects. The differences between rail and road are statistically highly significant and may largely be explained in terms of differences in incentive structures and the possibility to learn from previous and similar projects. In fact, rail projects typically compete for discretionary grants from a limited national or federal budget. This creates an incentive for promoters (agents) to make their projects look better on paper with artificially high benefit/cost ratios, or else the central government (the principal) may decide to fund some other project. That is, there are incentives to provide biased estimates.
In the case of roads, funds are typically allocated as block grants with a certain amount of dollars allocated for road building as where individual projects do not compete for funds directly against each other or against other types of projects outside the highway agency. As a consequence, the misalignment of incentives between promoters and approvers are higher for rail than for roads. This conclusion is supported by a study of stated causes for inaccuracies in traffic forecasts for 234 rail and road projects. For rail projects, deception in terms of “deliberately slanted forecasts” was explicitly stated as a main cause of inaccurate (biased) forecasts in 25% of projects, whereas this was the case for zero road projects. This does not mean that estimates of costs and benefits of planned roads are never deceptive. This source of bias, however, appears to be less prevalent and less systematic for road than for rail projects. Finally, road projects are more common than rail projects, so the opportunity for learning is greater as well.
For the largest public infrastructure projects, such as the Sydney Opera House, the Channel tunnel, concert halls or stadiums, the cost blowouts appear to be more heavily weighted towards deception. This suggests new governance procedures are needed to minimize waste in the upcoming infrastructure boom.

As the authors advised, public institutions need to build safeguards to mitigate against these risks. For example, they note that the UK Department of Transport recently implemented what is referred to as an “Optimism Bias Uplift” into its cost calculations to more accurately assess project costs, while also allocating cost-overrun risks to the local entity seeking budget approvals as a deterrent against strategic misrepresentation:

Recognizing that planners are subject to optimism bias, the Department for Transport requires that all requests for funds include an “Optimism Bias Uplift”, which is an empirically based adjustment to a project’s costs for different percentiles of cost overruns, on the basis of the project type. The uplifts are computed on the basis of actual cost overruns in a reference class of completed projects comparable to the project seeking funding. For example, if the funding institution was prepared to accept a 50% risk of cost overrun (the ‘50% percentile’) on a road scheme then an uplift of 15% should be applied. But if the funding institution was only prepared to accept a 20% risk of cost overrun (the ‘80% percentile’) then a higher uplift of 32% was recommended. In addition, those uplifts are different for project types – the same 50% percentile uplift for rail would be 40% (which is almost three times the amount for roads) – and for different stages of development – uplifts are the highest for “programme entry” and the lowest when the project is receiving “full approval”. Notice that these top down estimate uplifts encompass the different complexities of the projects without going into specific details, which is the point of the outside view.
The “Optimism Bias Uplift” is useful to control cost underestimation before the approval of projects. If no measure is taken to control cost escalation after project approval, promoters would simply “postpone” the appearance of costs during the project construction. Therefore, to discourage cost increases during the implementation of the project, the Department for Transport advises that requests for funds should include an additional risk allowance in the amount of 50% of the Optimism Bias uplift. If during the implementation phase a project requires further expenditures that are within the risk allowance, these do not require additional approval from the funding institution. However, the local authority is expected to contribute at least 50% of the cost increase. The local authority should be expected to fund any expenditure in excess of that risk allowance. In this way a clear incentive has been imposed on the local authority to avoid cost overruns. Such an incentive did not exist before.

However, the authors stressed that these measures are not, in themselves, a complete solution since the competitive bidding process also tends to encourage cost-underestimation and rewards unrealistically low bids submitted by bidders who game the system with the intention of seeking post-award change orders at unreasonably high prices:

In fact, during the tender, bidders can act opportunistically by assessing the probability that compensation is possible after the construction stage has been initiated. If compensation is possible, bidders will bid the lowest possible value in order to win the tender. The winning bidder will be typically the bidder who most underestimates the true costs of the project. We call this, the “winner’s blessing”. After the project has been initiated, the initial low price will be compensated through overpricing the expected scope increases, which the experienced bidders know are almost certain. When compensation is not possible, there is less chance that the bidding price is artificially low.
In this situation, the incentive is to place financial risk with bidders. In doing so, bidders have the incentive to disclose any specific information they have regarding costs and completion times, which is often a source of asymmetric information between bidders and the institution managing the construction of the infrastructure. If appropriate measures to overcome deception are taken in the bidding stage, the construction stage should go rather smoothly. However, placing financial risk with contractors for delays and scope increases should be a safeguard to be used in conjunction with other measures, especially with regard to coordination between contractors and between contractors and the client.

In its 2013 report Over-optimism in government projects, the United Kingdom’s National Audit Office recognized the endemic planning risks identified in the Flyvbjerg studies. The report summarized the adverse impact of planning over-optimism on the ability of government to successful execute its program objectives:

The problem
Ninety-five per cent of government policies are delivered through major projects. Successful project delivery is therefore essential to government delivering its promises and objectives. The 191 projects in the Government Major Projects Portfolio are, together, worth £354 billion. Yet we frequently report on major projects that fail to deliver the outcomes expected. Historically, the majority of major projects in government have not delivered the anticipated benefits within original time and cost expectations.
There are many reasons why projects fail to meet expectations, such as poor project management and the impact of external factors beyond the control of those responsible for the project. However, the challenges of delivering government projects are compounded by the endemic over-optimism which characterises decisions to commit to projects and the subsequent management of them. This undermines the likely success of a project, often leading to substantial cost overruns, delays in completion and failure to deliver the benefits.
The Civil Service Reform Plan recognises that the consideration of policy and the practical implementation of it need to be brought together – “too often policy draws from too narrow a range of views and evidence, and does not ensure that policy is capable of practical implementation” and “policy makers should have a clear understanding of what works based on robust evidence”.
These views are supported by our back catalogue of reports, which clearly illustrate that over-optimism is widespread and has many causes and adverse effects. This report sets out some of the contributory factors: they are neither exhaustive nor mutually exclusive – over-optimism typically has multiple causes

The National Audit Office report identified the following five factors as contributing to over-optimism: (i) complexity; (ii) evidence base; (iii) stakeholders; (iv) behaviour and incentives; and (v) independent challenge and accountability. With respect to complexity, the report noted that governments tend to underestimate complexity and rush their planning processes:

Complexity
The tendency to be overly optimistic leads public bodies to underestimate the delivery challenges of what are often complex projects. They may have financial and timing constraints, have multiple stakeholders, be interlinked or relate to other major projects, and be dependent on organisational or citizen behavioural changes. Our back catalogue shows that, in planning projects, government does not always take time to understand the complexity and, as a result, over-estimates its ability to deal with the challenges. Too often, government commits to a ‘solution’ without fully understanding the context and exploring alternative options to determine which solution matches the real need.

Insofar as evidence is concerned, the report also identified poor data as a source of poor planning:

Evidence base
Good decisions are based on having sufficient objective, accurate and timely information on costs, timescales, benefits and risks. Weaknesses in the quality and appropriateness of data and modelling techniques distort the information on which projects are approved and mask the risks. Over-optimism persists where these weaknesses are ignored and little effort is made to either develop robust estimates or be honest and transparent about the assumptions made on limited data. There are numerous examples in our back catalogue of projects being planned and evaluated on poorly thought through data and modelling. Half of our recent reports on major government projects refer specifically to issues with estimating.

The report also identified conflicting stakeholder interests as a source of over-optimism and noted the importance of understanding stakeholder motivations to better control for over-optimism:

Stakeholders
Successful projects are driven by the effective interaction of organisations and people who often have widely varying aspirations and requirements. The public sector’s most common delivery partners are contractors, consultants and devolved delivery bodies such as local authorities and the third sector. But other groups such as citizens, special interest groups and end users can have a significant impact on delivery and delay or derail projects. Understanding the motivations and level of influence of these groups can be crucial to the successful delivery of a project. But, government tends to be over-optimistic about its ability to align the different views and the amount of time it will take to have sufficient engagement, particularly where the project is complex or involves new ways of working. There is a tendency to make assumptions about the behaviours of groups over whom government has no direct control.

With respect to behaviour and incentives, the report distinguished between inadvertent optimism bias and strategic misrepresentation, and stressed the importance of promoting a culture of candour within the project planning process:

Behaviour and incentives
Over-optimism is not just about poor process; there are significant behavioural factors. Over-optimism can be unconscious or deliberate. Reasons for the latter, known as strategic misrepresentation, may include a desire of individuals to protect and boost their own prospects or the desire to secure investment for a project. It is widely accepted that a bias towards optimism can lead officials to underestimate or understate risks. The pressures of short-term political and budgetary cycles increase the risk of over-optimism.
“Executives make decisions based on delusional optimism rather than on a rational weighting of gains, losses, and probabilities. They overestimate benefits and underestimate costs… as a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns — or even to be completed.” Daniel Kahenman and Amos Tversky
Officials have a key role in advising ministers on policy and on the schemes for implementing it. It is important therefore that the culture of an organisation encourages and supports challenge and does not lead staff to hide bad news and be reluctant to challenge senior views. We regularly see major projects continue despite frequent and serious warnings that things are not going to plan and remedial action needs to be taken.

For independent challenge and accountability, the report highlighted the risks associated with the dilution of ultimate project accountability and how this dilution of accountability creates incentives for over-optimism:

Independent challenge and accountability
The natural tendency for organisations and individuals to be over-optimistic when considering investment in major projects underlines the need for effective independent challenge of decision-makers and the importance of clear personal accountability for the decisions made. Optimism bias, and the desire to show success, may lead decision-makers to push on and deliver something even if the outcome is likely to be materially different from, and inferior to, that originally intended.
Incentives to be over-optimistic are very strong, and disincentives relatively weak. Decision-makers seek short-term recognition and rewards, and are often not in the same role when the project is under way and issues emerge. Similarly, accountability of contractors for their behaviour is weak, and contractual penalties for producing over-optimistic tenders are low compared to potential profits involved.
We see many projects where no one person has overall responsibility for its delivery and, most importantly, the ability to take action. The Committee of Public Accounts has observed that “Senior Responsible Officers only have oversight, and not the authority and information they need, to manage the delivery of the project for which they are accountable”. Turnover can exacerbate this issue; for example, Senior Responsible Owners for major defence projects have typically moved post every two to three years, eroding the extent to which they can be held to account and encouraging short-term gain.
Organisations that actively invite external scrutiny and learn and apply lessons from other projects demonstrate higher levels of success. The introduction of non-executive directors on departmental boards is potentially key. They are independent and well placed to provide an objective view; to reinforce the importance of objectivity in analysis and to provide a means of challenging plans at a time when it can make a difference and genuinely influence decisions.

As the National Audit Office report indicates, entrenched and endemic planning biases that under-estimate project costs and timeframes, while over-estimating project rewards, are well-documented and widely recognized. The challenge moving forward will be to build effective strategies for managing expectations so that project teams can meet more realistic objectives on budget, on time, and within the procurement rules.

In conclusion, in their above-noted study, Flyvbjerg, Garbuio, and Lovallo suggested that outsourcing project design and delivery may offer a solution to avoiding the over-optimism risks that have plagued major public sector projects:

So far, we have illustrated several contractual arrangements that can be used to decrease the likelihood of strategic misrepresentation of costs, timeframe and benefits by transferring risks to the entities that would otherwise benefit from such misrepresentations. Rather than being part of separated arrangements, these measures can be bundled into one contract and a private sector entity can be charged with providing a flow of infrastructure services over time that goes beyond the provision of the building. For example, with a Design-Build-Finance-Operate-Maintain (DBFOM) contract, the private sector entity is responsible for the design, building, financing, operation and maintenance of an infrastructure under a very long period of time, usually 20-30 years, after which the facility is transferred to the public entity. This type of contract addresses in one place several of the mis-alignment issues discussed in this article. These are relatively new mechanisms and deserve further attention.

However, as subsequent studies illustrate, their hope that the Design-Build-Finance-Operate-Maintain model used in public-private partnerships would offer a solution for managing costs and time delays has proved to be, ironically, overly optimistic.