Like every four years, last August, we were able to enjoy the Olympic Games for a few weeks, this time held in Paris. Even if the Games always surprise us with their records and their stories of improbable athletes, There is a lesser known detail of the Games (but no less important) which has remained unchanged in all editions of this competition of the last decades, which is nothing other than the significant cost overruns on the initial budget that each of these editions underwent. In the case of Paris, for example, the initial budget of 3.6 billion euros ended up rising to 8.8 billion.
And unfortunately, Paris is by no means an isolated case. Of the 23 Olympic Games for which we have detailed information, the average cost overrun compared to the initial budget was 159%, and all of them suffered from it (none were spared). Indeed, the Olympic Games are among the “megaprojects” currently being undertaken, those that, along with nuclear power plants, suffer the worst cost overruns on the entire planet. The “Olympic champion” of cost overruns was Montreal in 1976, with a whopping 720% cost overrun compared to the initial budget. Why do some megaprojects suffer more cost overruns than others, and what can we do to avoid them?
In his recent book How Great Things Are DoneBent Flyvbjerg, now considered one of the world’s leading experts on megaproject management, and Dan Gardner explore what separates successful projects from those that don’t. Drawing on the world’s most comprehensive database of megaproject characteristics, Flyvbjerg and Gardner share countless stories—from the Sydney Opera House to the Guggenheim in Bilbao to a modest kitchen renovation in Brooklyn—to understand what are the best practices and why some projects end up derailing. Also read: Readings from a CFA professional: Having good investment ideas and knowing how to execute them.
The main conclusion drawn from the figures in this database (which includes around 16,000 projects in more than 20 different fields in 136 countries) is devastating: Only 8.5% of all projects analyzed reached the cost and the initial time with which they were budgeted. If we also include as a third variable whether the project ends up delivering the expected benefits, only a tiny 0.5% of all the projects analyzed met all three requirements!
One might think that all these undesirable characteristics of the projects we have just mentioned are ultimately due to the fact that they are “physical” projects, but that in the case of technological megaprojects, the reality should be quite different. But experience shows that this is unfortunately not the case. In fact, some mega technological projects (like how the HealthCare.gov website worked when Obamacare was launched, or the UK’s national health website) they tend to derail in a formidable way. Technological megaprojects are so dangerous because their statistical distribution exhibits the property of “fat tails”, that is, the presence of projects with absolutely monstrous deviations from the budget (the average cost overrun of these technological projects in the tail of the distribution is 447%!).
What does the book recommend to minimize the possibility of these disastrous executions? From a series of successful cases such as the Guggenheim in Bilbao (one of the few projects that selects 0.5% of successful projects), the expansion of the Madrid metro between 1995 and 2003, or the planning of films at Pixar, to name just three of them, the authors distill a series of principles or a manual of good practices in planning and executing projects. These principles are “think slowly, act quickly” (which advocates both long planning periods and short execution periods), the previous experience in similar projects of the team in charge (this is one of the problems of the Olympics, since they are always organized by different teams that end up suffering from the “eternal beginner syndrome”), the importance of the “external vision” of the problem, the mitigation of extreme risks and, finally, the importance of modularization, that is, organizing projects in such a way that they can be divided into repetitive subunits and where the failure of one of them does not slow down the execution of the entire project.
Of all these principles, the one that the authors probably devote the most time to is the importance of the external view, a concept imported from the discipline of behavioral finance and extremely useful for making predictions. In general, the external view asks us to abstract from the particularities of our case and to estimate only the average probabilities (called “base probabilities”) of similar events (“reference class”) that have occurred in the past. This rigorous way of doing things runs counter to the most widespread practice (“the internal view”) by which we collect all the information related to the problem about which we want to make a prediction, without paying attention to how cases similar to ours have played out in the past. One conclusion of the behavioral finance literature is that predictions from the internal view are invariably overoptimistic. It is therefore not surprising that that when planning a megaproject are particularly dangerous.
Considering the basic probabilities in the execution of a megaproject would lead us, for example, to consider (using the statistics provided by the book itself) that when it comes to building a hydroelectric plant, the average cost overrun that these projects have suffered in the past year is 75%, that 37% of these projects have ended up in the terrifying distribution queue (defined by projects that incur a cost overrun of more than 50% compared to the initial budget) and that the average cost overrun for projects in said queue is 186%. Although people have a great capacity to think that our project is special and different from that of others (“my plant will not bear the additional costs of others for such and such a reason”) and to blindly convince themselves of this, The authors of the book vehemently oppose such naive reasoning.
To concludeThe book examines five types of projects that are the opposite of the Olympic Games. and nuclear power plants, i.e. projects that, when delayed, are less likely to experience crushing cost overruns (they have statistical distributions with thinner tails). The five types of projects are: solar energy, wind energy, thermoelectric plants, electricity transmission and roads. What do all these projects have in common? The authors argue that the presence of modular elements, by definition repetitive, simplifies the execution of the project. These elements, very widespread for example in the automobile industry, are simple and functional, with the consequence that the costs of the project are considerably reduced (there is no need to design something new on purpose and from scratch) and the speed of execution is accelerated.
Although most of us will not have the opportunity to tackle one of these megaprojects in our lifetime, The lessons in the book apply to more everyday projects as well. (like the modest kitchen renovation mentioned above) that we will encounter repeatedly. Anyone looking to improve project management and execution will find it extremely useful to read one of the most comprehensive books on the subject to date. And besides, the next time they watch the Olympics, they will remember the challenge of such a task!
‘Technical sheet’
Qualification: “How Great Things Get Done: The Surprising Factors That Determine the Fate of Every Project, from Home Improvement to Space Exploration and Everything in Between”
Authors: Curve Flyvbjerg & Dan Gardner.
Editorial: Macmillan, 2023, p. 304, hardcover.
Reviewed by: Javier López Bernardo, PhD., CFA, member of the CFA Society Spain.
