PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto Managing the Planning Fallacy in Large, Complex Infrastructure Programs by Bob Prieto Daniel Kahneman’s recent book, “Thinking, Fast and Slow” 1 returned his concept of the “planning fallacy” to the project management center stage when considering large, complex projects and programs. First coined by Kahneman and Amos Tversky in a 1979 paper2, the planning fallacy is the tendency of people and organizations to underestimate how long a task will take even when they have experience of similar tasks over running. Perhaps the poster children for the planning fallacy are large scale public works projects. In a 2006 paper in the Project Management Journal3, Bent Flyvbjerg describes transportation projects “inaccuracy in cost forecasts in constant prices is on average 44.7% for rail, 33.8% for bridges and tunnels, and 20.4% for roads.” Work by Kahneman, Tversky, Flyvbjerg and others shows that errors of judgment are: - systematic and predictable - reflect bias - persist even when we are aware of, and - require corrective measures that reflect recognition of this bias These natural tendencies are further exacerbated when “motivated” individuals frame questions in such a way as to constrain the range of possible answers. Consider these two situations. In the first, a manager is given responsibility to come up with a budget and schedule for a large project. He engages outside help, conducts a thorough risk analysis and looks at comparable other projects. In the second a manager is asked by the politically appointed Chairman of the Authority if he can do the same project for $ XX. Which answer are you more comfortable with? Reference class forecasting is one method for suspending one’s impressions and providing a more critical evaluation of the task at hand. It addresses the natural tendency to underestimate costs, completion times and risks while at the same time overestimating benefits. It squeezes out biases while considering the inevitable “improbable” risks that all projects face. The risks 1 Thinking, Fast and Slow; Daniel Kahneman; ISBN:9780374275631; 2011 2 "Prospect theory: An analysis of decisions under risk". Econometrica; Kahneman and Tversky; 1979 3 From Nobel Prize To Project Management: Getting Risks Right; Bent Flyvbjerg; Aalborg University, Denmark; Project Management Journal; August, 2006. © 2013 Bob Prieto www.pmworldlibrary.net Page 1 of 16 PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto that inhabit the “white space” between elements of a program and possibly even the odd “Black Swan” that shows up from time to time. The Association for the Advancement of Cost Engineering (AACE) has recognized the value of estimate validation using separate empirical-based evaluations to benchmark the base estimate, the equivalent of reference based forecasting. This estimate benchmarking process is widely used in the process industries but need not be constrained to them. Reference Class Forecasting Let’s look at an example at how reference class forecasting can be used not only to provide a basis for checking planned execution approaches and associated project timelines but also to identify how the execution methodology and, in this case, even the contracting strategy will need to be modified. The particular project of interest was the pacing element of a larger program. The methodology described below was also extended to the complete program and identified several added changes to the program methodology which would be required. The reference class forecast began by identifying a comparable scale similar type project for which there was a good information database and performance was well documented. That project was in the later stages of completion and actual schedule performance through the majority of the project was already known. The schedule for this reference project is reflected in Figure 1. Project activities and dates have been generalized for purposes of this paper. While the design of the new project clearly will be different, it was judged that in terms of supply chain, complexity and scale those differences were not significant and that the reference class forecast undertaken would provide a good initial indicator of project durations and contract delivery strategies. © 2013 Bob Prieto www.pmworldlibrary.net Page 2 of 16 PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 Design Activity 1.1 Design Activity 1.2 Construction Tender 2 Construction Mobilization Activity 2.1 Contract Award Activity 2.2 Mobilization Activity 2.3 Specialized Construction Technology Mobilization 3 Enabling Works Activity 3.1 Enabling Works Activity 3.2 Temporary Construction – Land Based Activity 3.3 Temporary Construction – Marine Based Activity 3.4 Temporary Steel #1 Activity 3.5 Temporary Steel #2 4 Long Lead Procurement Activity 4.1 Group #1 Activity 4.2 Group #2 Activity 4.3 Group #3 © 2013 Bob Prieto www.pmworldlibrary.net Page 3 of 16 PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 5 Steel Fabrication Activity 5.1 Shop Drawings Activity 5.2 Shop Practices/Fabrication & Erection Drawings Activity 5.3 Fab Package #1 Activity 5.4 Fab Package #2 6 Erection Activity 6.1 Erection Package #1 Activity 6.2 Erection Package #2 Activity 6.3 Erection Package #3 Activity 6.4 Erection Package #4 Activity 6.5 Erection Package #5 Activity 6.6Major Structural Activity Activity 6.7 Activity 6.8 Activity 6.9 Activity 6.10 Activity 6.11 Mechanical/Electrical Activity 6.12 Completion & Commissioning Activity 6.13Complete Figure 1 The next step in developing a reference case based forecast was to overlay the project schedule against the then “current” calendar so that likely end dates could be forecast. This is shown in Figure 2. Initial activities pacing the schedule are related to design activities which in the reference case were completed before construction was started. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1 Design Activity 1.1 Design Activity 1.2 Construction Tender 2 Construction Mobilization Activity 2.1 Contract Award Activity 2.2 Mobilization Activity 2.3 Specialized Construction Technology Mobilization 3 Enabling Works Activity 3.1 Enabling Works Activity 3.2 Temporary Construction – Land Based Activity 3.3 Temporary Construction – Marine Based Activity 3.4 Temporary Steel #1 Activity 3.5 Temporary Steel #2 © 2013 Bob Prieto www.pmworldlibrary.net Page 4 of 16 PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4 Long Lead Procurement Activity 4.1 Group #1 Activity 4.2 Group #2 Activity 4.3 Group #3 5 Steel Fabrication Activity 5.1 Shop Drawings Activity 5.2 Shop Practices/Fabrication & Erection Drawings Activity 5.3 Fab Package #1 Activity 5.4 Fab Package #2 6 Erection Activity 6.1 Erection Package #1 Activity 6.2 Erection Package #2 Activity 6.3 Erection Package #3 Activity 6.4 Erection Package #4 Activity 6.5 Erection Package #5 Activity 6.6Major Structural Activity Activity 6.7 Activity 6.8 Activity 6.9 Activity 6.10 Activity 6.11 Mechanical/Electrical Activity 6.12 Completion & Commissioning Activity 6.13Complete Figure 2 As can be seen in Figure 3, construction was anticipated to be complete at the end of the first quarter of 2019 if a comparable design development and contracting approach was utilized. The client’s target date of mid-2017, also reflected in Figure 3, was 21 months earlier. The initial project execution strategy envisioned engaging a singular design-build contractor, but this initial reference class forecasting step highlighted that this would not achieve the required 21 month schedule reduction. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1 Design Activity 1.1 Design Activity 1.2 Construction Tender 2 Construction Mobilization Activity 2.1 Contract Award Activity 2.2 Mobilization Activity 2.3 Specialized Construction Technology Mobilization 3 Enabling Works Activity 3.1 Enabling Works Activity 3.2 Temporary Construction – Land Based © 2013 Bob Prieto www.pmworldlibrary.net Page 5 of 16 PM World Journal Managing the Planning Fallacy in Large Vol. II, Issue VIII – August 2013 Complex Infrastructure Programs www.pmworldjournal.net Featured Paper by Bob Prieto 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Activity 3.3 Temporary Construction – Marine Based Activity 3.4 Temporary Steel #1 Activity 3.5 Temporary Steel #2 4 Long Lead Procurement Activity 4.1 Group #1 Activity 4.2 Group #2 Activity 4.3 Group #3 5 Steel Fabrication Activity 5.1 Shop Drawings Activity 5.2 Shop Practices/Fabrication & Erection Drawings Activity 5.3 Fab Package #1 Activity 5.4 Fab Package #2 6 Erection Activity 6.1 Erection Package #1 Activity 6.2 Erection Package #2 Activity 6.3 Erection Package #3 Activity 6.4 Erection Package #4 Activity 6.5 Erection Package #5 Activity 6.6Major Structural Activity Activity 6.7 Activity 6.8 Activity 6.9 Activity 6.10 Activity 6.11 Mechanical/Electrical Activity 6.12 Completion & Commissioning Activity 6.13Complete Figure 3 This set the stage for developing an alternative contracting and delivery approach that would provide a better founded basis for project delivery. The development of the alternative approach began with sliding required construction activities forward such that the actual construction durations required could still be available to the program although it was clear that they would have to be contracted for in a very different manner.