Risk Management: Optimism Bias in Construction Projects - Valency

To thrive in the world of capital projects, we need a healthy dose of optimism. But there is a downside to optimism; it creates blinds spots. When optimism goes un-checked, it can cloud our critical thinking and allow us to accept unrealistic assumptions and estimates.

Simply put, optimism bias in construction projects is the tendency, unconsciously or deliberately, to overstate expected benefits and downplay the level of complexity of the project resulting in underestimates of costs and schedule.

Impact of Optimism Bias on Construction Projects

The Construction Industry Institute’s research in this area indicates that projects often suffer from over-optimism, resulting in poor project performance.

Case Study:

A common example is the public sector’s receipt of federal funding approved for regional infrastructure investments including water and wastewater rehabilitation, infrastructure improvements for roads, highways and public transit/light rail development.

This funding is approved on a pre-defined time schedule and must be spent by a designated date.

This influx in investment brings with it a tremendous amount of optimism in the regions where these projects will take place. Everyone wants to see this funding stimulate the economy and deliver long term value and business investment to their communities.

The Challenge:

Affected communities and municipal leaders want these projects completed and funded as planned, but could our optimism bias put us at risk of accepting unrealistic assumptions?

Here are two unique risk areas these infrastructure projects face where scrutiny and broad engagement of stakeholders can help us identify risks to cost and schedule estimates:

1. Renovation and rehabilitation of existing assets

These type of construction projects carry unique construction risks that must be carefully addressed, including:

• Safety and environmental factors such as zoning, permitting and other regulatory changes brought about by renovation and rehabilitation work.
• Security and logistics of construction in an operating facility or asset.
• Completing condition assessments to fully understand existing conditions.
• Verifying the accuracy of as-built drawings for aging assets.
• Coordinating with existing operations and other ongoing projects.

2. Skilled labour availability

With so many concurrent projects working to the same completion schedule, availability and securing skilled labour in specific trades will be critical.

How to Overcome Optimism Bias in Construction Projects

Ensuring your organization encourages scrutiny and broad stakeholder engagement in risk management is a proven strategy to address this optimism bias [1].

Effective Risk Management helps address common challenges including [2]:

1. Underestimating the time and cost to complete tasks.
2. Anchoring our expectations to the first estimate provided, even when we know it was developed with limited scope definition.
3. Underestimating the difficulties associated with complex projects.
4. Overestimating a project’s benefits.

In short, it helps protect against optimism bias.

Are you getting what you need from your current Risk Management practice?

If you are mandated to deliver a strategic project by a required completion date, or at a guaranteed maximum cost, a formal risk management process is one of the best ways to protect your project against optimism bias.

Here are a few questions to ask:

1. Are we achieving broad stakeholder engagement and participation in risk identification and risk assessment?
2. Does our risk management process encourage scrutiny of project assumptions and estimates by all project stakeholders – not just project leaders?
3. Are we using the best techniques to give everyone a voice in risk identification and risk assessment?
4. Are we successful in leveraging lessons learned from similar projects as part of our risk management process? [3]
5. How do we follow through to ensure implementation of effective risk responses?

Recommended Next Steps

Adopting a formal risk management process that is based on best practices from the Construction Industry Institute (CII) is shown to be one of the best ways to reduce optimism bias. Even if formal risk management is relatively new to your organization, you can rapidly take advantage of Industry-specific risk identification strategies that encourage broad stakeholder participation, including:

1. The Project Definition Rating Index (PDRI), used during front end planning
2. Structured brainstorming workshops, conducted during each project phase
3. Risk identification checklists, developed specifically for renovation and rehabilitation capital projects.
4. Configurable risk assessment templates that are purpose-built to support scrutiny of project assumptions and estimates.
5. Proven risk monitoring and reporting tools to help support follow-through and keep projects on budget and on schedule.

If you’re a project leader who is motivated to improve risk management practices, we invite you to register for an upcoming Risk Management Principles & Practices virtual training course. This course introduces CII’s best practices in risk management, along with the strategies, checklists and tools to add immediate value to your capital projects.

About Valency

Valency is an implementer of best practices in construction project management that dramatically improve project performance. We are a Registered Education Provider with the Construction Industry Institute (CII) and a CCM Recertification Points Provider with the Construction Management Association of America (CMAA). Our services include:

• Training courses accredited by CII and CMAA
• Facilitation of PDRI sessions, risk identification and assessment workshops
• Implementation consulting and support for CII best practices and tools

References

[1] Construction Industry Institute, “Four-casting for Early and Accurate Predictability,” Implementation Resource 291-2, 2013.

[2] Bent Flyvbjerg, Massimo Garbuio, and Dan Lovallo, “Delusion and Deception in Large Infrastructure Projects: Two Models for Explaining and Preventing Executive Disaster,” California Management Review, vol. 51, no. 2, Winter 2009.

[3] Construction Industry Institute, “Mega-Project Assessment of Criticality Tool,” Implementation Resource 315-2, 2015.