Reasons behind the budget overruns in extensive ventures
Big capital projects, such as nuclear power plants and major IT initiatives, often face significant setbacks in terms of budget and schedule. These deviations can be so drastic that they should prompt leaders to reconsider the reasons behind them [1].
In the book "How Big Things Get Done," authors Bent Flyvbjerg and Dan Gardner explore the reasons behind these project misfires and propose strategies for better management. What emerges is a concerning trend: human mishandling of massive projects, particularly infrastructure projects like airports, bridges, tunnels, subways, and buildings [1].
Addressing this issue is crucial, as inefficient management of complex projects wastes resources that could otherwise benefit human welfare and the careers of those in charge of these ventures [1].
Based on research spanning over 16,000 projects across various industries and countries since 1910, Flyvbjerg and Gardner found that 91% of large projects, with budgets surpassing $1 billion, exceed their budgets and schedules [2]. Furthermore, only 1% of such projects are completed as planned and deliver the promised results [2].
When considering the fiscal implications, the figures are disheartening. On average, mega projects show a 62% cost overrun, with a significant portion of projects experiencing cost overruns of over 50% [2]. In some instances, the cost overruns reach an astonishing 447% [2].
To combat such excessive cost overruns, Flyvbjerg and Gardner propose several key principles. While these recommendations are tailored to large-scale projects, they can also be applied to smaller initiatives [1].
- Clear Direction: Clearly define the project's purpose and goals. If the project aims to build an underground train system to transport people from one point to another, consider whether it is necessary to construct an underground network or if there are more practical alternatives [1].
- Detailed Planning: Utilize technology and software applications to explore various scenarios for the project's completion. Study similar projects to learn from their successes and failures, and assemble an experienced team, especially appointing a seasoned leader [1].
- The Lego Principle: Break down large tasks into smaller, repeatable tasks. By doing so, the project becomes more manageable, and operational efficiencies are improved as the tasks are repeated [1].
- Tackling Sunk Costs: It is tempting to overestimate the project's initial costs to bypass opposition or secure funding, resulting in overspending and poor execution. Instead, confront the realistic costs tactfully and plan with care before making any drastic decisions [1].
Effective management of large-scale projects is crucial because the returns, in terms of both financial capital and social benefits, can be substantial when projects are completed on time and within budget [1].
Finance plays a crucial role in managing large-scale projects, as inefficient management can lead to significant cost overruns. For instance, the average cost overrun for mega projects is 62%, as found in research spanning over 16,000 projects across various industries and countries [2].
In light of these findings, adhering to key principles such as clear direction, detailed planning, the Lego principle, and tackling sunk costs can help curb excessive cost overruns [1]. These principles, while tailored to large-scale projects, can also be applied to smaller initiatives in the business sector, ultimately promoting a more efficient and financially sound industry.
