1. Understanding Major Project Escalation
Graham M Winch
Centre for Infrastructure Development
Manchester Business School
Jubilee Professor
Chalmers University
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2. Understanding escalation on major projects
• What is a major project?
• Four perspectives on escalation on major projects
– Future-perfect thinking
– Strategic misrepresentation
– Escalation of commitment
– Contractor scapegoating
• Towards a model of escalation
• Policies for de-escalation
• Concluding thoughts
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3. What is a major project?
• Size matters
– > $1bn US
• The heroic definition
– “master builders”
• A proposed definition
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4. What is a major project: a definition
• The synergistic elements of a major project or
programme
– They are organisational endeavours producing complex
product systems
– They combine bespoke elements with different technological
trajectories
– They mobilise large human and financial resources
– They shape their environment, spatially and organisationally
– They are managed as a single or closely coupled entity
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5. Future-perfect strategies
(Clegg and colleagues)
• Sydney waste water project case
– Experiment in alliancing
• Designer culture
– Representations of the completed project
– CAD fly-thrus
– Artists impressions
– Virtual reality
• Endgaming
– Orientating action around completion dates
• Tinker Bell effect (Tim Smit)
– Projects only exist if you believe in them
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6. Strategic misrepresentation
(Flyvbjerg and colleagues)
• 258 transportation projects (1927-1998)
– Mean budget escalation 28%
– Systematic tendency to underperform estimates
– Cannot be explained by chance alone
– If based on incompetence would expect secular improvement
• Most plausibly explained by “lying” about costs and benefits
– This is a client-side phenomenon by project promoters.
• Strategic misrepresentation
– Socio-economic struggle for resources under uncertainty
– Perverse incentives in investment policies e.g. 10 cent dollar
• Optimism bias
– Psychological tendency to give the benefit of the doubt under uncertainty
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7. Strategic misrepresentation: explanations
• Technical explanations
– Forecasting errors
– Exogenous events
• Economic explanations
– Stakeholder self-interest
– Strategic misrepresentation
• Psychological explanations
– Optimism bias
• Political explanations
– Local elites and national funds
– Urban transit projects the classic case
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8. Escalation of commitment
(Staw and colleagues)
• Social-psychological experiments
– Post-hoc justification of selected courses of action
– Attribution of negative outcomes to exogenous events
– A retrospective, not prospective rationality
– The tendency to throw good money after bad
– Cultural norms of consistency in leadership
• Hindsight case studies
– Expo 86 and Shoreham nuclear power station
– A dynamic interplay of determinants through time
– Psychological determinants predominate earlier in life-cycle
– Project determinants predominate later in life-cycle
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9. Escalation of commitment: determinants
• Project determinants
– Expected returns
– Salvage value
– Alternative courses of action
• Psychological determinants
– Visibility
– Self-justification
• Social determinants
– Cultural norms of consistency in leadership
• Structural determinants
– Political support
– Symbolic aspects
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10. Contractor scapegoating
• Contractors obliged to provide bids complying with
promoters expectations or project cancelled
• Competitive bidding generates further “low-balling” by
contractors
– Reliance on claims then drives escalation
• Escalation inevitable during delivery as costs exceed
estimates
• Contractors set up to fail by their clients
• They thereby provide a convenient scapegoat for
project promoters.
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11. Complementarities and differences
• The expected utility (EU) paradigm dominates
investment appraisal and risk management
– Net present value
– Cost-benefit analysis
– Probability/impact matrix
– A heroic model in terms of information requirements
• In practice the EU norms are not applied
– Strategic misrepresentation and bad faith
– Escalation of commitment and good faith
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12. Complementarities and differences
• What enables strategic misrepresentation?
– Not personal gain
– Not masochism
– Rather future-perfect thinking
• What enables escalation of commitment?
– Norms of leadership supported by future perfect thinking
– Availability of exogenous actor (scapegoat)
– “getting the concrete on the table”
• A proposed model
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13. A model of escalation on major projects
Contractor
Scapegoating
Future Strategic Escalation
Project
Perfect Misrepresent- of
Outcome
State ation Commitment
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14. Policies for de-escalation
• Develop rigorous project assurance
• Ensure an external view
• Invest in front end definition
• Mitigate optimism bias
• Develop client capabilities
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15. Project assurance
• Stage-gates provide clear points of reflection and
decision in the project process
– They provide formal opportunities for the “outside view”
– They break the momentum of strategic misrepresentation
– Gates review progress to date and plan next phase
– Gates provide opportunities for peer review
– Gates provide opportunities for senior management review
• For example
– UK Office of Government Commerce Gateway Process
– Norwegian Government Quality at Entry Process
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16. A basic stage gate process
Gate 1 Gate 2 Gate 3
Is the Is scope Are we ready
business case complete? to execute the
sound? project?
(full funds
authorisation)
opportunity appraise select define execute operate
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1%-2% 3%-4% 95%
Developed from Merrow (2011)

17. An external view
• Industry cost indices
– e.g. Building Cost Information Service
– But very context-specific
• Inter-client process benchmarking
– e.g. Independent Project Analysis (IPA)
– High quality processes should achieve good outcomes
• Peer review
– The input of independent experts is invaluable
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18. Front end definition
• excellent project definition work brings multiple returns
– Treat it as an investment in the success of the project
• Economising on high impact/ low proportion of total
cost services is a false economy
– e.g. engineering services
• Projects go wrong from the head
– Just like fish!!
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19. Front end definition
high high
t
Ability
to Actual
influence project
project outcome
outcome
low low
opportunity appraise select define execute operate
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20. Develop client capabilities
• The outsourcing trend
– Projects and engineering capability
• The emergence of the ignorant client
• Clients need to understand the implications of what
their suppliers are telling them
• The key issue is oversight
– Do too little and you get unpleasant surprises
– Do too much and you generate costs and restrict innovation
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21. The client capability sine wave (Railtrack effect)
Engineering
is Core SM excellent
ATTITUDE OUTTURNS
Senior
Management Project Success
Attitude
disasterous
All engineering
can be
outsourced
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Source: Prof Bernard Kelly, UoM

22. Concluding thoughts
• Major projects need leadership and vision
– Future-perfect thinking is vital but needs tempering
• Quality of front-end work is crucial
– Stakeholder management
– Investment in dispassionate analysis
• Avoid perverse incentives in investment policies
– e.g. UK Private Finance Initiative
• Be prepared to cancel projects at gates
– A cancelled project is testimony to good project assurance
• Invest in client capabilities
– High quality front end work requires client-side engineering and
project management competencies
– It requires own-employees committed to the organisation’s goals
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23. Thank- you for your attention
Let’s discuss!!
graham.winch@mbs.ac.uk
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