Five Things You Should Know about Cost Overrun

Transportation Research Part A: Policy and Practice, vol. 118, December 2018, pp. 174-190

26 Pages Posted: 6 Oct 2018

See all articles by Bent Flyvbjerg

Bent Flyvbjerg

University of Oxford - Said Business School

Atif Ansar

University of Oxford - Said Business School

Alexander Budzier

University of Oxford - Saïd Business School

Søren Buhl

Aalborg University

Chantal Cantarelli

University of Oxford - Said Business School

Massimo Garbuio

The University of Sydney

Carsten Glenting

Independent

Mette Holm

Aalborg Municipality

Dan Lovallo

The University of Sydney

Daniel Lunn

University of Oxford - Department of Statistics

E.J.E. Molin

Delft University of Technology - Department of Transport and Logistics

Arne Rønnest

Independent

Allison Stewart

University of Oxford; University of Oxford - Said Business School

Bert van Wee

Delft University of Technology

Date Written: December 13, 2018

Abstract

This paper gives an overview of good and bad practice for understanding and curbing cost overrun in large capital investment projects, with a critique of Love and Ahiaga-Dagbui (2018) as point of departure. Good practice entails: (a) Consistent definition and measurement of overrun; in contrast to mixing inconsistent baselines, price levels, etc. (b) Data collection that includes all valid and reliable data; as opposed to including idiosyncratically sampled data, data with removed outliers, non-valid data from consultancies, etc. (c) Recognition that cost overrun is systemically fat-tailed; in contrast to understanding overrun in terms of error and randomness. (d) Acknowledgment that the root cause of cost overrun is behavioral bias; in contrast to explanations in terms of scope changes, complexity, etc. (e) De-biasing cost estimates with reference class forecasting or similar methods based in behavioral science; as opposed to conventional methods of estimation, with their century-long track record of inaccuracy and systemic bias. Bad practice is characterized by violating at least one of these five points. Love and Ahiaga-Dagbui violate all five. In so doing, they produce an exceptionally useful and comprehensive catalog of the many pitfalls that exist, and must be avoided, for properly understanding and curbing cost overrun.

Keywords: cost overrun, cost underestimation, cost forecasting, root causes of cost overrun, behavioral science, optimism bias, strategic misrepresentation, delusion, deception, moral hazard, agency, reference class forecasting, de-biasing

Suggested Citation

Flyvbjerg, Bent and Ansar, Atif and Budzier, Alexander and Buhl, Søren and Cantarelli, Chantal and Garbuio, Massimo and Glenting, Carsten and Holm, Mette and Lovallo, Dan and Lunn, Daniel and Molin, E.J.E. and Rønnest, Arne and Stewart, Allison and van Wee, Bert, Five Things You Should Know about Cost Overrun (December 13, 2018). Transportation Research Part A: Policy and Practice, vol. 118, December 2018, pp. 174-190. Available at SSRN: https://ssrn.com/abstract=3248999 or http://dx.doi.org/10.2139/ssrn.3248999

Bent Flyvbjerg (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Atif Ansar

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Alexander Budzier

University of Oxford - Saïd Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Søren Buhl

Aalborg University ( email )

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Chantal Cantarelli

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Massimo Garbuio

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Carsten Glenting

Independent ( email )

Mette Holm

Aalborg Municipality

Aalborg
Denmark

Dan Lovallo

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Daniel Lunn

University of Oxford - Department of Statistics ( email )

1 South Parks Road
Oxford OX1 3TG
United Kingdom

E.J.E. Molin

Delft University of Technology - Department of Transport and Logistics

Jaffalaan 5
NL-2628BX
Delft
Netherlands

Arne Rønnest

Independent ( email )

Allison Stewart

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Bert Van Wee

Delft University of Technology ( email )

Stevinweg 1
Stevinweg 1
Delft, 2628 CN
Netherlands

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