Hidden Inefficiency: Strategic Inflation of Project Schedules

35 Pages Posted: 30 Nov 2020

See all articles by Matej Lorko

Matej Lorko

Macquarie University - Macquarie Graduate School of Management

Maroš Servátka

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory

Le Zhang

Macquarie University, Macquarie Business School; Macquarie University - Macquarie Graduate School of Management

Date Written: September 20, 2020

Abstract

Establishing realistic project plans and completing the resulting business projects on schedule is crucial for organizations striving to effectively utilize their resources. However, incentivizing on-time project delivery may introduce moral hazard, as people may respond to estimation accuracy incentives by strategically inflating project duration estimates and subsequently prolonging the project execution. While the project is delivered on time, the resources are underutilized. We conjecture that these perverse effects can be mitigated by introducing incentives to complete the project as soon as possible (speed incentives) in addition to the schedule accuracy incentives. We conduct a diagnostic test of the effect of accuracy and speed incentives on the process of project estimation and delivery. Our study presents direct empirical evidence that the incentive structure rewarding solely the estimation accuracy can result in hidden inefficiency due to inflated estimates and deliberately prolonged project execution. However, when speed incentives are implemented alongside estimation accuracy incentives, the estimates are significantly lower and the project is completed more quickly, without compromising the schedule accuracy. Aligning the objectives of a project owner with those of planners, by incentivizing the planners for both estimation accuracy and quick project completion, can therefore foster more compressed but still accurate and reliable project schedules and accelerated project delivery. In summary, our study contributes to the economic analysis of incentive structures in project management by identifying a hidden inefficiency that could be present in projects delivered “on time” and by pointing out a mechanism that mitigates the risk of moral hazard.

Keywords: project management, project planning, time management, duration estimation, strategic overrepresentation, moral hazard

JEL Classification: C91, D82, D83, O21, O22

Suggested Citation

Lorko, Matej and Servátka, Maroš and Zhang, Le, Hidden Inefficiency: Strategic Inflation of Project Schedules (September 20, 2020). Available at SSRN: https://ssrn.com/abstract=3695879 or http://dx.doi.org/10.2139/ssrn.3695879

Matej Lorko

Macquarie University - Macquarie Graduate School of Management ( email )

Australia

Maroš Servátka (Contact Author)

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory ( email )

Sydney
Australia

Le Zhang

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Macquarie University - Macquarie Graduate School of Management ( email )

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