Think Value

Delays in construction projects and massive budget overruns appear to be not just a Georgian problem. Daniel Kahneman, in his book Thinking, Fast and Slow, refers to this phenomenon as the Planning Fallacy. The phenomenon arises from humans’ irrational tendency to plan for the desired (rather than objectively expected) scenario. Unfortunately, this issue affects all of us.

For example, from the book: A 2005 study of international railway projects from 1969-98 showed that in 90% of projects, the planned number of passengers was on average 106% higher than expected, while budget overruns averaged 45%. Even though the statistics of all historical plan deviations were published, every new plan still missed the mark, regardless of logic.

In my view, the problem is not just that the plan is overly optimistic, but also that updated realities are not followed and profitability is not managed. A famous example comes to mind about how a frog boils in water gradually heated on a stove without realizing it. Similarly, this happens in long-term construction projects.

The good news is that if we create a simple and effective reporting system and ask the right questions at least once a month, we can minimize both the overrun and delay problems. Some potential questions could be:

Deadlines:

• How many days are we behind the plan?
• What is the average cost of one delayed day?
• Is the problem systemic? Is future delay likely?
• How much will the total project completion time be extended?
• What can we do to get back on track?
• Is the delay more costly than the efforts to return to the plan?
• What new risks might we face in the near future?

Budget:

• What work should have been completed by now?
• How is the budget performing based on planned (not current) prices?
• How much overrun do we have due to material price increases?
• How much overrun do we have due to increased labor costs?
• How much overrun do we have due to quality adjustments?
• Should we make changes to the project’s architecture?
• Should we make changes to suppliers or contractors?
• Should we reflect the overrun in the revenue part?
• What risks does the project budget face in the future?

Profitability:

• What is the project’s profitability considering the updated budget and timelines?

P.S.
Here you can see the reporting form that typically answers the key questions with an Earned Value Report: [Download Form]

P.P.S
There are various software programs available for managing construction projects and generating similar reports automatically. I personally use MS Project, which is widely used, affordable, and easy to implement. If you’d like, I can assist you with implementation.