In this episode of Cleaning Up, host Michael Liebreich interviews the Danish economic geographer Bent Flyvbjerg on the implications of the net-zero transition of Flyvbjerg’s research into megaproject management. Their conversation covers the challenges of managing large, complex projects, heuristics for reducing risk, and insights into the plausibility of specific renewable energy technologies.
- Large projects go over budget and over schedule approximately 90% of the time.
- The root causes of poor project outcomes lie in psychology and power dynamics.
- Heuristics can help project managers reduce risks.
- Renewable energy technologies are polarized in terms of their performance.
- Nuclear presents problems and doesn’t offer a significant solution for reaching net zero.
Large projects go over budget and over schedule approximately 90% of the time.
The vast majority of large projects exceed their time and budget estimates while also under-delivering on benefits – this is the “iron law” of project management. Based on a database of over 16,000 large projects, only 9% come in on budget and schedule. If you add the criteria for meeting promised benefits, the percentage drops to 0.5% – one in 200.
“Bad news travels slow. That’s a slowness you don’t want. You want bad news to travel fast.” (Bent Flyvbjerg)
Many projects even become “black swans,” performing not merely poorly but exceptionally poorly. For these projects, the actual costs can reach multiples of their anticipated budgets. They can experience high levels of delays and significant benefit shortfalls.
The root causes of poor project outcomes lie in psychology and power dynamics.
The underlying reasons for the iron law stem from human psychology – specifically, cognitive biases – and the jockeying for power related to large project funding and positioning. Cognitive biases include overconfidence, the planning fallacy, the ease of retrieval bias and optimism. For example, the tendency toward optimism results in low budgets, overambitious schedules and overstatements of benefits, resulting in budget overruns, missed milestones and shortfalls in benefits.
“You’re biased. Because you’re biased, your biggest risk is you.” (Bent Flyvbjerg)
Power dynamics in the project proposal and selection processes lead to similar results. People want to make a project look good on paper to compete with other projects for limited funding – so they underplay the costs and time required and overstate the benefits. These unrealistic proposals look good and have a high likelihood of winning funding.
Heuristics can help project managers reduce risks.
Specific heuristics can assist project managers in reducing the effects of biases and minimizing the risks of large projects. For example:
- Think slow, act fast – Thinking fast is prone to errors; thinking slow means deliberating about a project before taking action. On the other hand, acting fast can significantly reduce the risks of a large project by minimizing the window during which the project is vulnerable.
- Take the outside view – People tend to take an inside view when considering actions, decisions and projects. They think in terms of costs and requirements from their point of view. Bringing the outside perspective means choosing an empirical approach instead, such as looking at similar projects and their historical costs. An external view results in more accurate, less biased estimates and decisions.
Energy projects are polarized in terms of their performance.
Energy projects tend to fall either at the top or the bottom of the performance scale: Nuclear and hydroelectric projects typically perform exceptionally poorly, while solar, wind and transmission projects tend to perform exceptionally well.
“We are so lucky that there are energy technologies that we can really scale up at enormous speeds and to enormous scale, which is exactly what we need now in order to meet the climate goals for 2030 and 2050.” (Bent Flyvbjerg)
The high performance of solar, wind and transmission projects can often be attributed to modularity and scalability, which lead to efficiencies. For example, wind turbines can now be built in one day because they’re manufactured in factories and can be assembled on-site.
Nuclear presents problems and doesn’t offer a significant solution for reaching net zero.
With regard to projects coming in on time, on schedule and achieving benefits, nuclear projects rank among the worst performers. They tend to experience enormous cost overruns and schedule delays. Because of the time required to build a nuclear plant and because these facilities are constructed on-site, they have large windows for risks such as changing political regimes or natural disasters.
These issues aren’t necessarily intractable, but the nuclear industry hasn’t found solutions so far. However, the prize for solving nuclear’s problems is so large that people should continue to work on them. And existing plants should continue to operate, as they can help solve the world’s climate challenges. Rolls-Royce is currently prototyping small modular nuclear reactors, which would be made in a factory and assembled on-site.
About the Speaker
Bent Flyvbjerg, a Danish economic geographer, is the author of numerous volumes on megaproject management, including How Big Things Get Done. Michael Liebreich has served for decades in the area of energy and climate finance as venture capitalist, entrepreneur and executive.