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Risk and Uncertainty in the Cost Contingency of Transport Projects: Accommodating Bias or Heuristics, or Both?

Version 2 2024-06-05, 06:02
Version 1 2021-11-18, 08:50
journal contribution
posted on 2024-06-05, 06:02 authored by PED Love, LA Ika, Jane MatthewsJane Matthews, W Fang
Transport projects are regularly subjected to cost misperformance. The contingency set aside to cover any increases in cost due to risk and uncertainty issues is often insufficient. We review approaches that have been used to estimate a cost contingency. We show that some approaches such as reference class forecasting, which underpins the planning fallacy theory, take a biased view to formulate a contingency. Indeed, there is a perception that the risks and uncertainties that form the parts of a cost contingency cannot be accurately assessed using heuristics. The absence of an overarching theory to support the use of heuristics has resulted in them often being downplayed in a project's investment decision-making process. This article fills this void and provides the theoretical backdrop to support the use of heuristics to formulate a cost contingency. We make a clarion call to reconcile the duality of the bias and heuristic approaches, propose a balanced framework for developing a cost contingency, and suggest the use of uplifts to derisk cost estimates is redundant. We hope our advocacy for a balanced approach will stimulate debate and question the legitimacy of uplifts to solely debias cost estimates.

History

Journal

IEEE Transactions on Engineering Management

Location

Piscataway, N.J.

ISSN

0018-9391

eISSN

1558-0040

Language

eng

Publication classification

C1 Refereed article in a scholarly journal

Publisher

Institute of Electrical and Electronics Engineers

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