Why the Sydney Opera House was 1,400% over budget

July 03, 2024

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  1. We now have a LinkedIn & Twitter account where we will be posting stories throughout the week.

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Okay, enough about us here is this week’s newsletter:

The Sydney Opera House is one of Australia’s most iconic sights. Yet the same place that draws thousands of curious tourists every year was an embarrassing flop when it was built.

One reason was that the Sydney Opera House was a whopping 1,400% over budget.

But the Opera House is unfortunately not alone. Most projects go over budget.

For example:

  • The Lötschberg Base Tunnel in Switzerland was 100% over budget

  • The James Webb telescope was predicted to cost $4 billion but ended up costing more than double at $9.4 billion.

  • The Montreal Olympics took an enormous toll on the taxpayer. It was expected to cost $300 million but took $1.4 billion! A bill that took almost 30 years to pay

In their book How Big Things Get Done they call it the Iron Law of Megaprojects: most projects are: “over budget, over time, under benefits, over and over again”

Bent Flyvbjerg and his team have a dataset with more than 16,000 projects from 136 countries. The results are shocking

  • 91.5% of projects are over budget, over schedule, or both

  • Only 8.5% of projects are on time and on budge.

Why are we so bad at predicting how much projects will cost?

Here are two reasons:

  1. Uniqueness Bias: People think their project is unlike any other. Therefore, they can’t make comparisons with similar projects

  2. Optimism Bias: When people are too optimistic about a project, bad things can happen:

    • The goals of the project are vague

    • They ignore better options

    • Problems are not spotted

    • There is no backup plan

How Can We Get Better At Making Predictions?

Luckily, we can get better at making predictions.

One method is to use reference class forecasting.

Here’s how it works:

Imagine we’re building a train station and we want to predict how much it’ll cost.

There are two steps to making this prediction:

Step 1: Ask How Long Do Projects Like This Tend To Cost?

Look at other train stations or projects that are similar in size. How much do they tend to cost?

This number is your anchor point

This sounds simple (and it is), but most people don’t make comparisons.

Step 2: Adjust Based On The Details Of Your Project

Take your anchor point and bump it up or down depending on your project.

Maybe you anticipate some delays with the project so you add $50,000 on to the cost.

But perhaps you can get a deal with some supplies, so you lower the estimate.

You’re Probably Not Building A Train Station

No stress, you can use this strategy to make other types of predictions

  • How much will your home renovation cost?

  • How much will hosting Sally’s 5th birthday set you back?

  • How much will I spend eating out this weekend?

You Can Also Use This Method To Predict How Long Something Will Take

  • How long will it take to write this book?

  • How many CVs will I have to write before I get a job offer?

  • How long will it take me to run my first marathon?

The Lesson:

  • Use Reference Class Forecasting: Make comparisons and then adjust.

Cheers,

Jared

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