Project Decisions, 2nd Edition

The Art and Science

Lev Virine, Michael Trumper

• Publisher: Berrett-Koehler Publishers
• Year: 2019
• eBook ISBN: 9781523085460
• Edition: 2
• Topic: Business
• Subtopic: Management
• Index: Business

This new edition gives project managers practical methods and tools to make the right decisions while juggling multiple objectives, risks and uncertainties, and stakeholders. Project management requires you to navigate a maze of multiple and complex decisions that are an everyday part of the job. To be effective, you must know how to make rational choices with your projects, what processes can help to improve these choices, and what tools are available to help you with decision-making. An entertaining and easy-to-read guide to a structured project decision-making process, Project Decisions will help you identify risks and perform basic quantitative and qualitative risk and decision analyses. Lev Virine and Michael Trumper use their understanding of basic human psychology to show you how to use event chain methodology, establish creative business environments, and estimate project time and costs. Each phase of the process is described in detail, including a review of both its psychological aspects and quantitative methods.

PART 1

Introduction to Project Decision Analysis

CHAPTER 1

Project Decision Analysis

What Is It?

Most of us believe we are pretty good at making decisions, yet we continue to make poor ones. And over time our poor decisions become a burden that we impose on each other, especially when the decisions we make as managers are connected to large-scale projects that affect many people. The process known as structured decision analysis—which is described in detail in this book—can improve our ability to make better decisions, particularly in project management, where the decisions can be complex. Indeed, today many organizations in both the public and private sectors use decision analysis to solve their project management problems.

The Burden of Poor Decision-Making

In the summer of 2017, several South Carolina utility companies decided to halt the construction of two new nuclear reactors on the V.C. Summer nuclear project (Plumer 2017). The project was originally planned to be completed in 2018 and cost $11.5 billion. In 2017 it was determined that the reactors would not begin generating electricity before 2021 and could cost as much as $25 billion. The companies had spent over $9 billion before canceling the project, and the reactors were only 40% completed. The reactors were meant to be the vanguard of a nuclear comeback as the United States had built no nuclear reactors since the 1970s. Instead, the halting of this project was a major setback for U.S. ambitions to reinvigorate the nuclear power industry. Currently, the Alvin W. Vogtle Electric Generating Plant, in Georgia, remains the only nuclear power plant under construction in the country, and it too faces enormous cost overruns and delays.

So, “What went wrong?” This question should always be asked in such cases. First, utility companies selected an advanced reactor design from Westinghouse Electric Company, the AP1000. However, when construction started, new features were incorporated into the design that caused significant re-engineering. In addition, since no new reactors had been built for some 40 years, supply chain and engineering expertise had been lost. In the resulting mess, Westinghouse, the company responsible for the plant’s design and construction, filed for bankruptcy and the utilities companies decided to accept the losses rather than pass on the costs to consumers.

We all remember that our parents always told us to “think before you do something.” Apparently, the people who sanctioned, planned, and executed this nuclear project failed to think about all the possible implications before making their decisions. Perhaps this was an isolated incident, or perhaps it was an emerging trend, never before seen? Here is another example:

In 2004–2005, Governor Arnold Schwarzenegger of California was involved in a complex decision-making process. He was not considering a role for his next action movie after he left office, nor was he selecting a new energy weapon to blast villains in a sci-fi movie. This was something more serious: the governor involved himself in the design process for a new bridge in San Francisco (Cabanatuan 2005).

This was not just any bridge. The $6.3 billion project (figure 1-1) was to replace the existing Bay Bridge. The original plans called for the section of the bridge east of Yerba Buena Island to include a huge suspension span. Although the construction of the foundations for the suspension span had started a few years earlier, the governor’s office insisted that a simple viaduct would be cheaper and faster to build. Transportation officials did not agree, believing that a design change from a suspension span to a viaduct would slow construction.

Wrong decisions are a burden that we impose on each other.

Early in 2005 the governor’s side appeared to have prevailed: work on the foundation was halted, and the contract was terminated. A few months later, however, following a detailed analysis, both sides agreed to follow the original design, which included the suspension span. In the end, the fight over the bridge design cost $81 million.

Figure 1-1. San Francisco Bay Bridge Construction (Photo by Oleg Alexandrov)

If you do not live in Northern California, you may not be directly affected by the Bay Bridge cost overrun. However, directly or indirectly, at some time you will pay for somebody’s wrong decision—regardless of where you live or what you do. This is because, for example:

• Costs related to problems in developing new drugs are passed on to consumers in the form of higher prices for medications.

• Dry wells lead to increased costs for oil and gas exploration and production, leading in turn to higher prices at the gas pump.

• Governments sometimes implement ill-considered policies that can adversely affect your taxes.

• You yourself occasionally make wrong decisions. The cheap brand of deck coating that you used to save a couple of dollars is already peeling off and you will have to paint your deck again next year (next time with a better brand).

Problems result from poor decision-making, whether the person making the decision is the manager at the pharmaceutical company, the geologist making a bad choice of where to drill for oil, the ineffective government bureaucrat or legislator making policy for the wrong reasons, or even you yourself, trying to save a few bucks by buying a low-priced deck coat.

We human beings have been making poor decisions since we first developed the ability—and the necessity—to make choices. In the modern world, however, due to the complexity and cost of projects, the price we pay for poor decisions has significantly increased. The overall cost of wrong decisions is very hard to estimate, but it is undoubtedly enormous. Say, for example, we design a multibillion-dollar oil pipeline but make a poor decision on the path it will follow through a particular location. Because of that poor decision, we now have to move it—a step that might increase the project costs by millions of dollars. Who pays that cost? It is passed on to somebody—investors, consumers, or the government.

Poor decision-making in the medical field can have expensive, even fatal, results. The causes of medical mistakes differ. Sometimes the cause is a flaw in a hospital procedure. Most medical mistakes, however, are related to errors in human judgment. In the United States, more than 250,000 deaths per year are the result of medical errors (Makary and Daniel 2016). As a comparison, according to the Centers for Disease Control, in 2013 a total of 611,105 people died of heart disease, 584,881 of cancer, and 149,205 of chronic respiratory disease—the top three causes of death in the nation.

Why Do We Make Wrong Decisions?

Lawrence Phillips, a prominent decision analysis expert, cites a curious paradox: although the ability to make right decisions is considered a main indicator of project-management professionalism, many project managers are unwilling to try to improve the quality of their decisions (Goodwin 2014). Phillips suggests that many people consider decision-making to be merely an automatic process, as natural as breathing. And if we don’t need to learn how to breathe, why do we need to learn how to make better decisions? With such a blasé attitude, many project managers don’t make the effort to understand decision analysis, or perhaps they believe that it is just a theoretical discipline with no practical use in their work.

If you were asked to rate your decision-making ability, most likely you would rate yourself as “better than average.” The “better-than-average effect,” where people tend to rate themselves as above average when asked to characterize their abilities, is a common psychological bias (Massey, Robinson and Kaniel 2006) that is applicable not only to self-assessments of decision-making but also to other activities. But, if we believe that we are such good decision-makers, why do we often make poor ones?

The answer resides in the fact that most of today’s important project-management decisions are complex. Without proper analysis, it is hard to make choices between alternatives. Every day, project managers make numerous decisions. Most of them are trivial and do not require sophisticated analysis. If a component for your construction project is delayed, you might decide to call the supplier. Obviously, in making this choice, you can rely on common sense. You do not need to perform an advanced analysis, solve a few differential equations, or run a complex simulation model. However, if you need to select a new supplier, the situation is quite different. A great deal is at stake, and a wrong decision could be very costly. In addition, you likely have many alternatives. So, now you realize that relying solely on your intuition may not be enough; you probably should perform a decision analysis.

Why is decision-making so complicated? It’s true for a number of reasons:

• Most problems in project management involve multiple objectives. Tesla’s Model 3 was planned to be an affordable, reliable, sporty, fuel-efficient, high-tech, luxurious, and practical mass-produced electric car (Grinshpun 2018). Production of such an ambitious product faced many challenges: the supply chain management needed to be built from scratch, new manufacturing processes needed to be developed, and distribution and delivery processes required implementation. Finally, costs had to be kept under control. That is quite a list of objectives that Tesla needed to achieve in a very short time frame. Because of these objectives, some hiccups were encountered along the way, particularly in regard to delays in reaching production goals and cash flow concerns. Decision analysis would help to prioritize multiple objectives.

• Project managers deal with uncertainties. Predicting the future is not an easy task. Selecting alternatives is the primary objective of decision analysis. Decision analysis offers tools to help project managers deal with uncertainties.

• Project management problems can be complex. The number of alternatives you face in managing a project can be significant. Decisions are usually made sequentially, based on previous decisions. Moreover, understanding how each decision will affect subsequent ones is difficult.

• Most projects include multiple stakeholders. Project managers deal with clients, project team members, project sponsors, and subcontractors, among others. All these stakeholders have different objectives and preferences.

Decision Analysis as a Process

Having explained what decision analysis encompasses, we still must ask: What is it, really? First, decision analysis is a tool to solve problems. It is a “practical framework of methods and tools to promote creativity and help people make better decisions” (Keeney 1982).

As a project manager, you don’t need to know every last detail about these methods and tools, some of which can be extremely complicated. It is important, however, that you know two basic things that affect how decisions are made:

• We are all subject to common psychological pitfalls. People come hardwired with psychological constructs that can mislead them when they make project decisions. If you are estimating projects costs, identifying possible risks, selecting viable alternatives, or identifying the most important project objectives, you can make predictable mental mistakes. A basic knowledge of these pitfalls and how they can affect decision-making will help you avoid them.

• We can use decision analysis techniques to avoid those pitfalls. These techniques will improve your ability to make better decisions. Moreover, most of these techniques can be applied in other areas of practice, such as financial analysis.

What you really need to know in general is that project decision analysis is a scalable and flexible process that is both practical and effective. In addition, it is important to understand that decision analysis is not a process that creates an additional level of bureaucracy. It can be integrated into other processes that are defined in the PMBOK^® Guide (Project Management Institute 2018). We strongly recommend that you begin to establish this process by improving your own thinking processes rather than setting it up at the organizational level.

The process includes four major phases (which are discussed in the following parts of this book):

1. Decision-framing, or structuring the problem (Part 1)

2. Modeling the situation (Part 2)

3. Quantitative analysis (Part 3)

4. Implementation, monitoring, and reviews of the decisions (Part 4)

Each phase of the process involves several steps, which we will cover in our discussions of each phase.

Often, project managers believe that decision analysis is a type of cost-benefit analysis. That is a technique used to compare the various costs associated with a project with the benefits that it is intended to return. In comparison, decision analysis is a much broader process that takes into account many parameters and uncertainties. It focuses on developing a more complete analysis of a project and on understanding the ramifications of the possible choices facing a project manager.

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Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• PREFACE
• TEST YOUR JUDGMENT
• ANSWERS TO JUDGMENT QUIZ
• PART 1 Introduction to Project Decision Analysis
• PART 2 Decision-Framing
• PART 3 Modeling the Situation
• PART 4 Quantitative Analysis
• PART 5 Implementation, Monitoring, and Reviews
• APPENDIX A Risk and Decision Analysis Software
• APPENDIX B Heuristics and Biases in Project Management
• APPENDIX C Risk Templates
• APPENDIX D Multi-Criteria Decision-Making Methodologies
• GLOSSARY
• FUTURE READING
• REFERENCES
• ACKNOWLEDGMENTS
• INDEX
• ABOUT THE AUTHORS