Managing uncertainty in megaprojects

Dr Ilias Krystallis of UCL’s Bartlett School of Sustainable Construction explains: “It’s impossible on a 15-20-year delivery cycle to account for all the possible risks. Something else is going to happen. Next year, or in five years, maybe in 10 years. The project owner has to pay extra to build in robustness against that uncertainty. 

“So you pay for all these premiums accounted for in risk management, but then that unknown event element, whatever that may be, you’ll still have to pay for that on top. And that’s why the costs are escalating.” 

Michel and Ilias are combining the efforts and research of UCL and Imperial College London to find new solutions. 

Michel argues, “we need a new mindset, but also new tools and methodologies to guide designers and planners on how to think about uncertainty very early on in the design process, where most important decisions can be made at the lowest cost.” 

Real options logic in real-world projects 

There are many examples of successful real options logic implementation. 

Ilias drew on the UK National Health Service (NHS) as an example of a project owner that has consistently promoted embedded flexibility approaches when meeting the changing needs of health provision in the UK. 

From as early as Lord Darzi’s report in 2008, through subsequent technical papers published by the NHS, the NHS has consistently pioneered flexibility in project design. 

“I think they’re innovating in that space,” said Ilias. “I haven’t come across any major project owners that have done this kind of exercise.” 

Michel added the NHS Nightingale hospital – a temporary healthcare site erected within nine days at London’s ExCeL centre at the height of the COVID-19 pandemic  – as a further example of how the NHS’s commitment to flexible design provided additional resilience and flexibility when needed. Despite some criticisms, it serves as a useful example where early planning can help deal with a sudden surge in critical care capacity needs. 

For specific examples of large-scale infrastructure projects that have demonstrated real options logic, we can look to the 25^th de Abril bridge that connects Lisbon with Almada in Portugal. 

Initially constructed in the 1960s (and coming in six months ahead of schedule), the bridge was designed to support later phases of construction, with additional capacity included beneath the bridge for more car lines and the railway line which were added in the 1990s. 

Another example of embedding design flexibility which Michel has long admired is the Health Care Services Corporation building in Chicago, which was constructed in two distinct phases of 33 and 24 floors each. 

“From a design standpoint, it was completely different from either a 33-storey or a 57-storey building. They had to plan for the additional load, but they didn’t know if they were going to use it. 

“At the time, they didn’t have the need for all that office space, but they figured potentially later they were going to need it. 10 years later, they decided to exercise that option, and built the additional 24 floors. 

“What was interesting is that it was the same team. Because often, a new team takes over the infrastructure and there’s no record keeping or continuity, and the flexibility gets lost. They don’t know it’s there.” 

Building a flexible community  

Both academics are well supported by their respective institutions to advocate strongly for real options logic approaches in project management. 

The Bartlett School of Sustainable Construction teaches risk and uncertainty management across a suite of master’s programmes, including project management, digital engineering and economics and finance. 

This includes both quantitative methods such as real option valuation and Monte Carlo simulations, as well as qualitative approaches using Harvard-style case studies, which immerse students in decision-making roles in a range of real-world management situations and scenarios. 

At Imperial's Dyson School of Design Engineering, Michel and his team are currently developing and testing a range of methodological and computational tools to translate the fundamental principles of real options theory into practical usage. 

These tools draw on a broad range of modelling approaches including machine learning and stochastic optimisation and are being tested in joint studies with leading global companies in energy, transport and infrastructure advisory. 

Michel and Ilias are also involved in a range of collaborative projects to help others in the industry engage with the principles of real options logic. These include further research papers, a special issue of a top engineering management journal devoted to real options logic, and a flexibility community building project with members from across Asia, Europe and the US. 

Michel explained their mutual enthusiasm and desire to disseminate this approach as widely as possible. 

“With everything that's happening, particularly around investments for decarbonisation, there's a clear need for this kind of thinking. There's so much uncertainty at the moment, a lot of companies are suffering from investment paralysis.  

“They don't know what to do or how to manage the risks and the uncertainty. For now, they're holding back, hoping that the government will help them solve all their problems  – but that’s not going to happen because the government is facing similar challenges.” 

The price of resilience 

Both Ilias and Michel stress that using real options logic to embed flexibility is a long-term strategic decision which project owners must accept may increase their initial costs as compared to a rigid solution. 

“There’s no free lunch here,” says Ilias. 

“We have to accept that if you embed flexibility, the project could be more expensive at the beginning compared to a more rigid alternative, but the savings could be huge at the end. 

“We recently published a paper in the American Association of Civil Engineers. We evaluated Heathrow's third runway expansion, using the master plan that was published a couple of years ago.  

“We took that master plan and said ‘ok, now what happens if we embed flexibility? How much is it going to cost?’ 

"We found that the upfront costs went up by 10-20% of the original budget. But if you don't make these accommodations, and you leave the project as is, if any of these scenarios happen, you're in trouble. 

“Our research shows that flexibility can unlock economic value improvement ranging routinely between 20-30%, and often more than 100%, as compared to rigid (or robust) solutions. 

“For megaprojects typically worth $100 million - $1 billion, the value of flexibility can be enormous.”