EPC Logistics: The importance of behavioural economics

To reflect EPC project logistics as a comprehensive approach towards managing all logistics activities on an EPC project, we will use the logistics definition introduced by Shapiro and Heskett – so called 7Rs – with slight a modification:  “EPC project logistics is defined as those EPC project supply chain activities that directly relate to receiving the right product or service in the right quantity, in the right quality, in the right place, at the right time, delivering to the right customer, and doing this at the right cost”

EPC project logistics’ position in the supply chain is illustrated in figure 1 – a slightly a slightly adjusted version of Steyn and Louren’s diagram (Steyn, J. and D. Lourens. 2017. “An Introduction to Project Logistics Management.”):

During the planning and execution phases, an EPC project logistics team enters into multiple interactions internally (within the EPC project) and externally, among which belong mainly:

Main Internal interactions:	Main External interactions
- Material and procurement dept.	- Logistics service providers
- Contracts dept.	- Ports and airports
- Construction	- Marine safety administrations
- Engineering dept.	- Traffic control departments
- Quality	- Customs
- Project control	- Material and equipment suppliers
- HSE dept.	- Fabrication yards

All these interactions occur within the highly fluid and quickly changing environment of the project lifecycle, as described in the first article of this series.

Due to the complexity of the interactions and many (sometimes competing) interests, EPC logisticians must be trained in logistics, contracting and understand at least the basic principles of material management and project execution.

Proper training in facts-based disciplines is relatively ‘easy’ – requiring plenty of effort and a bit of talent for the subject. The more challenging part is its successful application to the project environment.

In order to understand a project’s ongoing processes and to optimise the decision-making process, EPC logisticians must familiarise themselves with behavioural economics and apply its basic principles into their daily work.

Behavioural economics plays a significant role in EPC project logistics by providing insights into the decision-making processes of project stakeholders and understanding their behavioural biases and preferences. Reasons why behavioural economics is important for EPC project logistics include:

• Improved risk management: behavioural economics helps identify and mitigate cognitive biases that can affect decision-making related to risk assessment and management in EPC projects. By understanding how stakeholders perceive risks and make decisions under uncertain conditions, project logistics managers can develop more effective risk mitigation strategies.
• Efficient resource allocation: behavioural economics highlights how human behavior deviates from rationality when it comes to allocating resources. By considering behavioural biases such as loss aversion or overconfidence, project logistics managers can better allocate resources and make informed decisions about investing in specific areas of the project.
• Effective negotiation and collaboration: behavioural economics provides insights into how individuals make decisions during negotiations, considering factors such as fairness, cooperation, and reciprocity. Understanding these behavioural biases can help project logistics managers foster collaboration, resolve conflicts, and enhance relationships among stakeholders involved in the project.
• Optimal decision-making: Traditional economic theories assume that individuals always act rationally and in their best interest. However, behavioural economics acknowledges that people often make decisions based on heuristics, emotions, and social influences. By considering these cognitive biases, project logistics managers can design better decision-making processes that align with the actual behavior of stakeholders, leading to more optimal outcomes.

Overall, incorporating principles from behavioural economics into EPC project logistics can result in more informed decision-making, improved risk management, better resource allocation, enhanced negotiation and collaboration, and ultimately, increased project success.

Let’s go through couple of well-known examples of behavioural biases together with their possible consequences for EPC logistics and the main mitigation methods.

Anchoring bias: This bias occurs when individuals rely too heavily on the initial information or reference points they receive when making decisions. In project logistics, anchoring bias can influence estimates of costs, timelines, or resource allocation based on the first piece of information received, which may not accurately reflect the actual conditions or requirements.

• Budget anchoring: When a project logistics manager receives an initial budget estimate, they may anchor their subsequent decisions and negotiations around that figure. This can lead to overestimating or underestimating costs. It is important to conduct thorough cost analysis and consider multiple sources of information before settling on a budget.
• Schedule anchoring: If a project logistics manager receives an initial timeline estimate, they may anchor their planning and scheduling decisions around that timeframe. This can result in unrealistic expectations or inadequate time allocation for certain tasks. To mitigate this bias, it is crucial to gather input from various stakeholders, conduct a detailed analysis of project requirements, and consider historical data from similar projects.
• Supplier anchoring: When selecting suppliers for EPC projects logistics, project logistics managers may anchor their decisions based on the first supplier they encounter or the first quote they receive. This can lead to overlooking potentially better options or failing to negotiate favorable terms. It is important to conduct a comprehensive supplier evaluation process, solicit multiple bids, and compare offerings before making a decision.
• Risk anchoring: Project logistics managers may anchor their risk assessment and mitigation strategies based on past experiences or high-profile risks associated with similar projects. This can result in overlooking unique risks specific to the current project or underestimating the impact of certain risks. It is essential to conduct a thorough risk assessment that considers both historical data and project-specific factors. Engaging a diverse team in risk identification and analysis can help avoid anchoring on a limited set of risks.
• Resource anchoring: Project logistics managers may anchor their resource allocation decisions based on the initial estimates or assumptions made during project planning. This can lead to overcommitting or underutilising resources, impacting project efficiency and outcomes. To mitigate this bias, it is crucial to regularly review and update resource requirements based on evolving project needs. Flexibility in resource allocation and continuous monitoring can help avoid anchoring on initial assumptions.

 

Overconfidence bias: This bias refers to individuals’ tendency to believe that their judgments and skills are better than they actually are. This can lead to overly optimistic assessments of project performance or underestimation of risks, resulting in poor decision-making and planning. Some examples of overconfidence bias in EPC project logistics along with ways to mitigate them are:

• Underestimating project timelines: Overconfidence bias can lead project logistics managers to underestimate the time required for completing various tasks and activities. This can result in delays and cost overruns. To mitigate this bias, it is important to conduct a thorough analysis of each task, consider potential risks and uncertainties, and build in contingency time buffers.
• Underestimating project costs: Overconfidence bias can also lead to underestimating the costs associated with EPC project logistics, resulting in budget shortfalls and financial difficulties. It is crucial to conduct a comprehensive cost estimation process that includes all relevant factors such as materials, labor, equipment, transportation, and potential unforeseen expenses.
• Overestimating resource capabilities: Project logistics managers may exhibit overconfidence bias by overestimating the capabilities of their resources, including personnel and equipment. This can lead to inadequate resource allocation and poor performance. To mitigate this bias, it is important to conduct a realistic assessment of resource capacities and capabilities, considering factors such as skill levels, availability, and potential limitations.
• Ignoring potential risks: Project logistics managers may overlook or underestimate potential risks, resulting in inadequate risk management strategies and increased vulnerability to disruptions. Managers should conduct a comprehensive risk assessment that identifies potential risks, evaluates their likelihood and impact, and develops appropriate mitigation plans.
• Overreliance on past successes: Project logistics managers may exhibit overconfidence bias by relying too heavily on past successful experiences and assuming that similar outcomes will occur in the future. This can lead to complacency and a lack of proactive planning. To mitigate this bias, it is important to critically evaluate each project’s unique characteristics and challenges, rather than assuming that past successes will automatically translate into future achievements. Open communication, diverse perspectives, and a willingness to challenge assumptions is crucial. Additionally, implementing robust project management practices, such as regular progress monitoring, continuous risk assessment, and stakeholder engagement, can mightily benefit to the project success.

Confirmation bias: Confirmation bias occurs when individuals selectively seek out and interpret information that confirms their existing beliefs or expectations while ignoring contradictory evidence. This bias can hinder effective decision-making by leading people to overlook alternative viewpoints or potential risks that challenge their existing assumptions. Examples of confirmation bias in EPC project logistics and strategies to mitigate them are:

• Supplier selection: Confirmation bias can influence the selection of suppliers by favoring those who align with preconceived notions or preferences. To mitigate this bias, it is essential to establish clear evaluation criteria based on objective factors such as experience, track record, financial stability, and technical capabilities. Additionally, involving multiple stakeholders in the supplier selection process can help reduce individual biases.
• Risk Assessment: Confirmation bias can lead to an overemphasis on positive aspects while downplaying potential risks or challenges associated with a project. It is crucial to conduct a comprehensive risk assessment that considers both positive and negative factors. Engaging external experts or consultants can provide an unbiased perspective and help identify potential blind spots.
• Cost estimation: Confirmation bias can influence cost estimation by favouring optimistic assumptions or underestimating potential expenses. To mitigate this bias, multiple experts in the estimation process and encourage them to challenge each other’s assumptions. Conducting sensitivity analysis and benchmarking against similar projects can also help ensure more accurate cost estimates.
• Schedule planning: Confirmation bias can impact schedule planning by overly optimistic timelines or ignoring potential delays. To mitigate this bias, it is important to involve experienced project managers who can provide realistic assessments of time requirements. Conducting thorough feasibility studies and incorporating contingency plans into the schedule can also help mitigate the impact of potential delays.
• Performance evaluation: Confirmation bias can affect performance evaluation by focusing on information that supports positive outcomes while disregarding negative indicators. Managers should establish clear performance metrics and evaluation criteria at the beginning of the project. Regularly reviewing and analysing project data objectively can help identify areas for improvement and avoid biased judgments.

Overall, mitigating confirmation bias in EPC project logistics requires a combination of objective decision-making processes, involvement of multiple stakeholders, external expertise, and a commitment to challenging assumptions. By actively seeking out diverse perspectives and considering both positive and negative evidence, project teams can make more informed decisions and improve project outcomes.

Availability bias: This relates to individuals’ tendency to rely on easily accessible or readily available information when making decisions, rather than seeking out more comprehensive or representative sources of data. In EPC project logistics, availability bias can lead to suboptimal decision-making by relying on past experiences or readily available information without considering a broader range of potential factors or alternatives. Here are some examples which may lead to several implications if not mitigated properly:

• Overreliance on past experiences: This can lead to biased decision-making if the past experiences do not accurately represent the current project’s requirements. It is important to gather comprehensive and up-to-date data about the project’s specific logistics needs and consider a range of options before making decisions.
• Focusing on recent successes or failures: Project logistics managers may be influenced by recent successes or failures in logistics management, leading to biased decision-making. If a recent project had successful logistics management, there might be a tendency to overlook potential risks or challenges in the current project. Conversely, if there was a recent failure, there might be an overemphasis on avoiding similar mistakes without considering other factors. To mitigate this bias, it is crucial to conduct a thorough analysis of the current project’s unique requirements and not solely rely on recent outcomes.
• Availability of information from trusted sources: Project logistics managers may rely heavily on information from trusted sources such as vendors or contractors they have worked with before. While it is important to consider their expertise and experience, relying solely on their input can lead to availability bias. Instead, project logistics managers should seek diverse perspectives and gather information from multiple sources, including industry experts, consultants, and other stakeholders.
• Limited consideration of alternative solutions: Availability bias can lead to a narrow focus on familiar or easily accessible logistics solutions while overlooking potentially better alternatives. Project logistics managers may default to using the same logistics providers or methods they have used in the past without considering other options. To mitigate this bias, project logistics managers should actively seek out and evaluate a wide range of logistics solutions, considering factors such as cost, efficiency, reliability, and scalability.
• Influence of media or industry trends: Availability bias can also be influenced by media coverage or industry trends. Project logistics managers may be swayed by popular opinions or prevailing practices without evaluating their suitability for the specific project. Project managers should conduct thorough research and analysis to determine the best logistics strategies based on the project’s unique requirements.

The sunk-cost fallacy bias

This bias refers to the tendency of individuals or organisations to continue investing in a project or decision based on the resources already invested, even if it no longer makes rational sense. In the context of EPC project logistics, there are several examples of this bias:

• Continuing with a non-performing subcontractor: If a subcontractor is not delivering as per expectations or contractual obligations, but significant resources have already been invested in their involvement, there may be a reluctance to terminate the contract. To avoid this situation, regular performance evaluations should be conducted, and if a subcontractor consistently fails to meet expectations, it is important to terminate the contract and find an alternative solution.
• Persisting with an inefficient transportation route: Sometimes, due to initial investments in infrastructure or agreements with transportation providers, there may be a tendency to continue using an inefficient transportation route even when more cost-effective options become available. Mitigation: Regularly evaluate transportation routes and costs, considering factors such as distance, time, fuel consumption, and overall efficiency. If a better option emerges, it should be considered for implementation.
• Sticking to outdated technology or equipment: In some cases, investments may have been made in specific technology or equipment that becomes outdated or less efficient over time. However, due to the sunk costs associated with these investments, there may be resistance to upgrading or replacing them. Mitigation: Regularly assess the technological advancements and market trends in the industry. If newer technology or equipment offers significant improvements in efficiency or cost-effectiveness, it should be considered for adoption.
• Overcommitting to a specific project timeline: When delays occur during an EPC project, there can be pressure to accelerate the schedule to make up for lost time. However, this can lead to additional costs and compromises on quality. Mitigation: Conduct a thorough analysis of the project timeline and identify the root causes of delays. If necessary, adjust the schedule realistically, considering the impact on costs and quality. It is important to prioritize delivering a successful project rather than simply adhering to an arbitrary timeline.

To mitigate the sunk-cost fallacy bias in EPC project logistics, it is crucial to maintain a proactive and objective approach. Regular evaluation of project performance, continuous monitoring of market trends, and a willingness to make necessary changes are essential. Additionally, involving multiple stakeholders in decision-making processes can help provide diverse perspectives.

The behavioural economics gave the birth of the totally new discipline – behavioural logistics. Even though this discipline is relatively new, it plays important role especially in the project logistics segment. This article wanted to briefly illustrate its importance for project logistics. Get ready for the next part which will continue taking us through the EPC project logistics journey.