Edinburgh Tram Inquiry / strategic understatement of cost and risk at business-case stage
Risk Mechanism
Early cost and risk estimates were understated through unjustified reductions in optimism-bias and risk allowances, enabling the tram project to proceed on an unrealistic budget and later contributing to cost overruns, scope reductions, and contractual disputes.
Case Summary
The Edinburgh Tram Inquiry found that the project team failed to apply available optimism-bias guidance and understated risk allowances in the project budget. Evidence presented to the Inquiry described strategic misrepresentation as overstating benefits and understating costs to secure approval and funding. The project later experienced major cost overruns, delays, scope reductions, and contractual disputes.
Risk Lesson
This case demonstrates how major projects can secure approval on an unrealistic cost basis when early cost and risk estimates are reduced without clear evidence. It highlights warning signs such as unexplained reductions in optimism-bias or risk allowances, weak scrutiny of budget assumptions, and approval decisions based on estimates that have not been independently tested.
Reference
Edinburgh Tram Inquiry. (2023). Edinburgh Tram Inquiry report. Available from: https://www.edinburghtraminquiry.org/wp-content/uploads/2023/09/Edinburgh-Tram-Inquiry-Report-Signed.pdf