Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction (2007)

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3Background Project cost escalation is a major challenge for state highway agencies. Over the time span between the initiation of a proj- ect and the completion of construction, many factors influ- ence a project’s final costs. This time span is normally several years, but for highly complex and technologically challenging projects the time span can easily exceed a decade. Over that period, numerous changes to the project scope and schedule will occur. Many factors that influence project costs are un- defined during the early stages of project development, such as knowledge about right-of-way cost and alignment, environ- mental mitigation requirements, traffic control requirements, or work-hour restrictions. Moreover, there are process-related factors that can drive project cost increases, such as unforeseen engineering complexities and constructability issues, changes in economic and market conditions, changes in regulatory re- quirements, local governmental and stakeholder pressures, and a transformation of community expectations. All of these and other cost escalation factors create distinct challenges re- lated to the development of project estimates and effective cost estimation management. These challenges are • Difficulty in describing scope solutions for all issues early in project development, • Difficulty in evaluating the quality and completeness of early cost estimates, • Difficulty in identifying major areas of variability and uncer- tainty in project scope and costs, and • Difficulty in tracking the cost impact of design development that occurs between major cost estimates. Industry Problem Managing large capital construction projects requires the coordination of a multitude of human, organizational, and technical resources. Quite often, the engineering and con- struction complexities of such projects are overshadowed by economic, societal, and political challenges. Within the trans- portation community, project cost escalation has attracted management, political, and stakeholder attention at federal, state, regional, and local levels. News reports of project cost escalation cause the public to lose confidence in the ability of transportation agencies to effectively perform their responsi- bilities. Additionally, state highway agency management must deal with the disruption that project cost increases cause in priority programs (the disruption occurs when other projects have to be delayed or removed in order to accommodate higher project costs). As projects move from concept to construction, cost esca- lation is faced by every state highway agency, transit agency, and metropolitan planning organization (MPO) in the coun- try. Although project cost escalation is usually caused by lack of project scope control and factors external to the state high- way agency, it results in cost estimation practice and cost esti- mation management approaches that do not promote consistency and accuracy of cost estimates across the project development process. Guidebook Concepts This Guidebook presents a strategic approach for achiev- ing accurate project cost estimates based on strategies, meth- ods, and tools for project cost estimation practice and cost estimation management that are linked to (1) planning and the project development process and (2) project complexity. A strategy is a plan of action intended on accomplishing a specific goal. Strategies typically address a specific problem and are formulated to address a problem’s root cause. For example, a strategy might be risk. The risk strategy for con- trolling cost seeks to identify risks, quantify the impact of a risk on cost, and take actions to mitigate that impact. This strategy would likely address a root cause of cost escalation such as C H A P T E R 1 Introduction

scope changes caused by external and internal stakeholders providing input during project development. The strategy is implemented through a method. A method is a means or manner of procedure, especially a regular and sys- tematic way of accomplishing something. The method must support the strategy. A method for the described risk strategy might be a formal or structured risk analysis. This method is typically applied when preparing early project estimates, as the scope is being defined and detailed. One purpose of this method is to narrow the range of scope uncertainty. A method is then implemented using a tool. A tool is some- thing used in the performance of an operation. In this case, the operation is the method. A newly used tool for the risk analy- sis method is estimation ranges. At the core of this tool are risk identification, risk assessment, and the communication of uncertainty. This tool makes use of probabilities and simula- tion to produce a probabilistic range of project costs rather than a single-point estimate. Project estimates are made at various points in time dur- ing project development for a variety of reasons. An estima- tion method and tool must fit the information available at the time the estimate is developed. Thus, certain types of estimates apply to specific project development phases. For example, the risk analysis method is used when project- specific estimates are prepared during the early phases of proj- ect development. State highway agencies deal with a variety of project types; thus, the Guidebook considers strategies, methods, and tools in terms of their application to small or straightforward proj- ects, rehabilitation projects, major reconstruction projects, major new construction projects, and special situations such as when a state highway agency uses an innovative contracting method and does not prepare a complete set of plans and spec- ifications. Project complexity is also important because it may determine when, and to what extent, a specific method and tool should be used. As an example, the risk analysis method is typically used to expose areas associated with large, complex projects that have significant uncertainties associated with con- struction methods. The hierarchical decomposition of strategies, methods, and tools is illustrated in Figure 1.1. Methods are used to imple- ment strategies. As shown, more than one method may be used to implement a particular strategy. One or more tools can be used to implement a method. The use of specific strategies, methods, and tools changes with project development phases and different levels of project complexity. Guidebook Development This Guidebook was developed under NCHRP Project 8-49, “Procedures for Cost Estimation and Management for Highway Projects during Planning, Programming, and Pre- construction.” Approaches for addressing the transportation community problem of accurately estimating and managing project cost are proposed based on this research. The research was conducted in two phases. The first phase focused on a state-of-practice review of cost estimation prac- tice and cost estimation management processes. The current state of estimation practice was characterized by an extensive review of the literature supported by interviews of transporta- tion agencies. Major factors causing project cost escalation were identified during this first phase of the research. Over 23 state highway agencies provided input on the practices they use during different project development phases. A critical review of these practices formed the basis for identifying viable and successful approaches to cost estimation practice and cost estimation management. Based on this literature and inter- view work, eight strategies were identified to address the root causes of project cost escalation. These eight strategies were then linked to over 30 implementation methods. From the discussion with state highway agencies, over 90 tool applica- tions were identified to support the 30 methods. These strate- gies, methods, and tools align with planning, programming, and preconstruction. This strategic approach, including the methods and tools, was reviewed and approved by the NCHRP 8-49 panel. Based on the state-of-practice data from the state highway agencies, the second phase of the research developed this Guidebook. The Guidebook, with a focus on addressing cost escalation through the use of strategies, methods, and tools, was prepared in draft form. It was then critically reviewed by 10 state highway agencies. These state highway agencies pro- vided a critique of the Guidebook’s content, structure, layout, and user friendliness. The NCHRP 8-49 panel reviewed and commented on this final version of this Guidebook. Guidebook Organization The Guidebook has nine chapters, including the introduc- tion. The background information and fundamental concepts concerning the content of the Guidebook are developed in Chapters 2, 3, and 4. Chapter 2, “Agency Cost Estimation Prac- tice and Cost Estimation Management Processes,” demon- strates how cost estimation practice and cost estimation management are linked to planning and the project develop- ment process. The key information exchanged between differ- ent development phases is presented in a flow chart format. 4 Figure 1.1. Strategy, method, and tool hierarchy. Strategy 1 Method 1 Method 2 Tool 1 Tool 2 Tool 3 Strategy 2 Method 3 Tool 4

This flow chart is critical to understanding that achievement of accurate estimates requires a systematic approach. Further, the purposes of cost estimates prepared during different project phases are also discussed because estimates at specific points in planning and project development are critical to making sound financial decisions. Chapter 3, “Factors and Strategies,” iden- tifies and categorizes 18 cost escalation factors that have been found to repeatedly cause cost overruns on state highway agency projects. Eight strategies are then introduced that address these cost escalation factors. If these strategies are sys- tematically implemented as suggested in the Guidebook, state highway agencies will reduce project-specific cost increases and subsequent increases in capital program budgets. Chapter 4, “Guidebook Framework,” presents a consistent approach used to describe the strategies, methods, and tools as applied during planning and the project development process. Chapters 5, 6, and 7—“Guide for Planning Phase,” “Guide for Programming and Preliminary Design Phase,” and “Guide for Final Design Phase,” respectively, focus on the application of the fundamental concepts presented in Chapters 2, 3, and 4. These chapters provide guidance on cost estimation prac- tice and cost estimation management process implementation during each phase. Guidance is provided with a specific focus on the dominant cost escalation factors that most often occur during a specific project phase and the strategies that are effec- tive in addressing these cost escalation factors. Specific meth- ods employed to implement strategies are identified in terms of key information relevant to applying the method. Tools are linked to methods and strategies through an extensive appendix—Appendix A—which provides support for imple- mentation of the methods described in Chapters 5, 6, and 7. Appendix A provides information concerning tools, includ- ing examples and illustrations of all tools. New concepts and innovative ideas require a planned approach to facilitate their implementation into practice. Chapter 8, “Implementation,” covers key implementation thrust areas and steps in the implementation process that must be considered when introducing changes to current cost estimation practice and cost estimation management within a transportation agency. Finally, Chapter 9 summarizes the main features of the Guidebook and the challenges users may encounter when striving to improve agency cost estimation practice and cost estimation management. This chapter also provides 10 key principles that will lead to successful applica- tion of the strategies, methods, and tools presented in this Guidebook. Use of Guidebook The intent of the Guidebook is to provide transportation agencies with guidance on preparing realistic estimates and managing project cost. The material contained in the follow- ing chapters does not provide “how to” procedures with spe- cific details on cost estimation practice or cost estimation man- agement. However, the Guidebook does provide the necessary knowledge and information for state highway agencies to create “how to” approaches that fit within their own agency processes and culture. The Guidebook is designed to provide information to vari- ous users in a number of ways. Guidebook information is cat- egorized as having an implementation thrust or topic focus. Several examples are provided. The user is encouraged to use a strategic approach, but there are other ways to use the methods and tools presented in the Guidebook. Implementation Thrust Organization Level If cost escalation is a significant problem for an agency, changes in agency policy that influence how cost estimation practice and cost estimation management is performed may be necessary to improve the processes and provide more consis- tent and accurate estimates throughout project development. If this is the case, executive managers should review Chapters 2, 3, and 4 of the Guidebook. These chapters provide a basic structure and approach for developing agencywide policies that will lead to improved cost estimation practice and cost estimation management processes. Chapter 8 will provide assistance in implementing changes related to cost estimation practice and cost estimation management from an agencywide perspective. Program Level Program-level managers are often charged with imple- menting policy changes. If policy changes in cost estimation practice and cost estimation management are necessary, then these managers should read Chapter 2; Chapter 3; Chapter 4; the relevant Chapter 5, 6, and/or 7; and Chapter 8 on imple- mentation issues. For example, planning directors can focus on Chapter 5, “Guide for Planning Phase,” while managers of engineering and environmental programs can focus on Chapter 6, “Guide for Programming and Preliminary Design Phase.” Project Level Project-level managers, engineers, and discipline leaders (the chiefs of sections such as design, right-of-way, and/or estimation) who are directly responsible for cost estimation practice and cost estimation management processes should read Chapter 3; Chapter 4; the relevant Chapters 5, 6, and/or 7; and Appendix A according to their area of expertise. Those leaders directly involved in estimation should read the same chapters and Appendix A. If the estimator has a specific area of expertise—such as plans, specifications, and estimates 5

(PS&E)—then Chapter 7, “Guide for Final Design Phase,” should be studied in detail, including the relevant tools in Appendix A. Topic Focus Cost Escalation Problem If the user has a specific cost escalation problem to solve, the user should read Chapter 3. The user should determine which cost escalation factor is most closely aligned with the problem and then select a strategy or strategies that address the problem. Based on the development phase of interest, the user can deter- mine methods to implement specific strategies covered in Chapters 5, 6, and/or 7. Estimation Tools If the user is interested in finding a specific type of tool, the user should review the list of tools at the beginning of Appen- dix A. After finding a tool of interest, the user should study the description of the tool under the method that is relevant to the tool. If the user wants to determine where the tool is used, the user can locate the method and tool in the sum- mary section of Chapters 5, 6, and 7. Summary Cost escalation, or estimate increases, over the course of project development constitute the major problem that is addressed by this Guidebook. As projects evolve from concept to detailed development prior to construction, this problem is faced by every state highway agency, transit agency, and MPO in the country. Estimation strategies, methods, and tools pro- vide a structured approach for addressing the project cost esca- lation problem. This Guidebook was developed as part of NCHRP Project 8-49, “Procedures for Cost Estimation and Management for Highway Projects during Planning, Pro- gramming, and Preconstruction.” 6