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NATIONAL NCHRP REPORT 574 COOPERATIVE HIGHWAY RESEARCH PROGRAM Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction

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TRANSPORTATION RESEARCH BOARD 2006 EXECUTIVE COMMITTEE* OFFICERS CHAIR: Michael D. Meyer, Professor, School of Civil and Environmental Engineering, Georgia Institute of Technology, Atlanta VICE CHAIR: Linda S. Watson, Executive Director, LYNX--Central Florida Regional Transportation Authority, Orlando EXECUTIVE DIRECTOR: Robert E. Skinner, Jr., Transportation Research Board MEMBERS Michael W. Behrens, Executive Director, Texas DOT, Austin Allen D. Biehler, Secretary, Pennsylvania DOT, Harrisburg John D. Bowe, Regional President, APL Americas, Oakland, CA Larry L. Brown, Sr., Executive Director, Mississippi DOT, Jackson Deborah H. Butler, Vice President, Customer Service, Norfolk Southern Corporation and Subsidiaries, Atlanta, GA Anne P. Canby, President, Surface Transportation Policy Project, Washington, DC Douglas G. Duncan, President and CEO, FedEx Freight, Memphis, TN Nicholas J. Garber, Henry L. Kinnier Professor, Department of Civil Engineering, University of Virginia, Charlottesville Angela Gittens, Vice President, Airport Business Services, HNTB Corporation, Miami, FL Genevieve Giuliano, Professor and Senior Associate Dean of Research and Technology, School of Policy, Planning, and Development, and Director, METRANS National Center for Metropolitan Transportation Research, University of Southern California, Los Angeles Susan Hanson, Landry University Professor of Geography, Graduate School of Geography, Clark University, Worcester, MA James R. Hertwig, President, CSX Intermodal, Jacksonville, FL Gloria J. Jeff, General Manager, City of Los Angeles DOT, Los Angeles, CA Adib K. Kanafani, Cahill Professor of Civil Engineering, University of California, Berkeley Harold E. Linnenkohl, Commissioner, Georgia DOT, Atlanta Sue McNeil, Professor, Department of Civil and Environmental Engineering, University of Delaware, Newark Debra L. Miller, Secretary, Kansas DOT, Topeka Michael R. Morris, Director of Transportation, North Central Texas Council of Governments, Arlington Carol A. Murray, Commissioner, New Hampshire DOT, Concord John R. Njord, Executive Director, Utah DOT, Salt Lake City Pete K. Rahn, Director, Missouri DOT, Jefferson City Sandra Rosenbloom, Professor of Planning, University of Arizona, Tucson Henry Gerard Schwartz, Jr., Senior Professor, Washington University, St. Louis, MO Michael S. Townes, President and CEO, Hampton Roads Transit, Hampton, VA C. Michael Walton, Ernest H. Cockrell Centennial Chair in Engineering, University of Texas, Austin EX OFFICIO MEMBERS Thad Allen (Adm., U.S. Coast Guard), Commandant, U.S. Coast Guard, Washington, DC Thomas J. Barrett (Vice Adm., U.S. Coast Guard, ret.), Pipeline and Hazardous Materials Safety Administrator, U.S.DOT Marion C. Blakey, Federal Aviation Administrator, U.S.DOT Joseph H. Boardman, Federal Railroad Administrator, U.S.DOT John Bobo, Deputy Administrator, Research and Innovative Technology Administration, U.S.DOT Rebecca M. Brewster, President and COO, American Transportation Research Institute, Smyrna, GA George Bugliarello, Chancellor, Polytechnic University of New York, Brooklyn, and Foreign Secretary, National Academy of Engineering, Washington, DC J. Richard Capka, Federal Highway Administrator, U.S.DOT Sean T. Connaughton, Maritime Administrator, U.S.DOT Edward R. Hamberger, President and CEO, Association of American Railroads, Washington, DC John H. Hill, Federal Motor Carrier Safety Administrator, U.S.DOT John C. Horsley, Executive Director, American Association of State Highway and Transportation Officials, Washington, DC J. Edward Johnson, Director, Applied Science Directorate, National Aeronautics and Space Administration, John C. Stennis Space Center, MS William W. Millar, President, American Public Transportation Association, Washington, DC Nicole R. Nason, National Highway Traffic Safety Administrator, U.S.DOT Jeffrey N. Shane, Under Secretary for Policy, U.S.DOT James S. Simpson, Federal Transit Administrator, U.S.DOT Carl A. Strock (Lt. Gen., U.S. Army), Chief of Engineers and Commanding General, U.S. Army Corps of Engineers, Washington, DC *Membership as of November 2006.

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NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM NCHRP REPORT 574 Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction Stuart Anderson TEXAS TRANSPORTATION INSTITUTE College Station, TX Keith Molenaar UNIVERSITY OF COLORADO Boulder, CO Cliff Schexnayder DEL E. WEB SCHOOL OF CONSTRUCTION ARIZONA STATE UNIVERSITY Tempe, AZ Subject Areas Planning, Administration, and Environment Design Public Transit Rail Research sponsored by the American Association of State Highway and Transportation Officials in cooperation with the Federal Highway Administration TRANSPORTATION RESEARCH BOARD WASHINGTON, D.C. 2007 www.TRB.org

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NATIONAL COOPERATIVE HIGHWAY NCHRP REPORT 574 RESEARCH PROGRAM Systematic, well-designed research provides the most effective Project 8-49 approach to the solution of many problems facing highway ISSN 0077-5614 administrators and engineers. Often, highway problems are of local ISBN 978-0-309-09875-5 interest and can best be studied by highway departments individually Library of Congress Control Number 2007922065 or in cooperation with their state universities and others. However, the 2007 Transportation Research Board accelerating growth of highway transportation develops increasingly complex problems of wide interest to highway authorities. These problems are best studied through a coordinated program of COPYRIGHT PERMISSION cooperative research. Authors herein are responsible for the authenticity of their materials and for obtaining In recognition of these needs, the highway administrators of the written permissions from publishers or persons who own the copyright to any previously American Association of State Highway and Transportation Officials published or copyrighted material used herein. initiated in 1962 an objective national highway research program Cooperative Research Programs (CRP) grants permission to reproduce material in this employing modern scientific techniques. This program is supported on publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB, AASHTO, FAA, FHWA, a continuing basis by funds from participating member states of the FMCSA, FTA, or Transit Development Corporation endorsement of a particular product, Association and it receives the full cooperation and support of the method, or practice. It is expected that those reproducing the material in this document for Federal Highway Administration, United States Department of educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission Transportation. from CRP. The Transportation Research Board of the National Academies was requested by the Association to administer the research program because of the Board's recognized objectivity and understanding of NOTICE modern research practices. The Board is uniquely suited for this purpose as it maintains an extensive committee structure from which The project that is the subject of this report was a part of the National Cooperative Highway Research Program conducted by the Transportation Research Board with the approval of authorities on any highway transportation subject may be drawn; it the Governing Board of the National Research Council. Such approval reflects the possesses avenues of communications and cooperation with federal, Governing Board's judgment that the program concerned is of national importance and state and local governmental agencies, universities, and industry; its appropriate with respect to both the purposes and resources of the National Research Council. relationship to the National Research Council is an insurance of The members of the technical committee selected to monitor this project and to review this objectivity; it maintains a full-time research correlation staff of report were chosen for recognized scholarly competence and with due consideration for the specialists in highway transportation matters to bring the findings of balance of disciplines appropriate to the project. The opinions and conclusions expressed research directly to those who are in a position to use them. or implied are those of the research agency that performed the research, and, while they have been accepted as appropriate by the technical committee, they are not necessarily those of The program is developed on the basis of research needs identified the Transportation Research Board, the National Research Council, the American by chief administrators of the highway and transportation departments Association of State Highway and Transportation Officials, or the Federal Highway and by committees of AASHTO. Each year, specific areas of research Administration, U.S. Department of Transportation. needs to be included in the program are proposed to the National Each report is reviewed and accepted for publication by the technical committee according Research Council and the Board by the American Association of State to procedures established and monitored by the Transportation Research Board Executive Committee and the Governing Board of the National Research Council. Highway and Transportation Officials. Research projects to fulfill these needs are defined by the Board, and qualified research agencies are The Transportation Research Board of the National Academies, the National Research Council, the Federal Highway Administration, the American Association of State Highway selected from those that have submitted proposals. Administration and and Transportation Officials, and the individual states participating in the National surveillance of research contracts are the responsibilities of the National Cooperative Highway Research Program do not endorse products or manufacturers. Trade Research Council and the Transportation Research Board. or manufacturers' names appear herein solely because they are considered essential to the object of this report. The needs for highway research are many, and the National Cooperative Highway Research Program can make significant contributions to the solution of highway transportation problems of mutual concern to many responsible groups. The program, however, is intended to complement rather than to substitute for or duplicate other highway research programs. Published reports of the NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM are available from: Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet at: http://www.national-academies.org/trb/bookstore Printed in the United States of America

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COOPERATIVE RESEARCH PROGRAMS CRP STAFF FOR NCHRP REPORT 574 Robert J. Reilly, Director, Cooperative Research Programs Crawford F. Jencks, Manager, NCHRP Ronald D. McCready, Senior Program Officer Eileen P. Delaney, Director of Publications Beth Hatch, Editor NCHRP PROJECT 8-49 PANEL Field of Transportation Planning--Area of Forecasting G. Scott Rutherford, University of Washington, Seattle, WA (Chair) Nigel Blampied, California DOT Christopher D. Crachi, New York State DOT Greg Davis, Florida DOT Daryl J. Greer, Kentucky Transportation Cabinet, Frankfort, KY Timothy A. Henkel, Minnesota DOT Cheryl A. Kyte, Glendale, CA Robert J. Munchinski, H.W. Lochner, Inc., Bellevue, WA Jeffrey M. South, Illinois DOT Larry Anderson, FHWA Liaison Kimberly Fisher, TRB Liaison

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FOREWORD By Ronald D. McCready Staff Officer Transportation Research Board This guidebook presents approaches to cost estimation and management to overcome the root causes of cost escalation and to support the development of consistent and accu- rate project estimates through all phases of the development process, from long-range plan- ning, through priority programming, and through project design. The problem of cost escalation has become a major concern in virtually every field of capital project development. Within the transportation sector, cost escalation has attracted attention at the federal, state, regional, and local government levels for highways, transit, and other modes. State departments of transportation (DOTs), transit agencies, and other government entities responsible for delivering transportation projects historically have experienced increases in project cost estimates from the time that a project is first proposed or programmed until the time that it is completed. Recent studies have shown that this has been a worldwide problem, particularly for large projects. Cost estimate increases that occur after a project is first identified in a plan but before the project is designed create a substan- tial disruption in priority programs, because other projects have to be delayed or removed in order to accommodate higher cost estimates. The challenges of accurate cost estimation and management of costs are faced by almost every state DOT, transit agency, and metro- politan planning organization (MPO) in the country as projects evolve from concept in the long-range planning process, are prioritized within programs, and are subject to detailed development prior to construction. Cost estimates increasing over the course of project development may be caused by any number of factors, such as an inadequate project scope at the time of planning or program- ming, insufficient information on the extent of utility relocation requirements, insufficient knowledge of right-of-way costs and locations, required environmental mitigation costs to avoid certain impacts, traffic control requirements, and work-hour restrictions. As is often the case with very large and complex projects, the project scope and concept may not be fully understood until well after a substantial commitment has been made to its construc- tion. In addition, the project scope often expands as more internal and external stakehold- ers provide input on what elements should be included. Sometimes, if the cost of an item is not known, it is not included in early project cost estimates. In other instances, items such as right-of-way or construction engineering may be included with only tentative or super- ficial information to support their estimated costs. Initial cost estimates may be prepared by an agency other than the agency responsible for project delivery; this can result in different understandings of project requirements and vastly different estimates. There is sometimes speculation that, to secure funding for projects, items may be purposefully excluded from initial project scopes and costs with the intention of adding them later. Questions about

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honesty or competence can threaten the credibility of the planning and programming process and that of the transportation agency and create increased frustration by profes- sional staffs, policy makers, elected officials, and the general public. Both the Federal Highway Administration and the Federal Transit Administration have initiated major efforts to overcome this problem in federally aided projects. In recent years, states, transit agencies, and local public works agencies have studied the problem and attempted to find causes and solutions to improve the procedures, with varying degrees of success. There is a need for research into all aspects of cost estimation management and cost estimation procedures aimed at addressing consistency and accuracy throughout the entire project development process, from long-range planning, through priority programming, up to preconstruction engineering and design. The objective of this project was to develop a guidebook on highway cost estimation and management practice aimed at achieving greater consistency and accuracy between long-range transportation planning, priority programming, and preconstruction cost esti- mates. The guidebook provides strategies, methods, and tools to develop, track, and docu- ment more realistic cost estimates during each phase of the process. Under NCHRP Project 8-49, "Guidance on Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction," a research team led by Texas Transportation Institute carried out a comprehensive investigation into cur- rent and effective practices for cost estimation and management during the various plan- ning and project development phases prior to construction. The project resulted in a prac- tical guidebook designed to provide users with the most appropriate practices to develop and manage realistic cost estimates throughout the project development process. The guidebook should be of significant use to managers, practitioners, and decision makers interested in development and management of realistic and accurate cost estimates for transportation projects from the earliest stages of planning through final project design. The guidance provided is intended to provide methods and tools that will reduce un- intended or unanticipated escalation of costs as transportation projects proceed through the development process.

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CONTENTS 1 Summary 3 Chapter 1 Introduction 3 Background 3 Industry Problem 3 Guidebook Concepts 4 Guidebook Development 4 Guidebook Organization 5 Use of Guidebook 5 Implementation Thrust 6 Topic Focus 6 Summary 7 Chapter 2 Agency Cost Estimation Practice and Cost Estimation Management Processes 7 Transportation Development Phases 7 Cost Estimation Practice and Cost Estimation Management Overview 10 Cost Estimation Practice and Cost Estimation Management Steps 11 Summary 13 Chapter 3 Factors and Strategies 13 Cost Escalation Factors 13 Internal Cost Escalation Factors 15 External Cost Escalation Factors 16 Strategies 16 Management Strategy 16 Scope and Schedule Strategy 16 Off-Prism Strategy 17 Risk Strategy 17 Delivery and Procurement Strategy 17 Document Quality Strategy 17 Estimate Quality Strategy 17 Integrity Strategy 17 Summary 19 Chapter 4 Guidebook Framework 19 Background 19 Strategy, Method, and Tool Integration 19 Structure and Layout of Content 21 Tool Appendix 21 Summary 22 Chapter 5 Guide for Planning Phase 22 Introduction

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24 Methodology 25 5.1 Strategy: Management 25 5.1.1 Budget Control 26 5.1.2 Communication 26 5.1.3 Consistency 27 5.1.4 Recognition of Project Complexity 27 5.1.5 Risk Analysis 27 5.2 Strategy: Scope and Schedule 27 5.2.1 Buffers 28 5.2.2 Communication 29 5.2.3 Computer Software 29 5.3 Strategy: Off-Prism Issues 29 5.3.1 Communication 30 5.3.2 Identifying Off-Prism Issues 30 5.4 Strategy: Risk 30 5.4.1 Identification of Risk 31 5.4.2 Right-of-Way 31 5.4.3 Risk Analysis 32 5.5 Strategy: Delivery and Procurement 32 5.5.1 Delivery and Procurement Method 33 5.6 Strategy: Document Quality 33 5.6.1 Computer Software 33 5.6.2 Document Estimate Basis and Assumptions 34 5.6.3 Identifying Off-Prism Issues 34 5.7 Strategy: Estimate Quality 34 5.7.1 Computer Software 35 5.7.2 Conceptual Estimation 35 5.7.3 Estimate Review--External 36 5.7.4 Estimate Review--Internal 36 5.7.5 Project Scoping 37 5.7.6 Right-of-Way 37 5.8 Strategy: Integrity 37 5.8.1 Computer Software 38 5.9 Summary 39 Chapter 6 Guide for Programming and Preliminary Design Phase 39 Introduction 41 Methodology 41 6.1 Strategy: Management 41 6.1.1 Budget Control 43 6.1.2 Communication 44 6.1.3 Computer Software 44 6.1.4 Consistency 45 6.1.5 Gated Process 45 6.1.6 Recognition of Project Complexity 46 6.2 Strategy: Scope and Schedule 46 6.2.1 Buffers 46 6.2.2 Communication 47 6.2.3 Creation of Project Baseline 48 6.2.4 Delivery and Procurement Method

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48 6.2.5 Identification of Changes 49 6.2.6 Constructability 49 6.2.7 Value Engineering 50 6.3 Strategy: Off-Prism Issues 50 6.3.1 Communication 51 6.3.2 Right-of-Way 51 6.3.3 Public Involvement 52 6.3.4 Estimate Review--Internal 52 6.3.5 Identifying Off-Prism Issues 52 6.4 Strategy: Risk 53 6.4.1 Communication 53 6.4.2 Identification of Risk 54 6.4.3 Right-of-Way 54 6.4.4 Risk Analysis 55 6.4.5 Delivery and Procurement Method 55 6.5 Strategy: Delivery and Procurement 55 6.5.1 Delivery and Procurement Method 56 6.6 Strategy: Document Quality 56 6.6.1 Computer Software 57 6.6.2 Constructability 57 6.6.3 Estimate/Document Review 58 6.7 Strategy: Estimate Quality 58 6.7.1 Computer Software 58 6.7.2 Consistency 60 6.7.3 Creation of Project Baseline 60 6.7.4 Gated Process 60 6.7.5 Right-of-Way 61 6.7.6 Communication 61 6.7.7 Design Estimation 62 6.7.8 Document Estimate Basis and Assumptions 62 6.7.9 Estimate Review--External 63 6.7.10 Estimate Review--Internal 63 6.7.11 Project Scoping 63 6.8 Strategy: Integrity 63 6.8.1 Communication 64 6.8.2 Computer Software 65 6.8.3 Design to Mandated Budget 65 6.8.4 Consistency 66 6.8.5 Estimate Review--External 66 6.8.6 Estimate Review--Internal 66 6.8.7 Validate Costs 67 6.8.8 Verify Scope Completeness 67 6.9 Summary 69 Chapter 7 Guide for Final Design Phase 69 Introduction 69 Methodology 69 7.1 Strategy: Management 70 7.1.1 Budget Control 71 7.1.2 Consistency 73 7.1.3 Estimate Review--External

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A-161 Source: Project Risk Management Handbook, Caltrans Office of Project Management Process Improvement, 2003. PT = Project development team EIS = Environmental impact statement ND = Negative declaration FONSI = Finding of no significant impact EIR = Environmental impact report Figure R3.5. Caltrans risk management flowchart.

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A-162 Table R3.5-1. Caltrans risk management tasks and deliverables. Source: Project Risk Management Handbook, Caltrans Office of Project Management Process Improvement, 2003. the foundation of the CEVP process. A multidisciplinary that are integrated into the cost estimation, risk management, team of professionals from both the public and private sec- and project management processes at WSDOT. Other ele- tors examines the project. Table R3.5-3 presents the seven ments of the CEVP process are described in Sections C1.2, I2.2, phases in the WSDOT CEVP process. R3.1, and R3.4 in this guide. More information can be found While the workshop is a key component of the CEVP on the WSDOT CEVP and Cost Risk Analysis website at process, the CEVP process involves many other components www.wsdot.wa.gov/Projects/ProjectMgmt/RiskAssessment. Table R3.5-2. Caltrans risk management responsibility matrix. Legend: R = responsible, S = support, A = approve Source: Project Risk Management Handbook, Caltrans Office of Project Management Process Improvement, 2003.

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A-163 Table R3.5-3. CEVP workshop format. CEVP Process Phase Summary Description Phase I Project Project data compilation Identification and CEVP training and education Preparation Phase II Workshop Establishment of the workshop goals, workshop scope, and Initiation project alternatives being explored Project team presentation of: 1) scope and assumptions for each decision alternative; 2) cost and schedule estimate; and 3) major issues and concerns Development of project flow chart or schedule (the basis for the cost and schedule risk and uncertainty model) Phase III Cost Validation Cost validation team breakout activities and Risk Identification Risk team breakout activities Environmental costing team breakout activities Modeling team breakout activities Phase IV Integration and Breakout team reports Model Construction Reconciliation of breakout assumptions Construction of cost and schedule risk and uncertainty model Phase V Presentation of Oral presentation of workshop results Results Written presentation of workshop results Phase VI Validation of Project and CEVP teams validate workshop results Results and Generation of Alternative project scenarios are explored and evaluated Alternatives Phase VII Implementation Development of risk mitigation planning and integration into and Auditing project management Reviewing and updating of workshop results and predictions as compared with actual project results Tips Project Management Institute (2004). A Guide to Project Management Body of Knowledge (PMBOK Guide). Implementation of a programmatic cost risk analysis tool Washington State DOT (2006). Cost Estimating Valida- will involve significant changes to most state highway agencies' tion Process (CEVP) website: www.wsdot.wa.gov/Projects/ cost estimation and project management procedures. In fact, ProjectMgmt/RiskAssessment. the process will likely require a cultural change within the organization. To be successful, this tool will require manage- ment's full support and commitment of resources. V1 Validate Costs Constant project cost evaluation is a means to better manage Resources projects and respond to public skepticism and concern about project estimates and actual costs. Validation processes appraise Caltrans Office of Project Management Process Improve- the reasonableness and completeness of the assumptions, pro- ment (2003). Project Risk Management Handbook. www.dot.ca. cedures, and calculations used in developing an estimate. gov/hq/projmgmt/documents/prmhb/project_risk_manage ment_handbook.pdf. Federal Transit Authority (2004). Risk Assessment Method- V1.1 Estimation Software ologies and Procedures, report under Contract No. DTFT60- (Also See C2, C3, D2, P1) 98-D-41013. Computer software provides state highway agencies with the Federal Highway Administration (2004). Major Project ability to manage large data sets that support estimate devel- Program Cost Estimating Guidance. opment for all project types and levels of complexity. Estima- Molenaar, K. R. (2005). "Programmatic Cost Risk Analy- tion programs with preloaded templates for creating cost items sis for Highway Mega-Projects," Journal of Construction Engi- help project teams define the project scope, cost, and schedule. neering and Management, Vol. 131, No. 3, American Society It is easy to include checks in estimation software to flag cost of Civil Engineers. items that do not fall within historical price ranges.

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A-164 What Is It? Tips Estimation software is the computer program that assists The effectiveness of any estimation software is directly the state highway agencies in developing cost estimates. Most related to product support and training. When selecting soft- estimation software, be it agency developed or a commercial ware, always ensure that product support will be available and product, has preloaded templates that help the state highway that training and training material will be provided. agency project teams define the project scope, cost, and sched- ule. The software provides a means to track project develop- Resources ment, and it can assist in project review, particularly if it For more information about Trnsport Estimator, contact includes features that flag costs that do not fall within preset the AASHTOWare contractor: Info Tech, 5700 SW 34th Street, historical cost ranges. Suite 1235, Gainesville, FL 32608. Phone (352) 381-4400; Fax (352) 381-4444; E-mail info@infotechfl.com; Internet Why? www.infotechfl.com. Heavy Construction Systems Specialists, Inc. (HCSS), 6200 One of the advantages of using estimation software to cal- Savoy, Suite 1100, Houston, TX 77036. Phone (800) 683-3196 culate project cost is that it can provide rapid search features or (713) 270-4000; Fax (713) 270-0185; E-mail info@hcss.com; that detect errors or anomalies in an estimate. Estimates on Internet www.hcss.com. large projects and even on many small urban projects are very complex, and computer software is the only efficient V2 Value Engineering method of checking the many small details that support the cost calculations. Value engineering can be defined as a systematic method to improve the value of goods and services by examining func- tion. Value is the ratio of function to cost. Value can therefore What Does It Do? be increased by either improving the function or reducing the cost. It is a primary tenet of value engineering that quality not The estimation software will direct the estimator's attention be reduced as a consequence of pursuing value improvements. to input data or costs that the software detects as not being In the United States, value engineering is specifically appropriate. The software does not tell the estimator what is addressed in Public Law 104-106, which states, "Each execu- wrong, but it focuses attention on those areas of the estimate tive agency shall establish and maintain cost-effective Value that should be carefully reviewed. Engineering procedures and processes." Value engineering is sometimes taught within the industrial When? engineering body of knowledge as a technique in which the value of a system's outputs is optimized by crafting a mix of Cost validation is an ongoing process that should be occur- performance (i.e., function) and costs. In most cases, this ring during all project development stages. By using estima- practice identifies and removes unnecessary expenditures, tion software with built-in anomaly detection features, the thereby increasing the value for the manufacturer and/or their validation checks take place as the estimate is created. This customers. means that problem identification is continuous. In late 1995, Congress passed the National Highway System (NHS) Designation Act, which included a provision requiring the U.S. Secretary of Transportation to establish a program that Examples would require states to carry out a value engineering analysis for The Heavy Construction Systems Specialists, Inc. (HCSS), all federal-aid highway projects on the NHS with an estimated software, HeavyBid, has a feature that checks the estimate and total cost of $25 million or more. On February 14, 1997, the takes the estimator to each questionable location so that cor- FHWA published its value engineering regulation establishing such a program. rections can easily be made as necessary. The AASHTO CES and Estimator software have a feature that allows the estimator to spot unit costs that are outside V2.1 Value Engineering the range of unit cost data included in the database. There is Value engineering is a requirement of federal-aid projects. a statistical regression option that provides a best-fit curve The value engineering process is a systematic approach to with confidence intervals. This feature can be used to deter- improving cost-effectiveness of designs for highway projects. mine if a unit price that was input by the estimator is within Value engineering can provide a mechanism for enhancing the range of expected unit prices as deleted through the cost estimates of projects by clarifying scope and the quality regression analysis. of design documents.

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A-165 What Is It? 3. Speculation Phase: Be creative and brainstorm alternative proposals and solutions. Value engineering is the systematic review of a project, 4. Evaluation Phase: Analyze design alternatives, technical pro- product, or process to improve performance, quality, and/or cesses, life cycle costs, documentation of logic, and rationale. life cycle cost by an independent multidisciplinary team of 5. Development Phase: Develop technical and economic specialists. The value engineering process, referred to as the supporting data to prove the feasibility of the desirable job plan, defines a sequence of activities that are undertaken concepts. Develop team recommendations. Recommend during a value engineering study before, during, and follow- long-term as well as interim solutions. ing a workshop. During the value engineering workshop, the 6. Presentation Phase: Present the recommendations of the value engineering team learns about the background issues; value engineering team in an oral presentation and in a defines and classifies the project (or product or process) func- written report and workbook. tions; identifies creative approaches to providing the func- 7. Implementation Phase: Evaluate the recommendations. tions; and then evaluates, develops, and presents the value Prepare an implementation plan, including response of engineering proposals to key decision makers. The focus on the managers and a schedule for accomplishing the deci- the functions that the project, product, or process must per- sions based on the recommendations. form sets value engineering apart from other quality improve- 8. Audit Phase: Maintain a records system to track the results ment or cost reduction approaches. and accomplishments of the value engineering program on a statewide basis. Compile appropriate statistical analy- Why? ses as requested. When value engineers talk about reducing costs, they are The duration and assessment for these phases depend on usually referring to either total life cycle costs or the direct costs the complexity of the project. By performing the steps in of production. Total life cycle costs are the total expenditures these phases, the value engineering team will evaluate several over the whole life span of the highway. This measure of cost is components of a project, such as designs, topographical most applicable to expensive capital equipment and includes implications, and environmental impacts, and make recom- engineering, procurement, construction, maintenance, and mendations for several feasible options along with the cost decommissioning costs. Individual expenditures must be dis- differences and their impact on total project cost and sched- counted to reflect the time value of money, which translates to ule. These details are compiled into a value engineering deci- a more accurate estimate. sion document for appraisal from concerned authorities. The main objectives that the value engineering process seeks include improving project quality, reducing project costs, fos- When? tering innovation, eliminating unnecessary and costly design elements, ensuring efficient investment in projects, and devel- Value engineering is most successful when it is performed oping implementation procedures. early in project development. A value engineering study should be performed within the first 2530% of the design effort prior to selecting the final design alternative. Value What Does It Do? engineering is compulsorily performed on federal aid projects Value engineering uses intuitive logic (a unique "how"/ greater than $25 million and should be performed on high- "why" questioning technique) and analysis to identify rela- cost projects. The process can provide a justified logic for alle- tionships that increase value. Value engineering is a quantita- viating cost escalations while not compromising quality. tive method similar to the scientific method (which focuses on hypothesis and conclusion to test relationships) and opera- Examples tions research (which uses model building to identify predic- Figure V2.1, the value analysis flowchart for Nevada DOT, tive relationships). shows how the value engineering process is incorporated into The value engineering process follows a general framework practice. commonly referred to as an eight-phase job plan, with the fol- lowing phases: Tips 1. Selection Phase: Select the right projects, timing, team, Often, value engineering reduces costs by eliminating and project processes and elements. wasteful practices. This can be done in several areas: 2. Investigation Phase: Investigate the background informa- tion, technical input reports, field data, function analysis, Material substitutions: Unnecessarily expensive inputs can and team focus and objectives. sometimes be replaced by less expensive ones that function

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A-166 Figure V2.1. Value analysis flow chart (Nevada). just as well. If a product has a life span of 10 years, then that it is easier to construct. Reducing unnecessary design using a material that lasts 30 years is wasteful. In a perfectly elements, unnecessary precision, and unnecessary con- value-engineered product, every component of a highway struction operations can lower costs and increase the speed will function perfectly until the product is no longer useful, of construction and reliability. at which time all components will deteriorate. Modularity: Many highway project design elements are Process efficiency and producibility: More efficient pro- identical and can be mass produced to reduce costs. Such cesses can be used, and the highway can be redesigned so designs are developed once and reused in many slightly dif-

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A-167 ferent products, thereby reducing a project's engineering and which cause the estimator to review the scope for complete- design costs. For example, precast concrete slabs have proven ness, will yield comprehensive and improved cost estimates. to be a quick and efficient solution to time-constrained construction operations. These slabs can be factory cast for What Is It? different sizes and transported and assembled at the sites by modern construction practices, such as posttensioned con- This tool is the employment of checklists or templates that crete structures. Also, these slabs can be produced to a estimators and managers use to ensure that the project scope desired quality as they are manufactured under controlled is complete. These checklists guide the estimator through an conditions. inventory of items and questions that address both the design Energy efficiency: In an environmentally conscious soci- elements of the project and other things that drive project cost, ety, value can be created by making a product or process such as environmental permits, purchase of right-of-way, and more energy efficient for the user. For example, develop- utility interference. ment and usage of customized equipment, such as slip form pavers, ensure that a single piece of equipment performs Why? several operations that would require several resources traditionally. Estimators are generally very familiar and proficient with assembling cost data and developing item costs, but for the esti- Additionally, agencies must mate to be of value, it must match what will actually be built and the build environment conditions. Thus, one of the first steps Ensure they have adequate training facilities or trained staff to achieving estimate accuracy is verifying that the project scope Identify and train value engineering team member in-house is complete, in terms of both the physical structures to be built Share knowledge gained or results derived during value and the environment where the construction will take place. engineering studies to continuously improve the process What Does It Do? Resources Checklists serve to delineate the large number of factors Wilson, David C. (2005), NCHRP Synthesis of Highway that must be considered during scope development. There- Practice 352: Value Engineering Applications in Transportation, fore, they are an excellent means of avoiding omissions and Transportation Research Board. http://www.trb.org/news/ calling attention to the interaction between factors that can blurb_detail.asp?id=5705. impact scope and cost. The answers to the checklist questions Washington State DOT (1998), "Design Manual," Section will provide an overview of scope completeness and focus the 315. http://www.wsdot.wa.gov/EESC/Design/DesignManual/ estimator and project management team's attention on criti- desEnglish/315-E.pdf. cal issues that need to be considered. V3 Verify Scope Completeness When? Scope completeness is key to producing an accurate cost Scope checklists can support estimate creation at all stages estimate. Therefore, reviewing a project's scope documents of project development. The purpose of a checklist is to assist for completeness is an important task in the overall estimation the project team in developing a complete description of proj- process. The project that is estimated early in the development ect scope. Checklists should be as inclusive as possible, with process is often not the project actually built because of scope questions that specifically probe the scope at the different changes that could have been avoided if more attention were stages in project development. given to both project requirements and community desires earlier in project development. Examples A scope checklist for bridge construction might review the V3.1 Estimation Checklist following topics: (Also See C4.2, P2.1) Many changes in scope result from an improved under- 1. Maintenance of traffic standing of project need and outcome requirements. Check- 2. Removals lists are intended to serve as guides in checking and reviewing 3. Foundation whether there are scope omissions. The use of checklists, 4. Wetland mitigation

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A-168 5. Garbage dump removal project development, but they should all include questions 6. Toxic waste removal about third-party requirements. 7. Utilities (relocation companies/owners) The project scope must be monitored as the project pro- 8. Unusual conditions, such as power stations, sewerage ceeds through the development phases to ensure that any and plants, high-tension lines, and pumping stations all changes are properly managed. 9. Railroad engineering 10. Right-of-way summary Resources 11. Mitigation for wetland sites 12. Sidewalks on bridge Sturgis, Robert P. (1967). "For Big Savings--Control Costs 13. Maintenance operations, such as cleaning existing pipes, while Defining Scope." AACE 11th National Meeting, AACE drainage structures, and ditches International, Vol. 67-C.3, pp. 4952. 14. Noise barriers Though it is not strictly for transportation work, a scope development checklist can be found on the Construction Industry Cooperative Alliance (CICA) web page at www.ces. Tips clemson.edu/cica/Toolbox/files/SD1_Scope%20Develop The project scope should clearly define each deliverable, ment%20Checklist.doc. CICA is a cooperative alliance be- including exactly what will be produced and what will not be tween member firms from the construction industry in the produced. Get approval from all stakeholders. There can be eastern United States and Clemson University's Department of many individual checklists to support the different phases of Civil Engineering.

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APPENDIX B Implementation Framework

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B-1 APPENDIX B Implementation Framework Please see Chapter 8 for guidance on completing this table. Cost Management Strategy Performance Improvement Implementation Steps Responsible Party and (Strategies) Opportunity/Action (Methods) (Tools) Performance Measurement Management--Manage the estimation process and costs through all stages of project development. Scope/Schedule--Formulate definitive processes for controlling project scope and schedule changes. Off-Prism--Use proactive methods for engaging external participants and conditions that can influence project costs. Risk--Identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed. Delivery and Procurement Method--Apply appropriate delivery methods to better manage cost, as project delivery influences both project risk and cost Document Quality--Promote cost estimate accuracy and consistency through improved project documents Estimate Quality--Use qualified personnel and uniform approaches to achieve improved estimate accuracy Integrity--Ensure checks and balances are in place to maintain estimate accuracy and minimize the impact of outside pressures that can cause optimistic biases in estimates

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APPENDIX C Definitions