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NATIONAL NCHRP REPORT 658 COOPERATIVE HIGHWAY RESEARCH PROGRAM Guidebook on Risk Analysis Tools and Management Practices to Control Transportation Project Costs

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TRANSPORTATION RESEARCH BOARD 2010 EXECUTIVE COMMITTEE* OFFICERS CHAIR: Michael R. Morris, Director of Transportation, North Central Texas Council of Governments, Arlington VICE CHAIR: Neil J. Pedersen, Administrator, Maryland State Highway Administration, Baltimore EXECUTIVE DIRECTOR: Robert E. Skinner, Jr., Transportation Research Board MEMBERS J. Barry Barker, Executive Director, Transit Authority of River City, Louisville, KY Allen D. Biehler, Secretary, Pennsylvania DOT, Harrisburg Larry L. Brown, Sr., Executive Director, Mississippi DOT, Jackson Deborah H. Butler, Executive Vice President, Planning, and CIO, Norfolk Southern Corporation, Norfolk, VA William A.V. Clark, Professor, Department of Geography, University of California, Los Angeles Eugene A. Conti, Jr., Secretary of Transportation, North Carolina DOT, Raleigh Nicholas J. Garber, Henry L. Kinnier Professor, Department of Civil Engineering, and Director, Center for Transportation Studies, University of Virginia, Charlottesville Jeffrey W. Hamiel, Executive Director, Metropolitan Airports Commission, Minneapolis, MN Paula J. Hammond, Secretary, Washington State DOT, Olympia Edward A. (Ned) Helme, President, Center for Clean Air Policy, Washington, DC Adib K. Kanafani, Cahill Professor of Civil Engineering, University of California, Berkeley Susan Martinovich, Director, Nevada DOT, Carson City Debra L. Miller, Secretary, Kansas DOT, Topeka Sandra Rosenbloom, Professor of Planning, University of Arizona, Tucson Tracy L. Rosser, Vice President, Corporate Traffic, Wal-Mart Stores, Inc., Mandeville, LA Steven T. Scalzo, Chief Operating Officer, Marine Resources Group, Seattle, WA Henry G. (Gerry) Schwartz, Jr., Chairman (retired), Jacobs/Sverdrup Civil, Inc., St. Louis, MO Beverly A. Scott, General Manager and Chief Executive Officer, Metropolitan Atlanta Rapid Transit Authority, Atlanta, GA David Seltzer, Principal, Mercator Advisors LLC, Philadelphia, PA Daniel Sperling, Professor of Civil Engineering and Environmental Science and Policy; Director, Institute of Transportation Studies; and Interim Director, Energy Efficiency Center, University of California, Davis Kirk T. Steudle, Director, Michigan DOT, Lansing Douglas W. Stotlar, President and CEO, Con-Way, Inc., Ann Arbor, MI 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, U.S. Department of Homeland Security, Washington, DC Peter H. Appel, Administrator, Research and Innovative Technology Administration, U.S.DOT J. Randolph Babbitt, Administrator, Federal Aviation Administration, U.S.DOT Rebecca M. Brewster, President and COO, American Transportation Research Institute, Smyrna, GA George Bugliarello, President Emeritus and University Professor, Polytechnic Institute of New York University, Brooklyn; Foreign Secretary, National Academy of Engineering, Washington, DC Anne S. Ferro, Administrator, Federal Motor Carrier Safety Administration, U.S.DOT LeRoy Gishi, Chief, Division of Transportation, Bureau of Indian Affairs, U.S. Department of the Interior, Washington, DC Edward R. Hamberger, President and CEO, Association of American Railroads, Washington, DC John C. Horsley, Executive Director, American Association of State Highway and Transportation Officials, Washington, DC David T. Matsuda, Deputy Administrator, Maritime Administration, U.S.DOT Victor M. Mendez, Administrator, Federal Highway Administration, U.S.DOT William W. Millar, President, American Public Transportation Association, Washington, DC Cynthia L. Quarterman, Administrator, Pipeline and Hazardous Materials Safety Administration, U.S.DOT Peter M. Rogoff, Administrator, Federal Transit Administration, U.S.DOT David L. Strickland, Administrator, National Highway Traffic Safety Administration, U.S.DOT Joseph C. Szabo, Administrator, Federal Railroad Administration, U.S.DOT Polly Trottenberg, Assistant Secretary for Transportation Policy, U.S.DOT Robert L. Van Antwerp (Lt. Gen., U.S. Army), Chief of Engineers and Commanding General, U.S. Army Corps of Engineers, Washington, DC *Membership as of June 2010.

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NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM NCHRP REPORT 658 Guidebook on Risk Analysis Tools and Management Practices to Control Transportation Project Costs Keith Molenaar UNIVERSITY OF COLORADO Boulder, CO Stuart Anderson TEXAS TRANSPORTATION INSTITUTE College Station, TX AND Cliff Schexnayder DEL E. WEBB SCHOOL OF CONSTRUCTION ARIZONA STATE UNIVERSITY Tempe, AZ Subscriber Categories Administration and Management Construction Design Environment Highways Planning and Forecasting 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. 2010 www.TRB.org

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NATIONAL COOPERATIVE HIGHWAY NCHRP REPORT 658 RESEARCH PROGRAM Systematic, well-designed research provides the most effective Project 08-60 approach to the solution of many problems facing highway ISSN 0077-5614 administrators and engineers. Often, highway problems are of local ISBN 978-0-309-15476-5 interest and can best be studied by highway departments individually Library of Congress Control Number 2010928846 or in cooperation with their state universities and others. However, the 2010 National Academy of Sciences. All rights reserved. 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 INFORMATION 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. possesses avenues of communications and cooperation with federal, The members of the technical panel selected to monitor this project and to review this state and local governmental agencies, universities, and industry; its report were chosen for their special competencies and with regard for appropriate balance. relationship to the National Research Council is an insurance of The report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved objectivity; it maintains a full-time research correlation staff of by the Governing Board of the National Research Council. specialists in highway transportation matters to bring the findings of The opinions and conclusions expressed or implied in this report are those of the research directly to those who are in a position to use them. researchers who performed the research and are not necessarily those of the Transportation The program is developed on the basis of research needs identified Research Board, the National Research Council, or the program sponsors. by chief administrators of the highway and transportation departments The Transportation Research Board of the National Academies, the National Research and by committees of AASHTO. Each year, specific areas of research Council, and the sponsors of the National Cooperative Highway Research Program do not needs to be included in the program are proposed to the National endorse products or manufacturers. Trade or manufacturers' names appear herein solely because they are considered essential to the object of the report. Research Council and the Board by the American Association of State Highway and Transportation Officials. Research projects to fulfill these needs are defined by the Board, and qualified research agencies are selected from those that have submitted proposals. Administration and surveillance of research contracts are the responsibilities of the National Research Council and the Transportation Research Board. 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 658 Christopher W. Jenks, Director, Cooperative Research Programs Crawford F. Jencks, Deputy Director, Cooperative Research Programs Lori L. Sundstrom, Senior Program Officer Megan A. Chamberlain, Senior Program Assistant Eileen P. Delaney, Director of Publications Margaret B. Hagood, Editor NCHRP PROJECT 08-60 PANEL Field of Transportation Planning--Area of Forecasting Robert E. "Buzz" Paaswell, City College of New York, New York, NY (Chair) Timothy A. Henkel, Minnesota DOT, St. Paul, MN Terry L. Berends, Washington State DOT, Wenatchee, WA Daryl James Greer, Versailles, KY Dennis A. Randolph, Calhoun County (MI) Road Commission, Marshall, MI Jennifer S. Shane, Iowa State University, Ames, IA Robert Stuard, Texas DOT, Austin, TX Jon Tapping, California DOT, Sacramento, CA Steven F. Wilson, Michael Baker, Jr., Inc., Moon Township, PA Robin K. Smith, FHWA Liaison Martine A. Micozzi, TRB Liaison

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FOREWORD By Lori L. Sundstrom Staff Officer Transportation Research Board This guidebook provides guidance to state departments of transportation for using spe- cific, practical, and risk-related management practices and analysis tools for managing and controlling transportation project costs. Containing a toolbox for agencies to use in select- ing the appropriate strategies, methods and tools to apply in meeting their cost-estimation and cost-control objectives, this guidebook should be of immediate use to practitioners that are accountable for the accuracy and reliability of cost estimates during planning, priority programming and preconstruction. Identifying, analyzing, and managing the risk of project-cost escalation are fundamental challenges facing the transportation industry. NCHRP Report 574: Guidance for Cost Esti- mation and Management for Highway Projects During Planning, Programming, and Precon- struction focused on the issue of cost escalation and developed a guidebook on highway cost- estimation management and tools aimed at achieving greater consistency and accuracy in long-range transportation planning, priority programming, and preconstruction estimates. Building on NCHRP Report 574, NCHRP Report 625: Procedures Guide for Right-of-Way Cost Estimation and Cost Management details practical and effective approaches for devel- oping right-of-way (ROW) cost estimates and for then tracking and managing ROW cost during all phases of project development from planning through final design. Again build- ing on NCHRP Report 574, NCHRP Report 658 provides an in-depth treatment of specific risk-related management practices and analysis tools. Under NCHRP Project 08-60, the University of Colorado was asked to develop a com- prehensive guidebook on risk-related analysis tools and management practices for estimat- ing and controlling transportation project costs. Specifically, the guidebook addresses (1) the inconsistent application of contingency to risk management and cost estimation, (2) the lack of uniformity in methods of documenting and tracking risk within a comprehensive cost-control strategy or program, (3) insufficient procedures for determining timing of risk management within various phases of project development, the need for matching appro- priate tools to different project scales, (4) insufficient organizational structure, (5) organi- zational commitment, performance measurement, and accountability within transporta- tion agencies, (6) policy and political issues, and (7) the regulatory environment. To meet the project objectives, the research team (1) conducted a comprehensive litera- ture review, (2) reviewed current practice in defining and categorizing risk, and in assessing the degree of uncertainty in transportation project-cost estimation, (3) reviewed a range of well-established risk analysis tools and management practices, and (4) prepared a series of case studies that demonstrate effective application of risk-analysis tools and management practices. The contractor's project final report that contains documentation of the research teams' conduct of the research is available on the TRB project web site.

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CONTENTS 1 Summary 1 Risk Management Framework 2 Keys to Success 3 Chapter 1 Introduction 3 1.1 Introduction 3 1.1.1 Cost Escalation and Cost Containment 4 1.1.2 Guidebook Concepts 5 1.2 Guidebook Development 5 1.3 Guidebook Organization 6 1.4 Guidebook Use 6 1.4.1 Organizational Implementation 6 1.4.2 Programmatic Implementation 6 1.4.3 Project Implementation 6 1.5 Limitations of the Guidebook 6 1.6 Summary 7 Chapter 2 Project Cost Estimation and Management 7 2.1 Introduction 7 2.2 Transportation Project Development Phases 7 2.3 Cost Estimating and Cost Management Definitions 8 2.3.1 Cost Estimating Terms 9 2.3.2 Cost Management Terms 9 2.4 Timeline of Cost Estimating and Cost Management 10 2.4.1 Planning Phase 10 2.4.2 Programming Phase 10 2.4.3 Preliminary Design Phase 11 2.4.4 Final Design Phase 11 2.5 Cost Estimating Process 11 2.6 Cost Management Process 12 2.7 Project Complexity and Impact on Estimation and Risk Management Process 14 2.8 A Strategic Approach 14 2.8.1 Inconsistent Application of Contingencies 14 2.8.2 Risk Strategy 15 2.9 Management Support for Estimating and Cost Management Practices 15 2.10 Summary 16 Chapter 3 Risk Management Overview 16 3.1 Introduction 17 3.2 Risk Management in Support of Cost Estimating and Cost Management 21 3.3 Risk Management Definitions 22 3.3.1 Risk Analysis Terms

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22 3.4 Risk Management Framework 23 3.4.1 Risk Identification 25 3.4.2 Risk Assessment 26 3.4.3 Risk Analysis 30 3.4.4 Risk Mitigation and Planning 32 3.4.5 Risk Allocation 34 3.4.6 Risk Monitoring and Control 36 3.5 Risk Management Policies and Performance Measures 36 3.5.1 Policies 36 3.5.2 Performance Measures 39 3.6 Summary 40 Chapter 4 Guidebook Framework 40 4.1 Introduction 40 4.2 Guidebook Structure and Layout 42 4.3 Appendix A 42 4.4 Summary 44 Chapter 5 Guide to the Planning Phase 44 5.1 Introduction 44 5.1.1 Planning Phase Overview 44 5.1.2 Planning Phase Risk Management Emphasis 45 5.2 Planning Phase Risk Identification 45 5.2.1 Planning Phase Risk Identification Inputs 45 5.2.2 Planning Phase Risk Identification Tools 45 5.2.3 Planning Phase Risk Identification Outputs 46 5.2.4 Planning Phase Risk Identification Relationship to Project Complexity 46 5.2.5 Planning Phase Risk Identification Tips 46 5.3 Planning Phase Risk Assessment and Analysis 46 5.3.1 Planning Phase Risk Assessment and Analysis Inputs 47 5.3.2 Planning Phase Risk Assessment and Analysis Tools 47 5.3.3 Planning Phase Risk Assessment and Analysis Outputs 47 5.3.4 Planning Phase Risk Assessment and Analysis Relationship to Project Complexity 47 5.3.5 Planning Phase Risk Assessment and Analysis Tips 48 5.4 Planning Phase Risk Mitigation and Planning 48 5.4.1 Planning Phase Risk Mitigation and Planning Inputs 48 5.4.2 Planning Phase Risk Mitigation and Planning Tools 48 5.4.3 Planning Phase Risk Mitigation and Planning Outputs 48 5.4.4 Planning Phase Risk Mitigation and Planning Relationship to Project Complexity 49 5.4.5 Planning Phase Risk Mitigation and Planning Tips 49 5.5 Planning Phase Risk Allocation 49 5.5.1 Planning Phase Risk Allocation Inputs 49 5.5.2 Planning Phase Risk Allocation Tools 49 5.5.3 Planning Phase Risk Allocation Outputs 49 5.5.4 Planning Phase Risk Allocation Relationship to Project Complexity 49 5.5.5 Planning Phase Risk Allocation Tips

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49 5.6 Planning Phase Risk Monitoring and Control 50 5.6.1 Risk Monitoring and Control Inputs 50 5.6.2 Planning Phase Risk Monitoring and Control Tools 50 5.6.3 Planning Phase Risk Monitoring and Control Outputs 50 5.6.4 Planning Phase Risk Monitoring and Control Relationship to Project Complexity 50 5.6.5 Planning Phase Risk Monitoring and Control Tips 50 5.7 Conclusions 51 Chapter 6 Guide to the Programming Phase 51 6.1 Introduction 51 6.1.1 Programming Phase Overview 51 6.1.2 Programming Phase Risk Management Emphasis 52 6.2 Programming Phase Risk Identification 52 6.2.1 Programming Phase Risk Identification Inputs 52 6.2.2 Programming Phase Risk Identification Tools 53 6.2.3 Programming Phase Risk Identification Outputs 53 6.2.4 Programming Phase Risk Identification Relationship to Project Complexity 53 6.2.5 Programming Phase Risk Identification Tips 54 6.3 Programming Phase Risk Assessment and Analysis 54 6.3.1 Programming Phase Risk Assessment and Analysis Inputs 54 6.3.2 Programming Phase Risk Assessment and Analysis Tools 55 6.3.3 Programming Phase Risk Assessment and Analysis Outputs 55 6.3.4 Programming Phase Risk Assessment and Analysis Relationship to Project Complexity 55 6.3.5 Programming Phase Risk Assessment and Analysis Tips 56 6.4 Programming Phase Risk Mitigation and Planning 56 6.4.1 Programming Phase Risk Mitigation and Planning Inputs 56 6.4.2 Programming Phase Risk Mitigation and Planning Tools 57 6.4.3 Programming Phase Risk Mitigation and Planning Outputs 57 6.4.4 Programming Phase Risk Mitigation and Planning Relationship to Project Complexity 57 6.4.5 Programming Phase Risk Mitigation and Planning Tips 57 6.5 Programming Phase Risk Allocation 57 6.5.1 Programming Phase Risk Allocation Inputs 58 6.5.2 Programming Phase Risk Allocation Tools 58 6.5.3 Programming Phase Risk Allocation Outputs 58 6.5.4 Programming Phase Risk Allocation Relationship to Project Complexity 58 6.5.5 Programming Phase Risk Allocation Tips 58 6.6 Programming Phase Risk Monitoring and Control 58 6.6.1 Risk Monitoring and Control Inputs 58 6.6.2 Programming Phase Risk Monitoring and Control Tools 58 6.6.3 Programming Phase Risk Monitoring and Control Outputs 59 6.6.4 Programming Phase Risk Monitoring and Control Relationship to Project Complexity 59 6.6.5 Programming Phase Risk Monitoring and Control Tips 59 6.7 Conclusions

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60 Chapter 7 Guide to the Design Phase 60 7.1 Introduction 60 7.1.1 Design Phase Overview 60 7.1.2 Design Phase Risk Management Emphasis 61 7.2 Design Phase Risk Identification 61 7.2.1 Design Phase Risk Identification Inputs 62 7.2.2 Design Phase Risk Identification Tools 62 7.2.3 Design Phase Risk Identification Outputs 62 7.2.4 Design Phase Risk Identification Relationship to Project Complexity 63 7.2.5 Design Phase Risk Identification Tips 63 7.3 Design Phase Risk Assessment and Analysis 63 7.3.1 Design Phase Risk Assessment and Analysis Inputs 64 7.3.2 Design Phase Risk Assessment and Analysis Tools 64 7.3.3 Design Phase Risk Assessment and Analysis Outputs 64 7.3.4 Design Phase Risk Assessment and Analysis Relationship to Project Complexity 65 7.3.5 Design Phase Risk Assessment and Analysis Tips 65 7.4 Design Phase Risk Mitigation and Planning 65 7.4.1 Design Phase Risk Mitigation and Planning Inputs 66 7.4.2 Design Phase Risk Mitigation and Planning Tools 66 7.4.3 Design Phase Risk Mitigation and Planning Outputs 66 7.4.4 Design Phase Risk Mitigation and Planning Relationship to Project Complexity 67 7.4.5 Design Phase Risk Mitigation and Planning Tips 67 7.5 Design Phase Risk Allocation 67 7.5.1 Design Phase Risk Allocation Inputs 67 7.5.2 Design Phase Risk Allocation Tools 68 7.5.3 Design Phase Risk Allocation Outputs 68 7.5.4 Design Phase Risk Allocation Relationship to Project Complexity 68 7.5.5 Design Phase Risk Allocation Tips 68 7.6 Design Phase Risk Monitoring and Control 68 7.6.1 Risk Monitoring and Control Inputs 68 7.6.2 Design Phase Risk Monitoring and Control Tools 69 7.6.3 Design Phase Risk Monitoring and Control Outputs 69 7.6.4 Design Phase Risk Monitoring and Control Relationship to Project Complexity 69 7.6.5 Design Phase Risk Monitoring and Control Tips 69 7.7 Conclusions 70 Chapter 8 Implementation 70 8.1 Introduction 70 8.2 Step One Implementation of Risk Strategy: Organizational Change 70 8.2.1 Establish Steering Committee 71 8.2.2 Develop Action Plan 71 8.2.3 Determine Organizational Structure for Risk Management 72 8.3 Step Two Implementation of Methods: Programmatic Change 72 8.3.1 Assess Current Practice 72 8.3.2 Determine Policies and Procedures 73 8.3.3 Develop Education and Training

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73 8.4 Step Three Implementation of Tools: Project Change 74 8.4.1 Assess Current Practice 74 8.4.2 Test New Tools 74 8.4.3 Customize Tools to Fit Agency 74 8.5 Step Four Integrating the System: A Strategic Plan 75 8.6 Summary 76 Chapter 9 Path Forward 76 9.1 Industry Problem 76 9.2 Guidebook Development 77 9.3 The Risk Management Framework 77 9.4 Challenges and Keys to Success 79 References 80 Appendix A Tools 80 D1.1 Contract Packaging 82 D1.2 Delivery Decision Support 85 I2.1 Red Flag Items 86 I2.2 Not Used 86 I2.3 Risk Checklists 90 I2.4 Assumption Analysis 91 I2.5 Expert Interviews 91 I2.6 Crawford Slip Method 92 I2.7 SWOT Analysis 94 R1.1 Recognition of Complexity 94 R3.1 Risk Management Plan 96 R3.2 Contingency--Percentage 101 R3.3 Contingency--Identified 102 R3.4 Estimate Ranges Three-Point Estimates 103 R3.5 Estimate Ranges Monte Carlo Analysis 106 R3.6 Risk Workshops 107 R3.7 Risk Priority Ranking 109 R3.8 Probability Impact Matrix (P I) 110 R3.9 Risk Comparison Table 111 R3.10 Risk Map 113 R3.11 Risk Breakdown Structure 113 R3.12 Risk Register 117 R3.13 Risk Management Information System 117 R3.14 Self Modeling Worksheet