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11 funding approved by management may be required. These and refinement of project design will drive these variations. estimates are important because they support management Further, the application of each step may change depending monitoring and control of the project budget. on the project component that is being estimated, such as Cost management based on revised or updated estimates costs for preliminary engineering/final design, right of way, is an essential activity during the preliminary design phase and construction. when scope is transformed into construction details. Agen- In this four step cost estimation process, a separate step cies should systematically compare periodic cost estimate up- focuses specifically on risk and contingency at the time of dates and compare them to the baseline cost. If estimates are estimate preparation. Determine risks and set contingency not preformed regularly during project design the depart- requires some level of risk analysis to set an appropriate con- ment will experience what is known as cost blackout periods tingency consistent with the impact of the identified risks. (Clark and Lorenzoni 1997) and these can lead to major In the context of this Guidebook and the risk management budget problems when cost increases are identified later in process shown in Figure 1.1, identifying risks and assessing/ project development. To effectively manage overall project analyzing risks closely aligns with cost estimate step to deter- cost, agencies must continuously evaluate changes in scope, mine project risks and evaluate the contingency value consis- design, risks, and project site or market conditions in relation tent with the project risks. to cost and time impacts against the project baseline scope, cost, and schedule. During this phase of project development 2.6 Cost Management Process the risks identified in the planning and programming phases may have been mitigated, but new risks may be identified and Cost estimation management should occur continuously their corresponding impacts on cost determined. Risk regis- throughout the project development process. Some efforts ters are updated and the changes due to the resulting impacts are exclusive to a particular stage of development, while are reflected in the overall contingency, which is then used to others are inclusive throughout the process. The four update earlier estimates. Management uses estimate updates phases--planning, programming, preliminary design, and final to evaluate scope changes and other issues that affect project design--require the application of different cost manage- cost. Any deviation from budget and schedule must have doc- ment methods due to the level of project information that is umented management approval. available and the manner in which the estimate must be com- municated internally and externally. Even early in project development, agency management 2.4.4 Final Design Phase has the responsibility of reviewing, approving, and commu- The final design phase typically represents that point in nicating the project estimate. Communication is very impor- the project development process when plans and specifica- tant in the case of early estimates and management must tions are complete. At this stage the project is well defined make both internal and external stakeholders aware of an es- and any construction related risks are embedded into the timate's precision and its limits of accuracy. Many times a project line or pay items. This approach is necessary as the cost for a particular project comes out early in the planning final estimate is compared with contractor's estimates by line or programming phase and it is a number that stakeholders or pay item. The contractor incorporates risk into its esti- compare final costs to and judge the "success" of the project mate of each pay item. by, no matter how preliminary (and subject to further refine- ment) that initial estimate was. These management actions, the use of conceptual estimating techniques and proper com- 2.5 Cost Estimating Process munication of estimate uncertainty, have the potential to sig- A successful cost estimating process provides a structured nificantly improve proper use of early cost estimates. and systematic approach to determining project costs. NCHRP Five steps describe the cost estimation management process Report 574 provides nine steps to describe the fundamental (Anderson et al. 2007). Table 2.3 provides a description for each elements of cost estimation and cost estimation management of these steps. Again, the descriptions are general and therefore practice. Four basic steps describe cost estimation practice. applicable to the cost estimation management process across Table 2.2 presents these four steps together with a brief de- project development phases. Implementation of these steps scription of each. The descriptions are generic and, therefore, will vary by development phase and the project component applicable to the estimation process across each development (preliminary engineering/final design, right of way, and con- phase. These four steps convey the idea of a structured ap- struction). Similar to the cost estimation practice steps, the cost proach to cost estimation. The operational manner in which estimation management steps and their descriptions could be the steps are performed will vary depending on project devel- shown in greater detail, but five steps are sufficient to outline a opment phase. The level of completeness in the project scope structured approach to cost estimation management. As with