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7 CHAPTER 2 Project Cost Estimation and Management 2.1 Introduction 2.2 Transportation Project Development Phases Based on a project's level of definition, cost estimates are prepared by a SHA during each phase of project develop- Due to slight variations in the terms used by the state high- ment to establish the project's probable cost. These cost es- way agencies to describe their project development phases, a timates are used by agency and external decision makers and generic set of terminologies are presented in this guidebook management to support crucial project or program funding consistent with the NCHRP Report 574: Guidance for Cost Esti- decisions. mation and Management for Highway Projects During Plan- A number of factors affect the accuracy of these estimates ning, Programming, and Preconstruction project development and the estimation techniques used to arrive at the esti- phases: 1) Planning, 2) Programming, 3) Preliminary design, mated cost figures. Some of the most significant will be dis- 4) Final design. These phases are described in Table 2.1 and cussed further in detail later in this chapter: the available shown in Figure 2.1. To ensure the applicability of terms SHAs project information at the time of estimate preparation; the from across the country participated in a vetting of the project nature and magnitude of risks affecting the project cost; and development phases described in the Report 574. Typically, a the project complexity, project size, and timing. SHA will prepare project cost estimates during each of the four Contingency planning is a critical part of the estimate phases of project development. preparation process. It is the estimate process component Figure 2.1 depicts an overlapping approach in the Planning, that seeks to address uncertainties inherent to each cost es- Programming, and Preliminary Design phases. This overlap- timate. As a standard practice SHAs often provide some ping indicates the cyclical nature of these phases as transporta- form of contingency in their cost estimates by allocating tion agencies identify needs and define projects to address predetermined percentages of project cost as contingency or those needs. by performing some level of qualitative or quantitative risk assessment to determine risk impact on project cost and to 2.3 Cost Estimating and Cost thereby establish a contingency amount. This guidebook fo- Management Definitions cuses on risk management practices and risk analysis tools to better estimate and control project cost. Cost control is A key to implementing any new process or procedure accomplished through consistent and accurate estimates, within an agency is to have a common vocabulary for the and through proper contingency planning and manage- process. The following definitions were developed with the ment. In this chapter, risk practices are considered within intention of developing a common vocabulary and set of the context of the project development phases common to practices that promote learning and the exchange of new state highway agencies, cost estimation and cost manage- tools, ideas, and innovations relating to cost estimating and ment processes, and project complexity. cost management. Definitions for risk management are

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8 Table 2.1. Development phases and activities (Anderson and Blaschke 2004). Development Phases Typical Activities Purpose and need; improvement or requirement studies; environmental Planning considerations; right-of-way considerations; schematic development; public involvement/participation; interagency conditions. Programming Environmental analysis; alternative selections; public hearings; right-of-way (a.k.a. scoping, impact; design criteria and parameters; project economic feasibility and definition) funding authorization. Right-of-way development; environmental clearance; preliminary plans for Preliminary Design geometric alignments; preliminary bridge layouts; surveys/utility locations/drainage. Right-of-way acquisitions; PS&E development final pavement and bridge Final Design design, traffic control plans, utility drawings, hydraulics studies/final drainage design, final cost estimates. provided in Chapter 3. The definitions rely heavily on published engineering, cooperative agreements, right-of-way, environ- definitions from estimating and risk management standards to mental, utilities, preconstruction, and construction work. highway-specific risk management and cost control.1 Contingency. An estimate of costs associated with iden- tified uncertainties and risks, the sum of which is added to the 2.3.1 Cost Estimating Terms base estimate to complete the project cost estimate. Contin- Allowance. An amount included in the base estimate for gency is expected to be expended during the project develop- items that are known but the details of which have not yet ment and construction process. been determined. Cost Estimate. A prediction of quantities, cost, and/or Base Estimate. The most likely project estimate, exclusive price of resources required by the Scope of a project. As a pre- of project contingency, for known costs for all known design, diction, an estimate must address risks and uncertainties. The cost estimate consists of the base estimate for known costs associated with identified uncertainties and risks. 1 Over 500 definitions were reviewed to create the concise list of 40 definitions for this Guidebook. These referenced definitions have been integrated and mod- Cost Estimating. The predictive processes for approximat- ified to specifically support highway project development processes, to incorpo- rate common transportation language, and adhere to current agency cultures. ing all project costs such as design, engineering, cooperative The following references were used to support definition development: agreements, right-of-way, environmental, utilities, precon- Association for the Advancement of Cost Engineering International (2007). struction, and construction work. As a predictive process, Cost Engineering Terminology: AACE International Recommended Practice estimating must address risks and uncertainties. Project cost No. 10S-90. AACE International, Morgantown, PA. Association for the Advancement of Cost Engineering International Risk estimating generally involves the following general steps: Committee (2000). "AACE International's Risk Management Dictionary," determine estimate basis, prepare base estimate, determine risk Cost Engineering Journal, Vol. 42, No. 4, pp. 28-31. and set contingency, and review total estimate. Caltrans (2007). Project Risk Management Handbook. Report of the Califor- nia Department of Transportation (Caltrans), Office of Project Management Process Improvement. Sacramento, CA. Estimate Basis. A documentation of the project type and Department of Energy (2003). Project Management Practices, Risk Manage- scope for each cost estimate, including items such as drawings ment, U.S. Department of Energy, Office of Management, Budget and Evalua- that are available (defining percent engineering and design tion, Office of Engineering and Construction Management, Washington, D.C. Molenaar, K.R., Diekmann, J.E. and Ashley, D.B. (2006). Guide to Risk As- completion), project design parameters, project complexity, sessment and Allocation for Highway Construction Management, Report unique project location characteristics, and disciplines re- No. FHWA-PL-06-032, Federal Highway Administration, Washington, D.C. quired to prepare the cost estimate. Project Management Institute (2004). A Guide to Project Management Body of Knowledge (PMBOK Guide), The Project Management Institute, Newton Square, PA. Range (or Stochastic) Estimating. A risk analysis tech- Washington State Department of Transportation (2006). Cost Estimate Vali- nology that combines Monte Carlo sampling, a focus on the dation Process (CEVP) and Cost Risk Assessment (CRA), Washington State few key variables, and heuristics (rules-of-thumb) to rank Department of Transportation, Olympia, WA. Wideman, R.M. (1992). Project and Program Risk Management: A Guide to range of the total project estimate and to define how contin- Managing Project Risks. Newton Square, Pennsylvania. gency should be allocated among the critical elements.