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Factors Other Than Estimates That Contribute to Budget-Related Problems As noted in the Introduction (Chapter 1), Con- gress appropriates money for major construction projects (which include both the construction of new facilities and the renovation or alteration of existing facilities) on the basis of estimates submit- ted by the responsible agencies. Congress holds the agencies accountable for completing the needed construction work for the amount of money author- ized. When for some reason a project cannot be completed with available funding, agency manag- ers are subject to congressional criticism, and often the additional funds needed are taken from other projects. In the event of a problem, many agency manag- ers and members of Congress tend automatically to blame a faulty estimate. Lois is a natural and logi- cal reaction since there is a direct and obvious link between estimates and bids. Indeed, this study is a reflection of the concern of the agencies about the accuracy of their budges estimates.* However, while there is certainly room for improvement in budget estimating per se (as discussed in the next two chapters of the report), inaccurate budget estimates are not the sole cause of budget-related problems on federal projects. In fact, they are probably not the major cause. As discussed in Appendix A, and demonstrated especially by Figure Am, there are a variety of factors causing budget-related problems *A budget estimate is an estimate on which a request to Congress for funding is based. As noted previously, it can range from a pre-progranuning estimate to a design development estimate, depending on the agency. 7 on federal construction projects. Thus the commit- tee has included in this report a discussion of fac- tors other than the accuracy of early estimates that affect whether a construction project is completed within budget. This chapter includes a brief review of the de- sign and construction process, a discussion of the keys to a successful project, and committee sugges- tions on some procedural steps agencies might take to help improve their success rate with construction projects. ELEMENTS OF THE CONSTRUCTION PROCESS The ultimate goal of federal agencies when pro- cunng construction is to acquire cost-effective fa- cilities that meet the needs of the users within the budget available (i.e., the amount authorized by Congress). However, major construction projects are complex undertakings that involve many differ- ent individuals and organizations and a number of separate steps. Mistakes made in any step by any participant may result in budget-related problems. The process by which facilities are acquired dif- fers depending on the owner and the type of facility involved. For example, as discussed in Appen- dixes B and C, the processes followed by the Naval Facilities Engineering Command and IBM Corpo- ration are quite different. However, regardless of the owner, the process typically involves a number of distinct sequential steps culminating with the completion of construction and the recycling of

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8 cost data, as discussed below and as depicted in Figure 1. Figure 1 shows the typical construction cycle; the arrow becomes broader to illustrate Hat both the amount of money being spent and the amount of information available on a project increase with each succeeding step in the process. The figure also illustrates that the process involves a series of steps and that the successful completion of a proj- ect is as dependent on Be early steps as the later steps. It should be noted that Figure 1 shows the traditional sequential construction process, which is used for the overwhelming majority of federal projects. The process can be shortened by "fast- tracking," which means that contracts covering the early phases of construction are awarded and con- in ~ as, Id a) ._ z a) n . - ° Ins .o O ~ .L -,_ ~ a) ~ co 3 a) fir a) o ~ a, ._ a_ ~ Cal a) E a) ·— u' ~ ' 0 _ Q ~ _~ C) o EARLY COST ESTIMATES FOR FEDERAL CONSTRU~IONPROJE=S struction is undertaken before the entire design is completed. Identification of User Needs Id federal agencies and other large organizations with continuing construction programs, the fast step in the facilities acquisition process usually is the identification of a facilities need by an operational element of the organization (i.e., a user). Occa- sionally, a facility requirement may originate at a high level in the organization; however, responsi- bility for administering such projects ordinarily is assigned to an operational element. Most large organizations have a formal proce- dure by which users notify higher management of - a) a) r_ ._ ~ a) a) a) 0 ~.E E ~ " -° a, a) E _ _ _ ~~ ~ ~ o O In ° > ~ ~ ~ a) O) Q O) E ~ ~ ~ Q O I.) O ~ O a' ° a) (I, ~ a' ~ In a) ._ In CO ~ 5 _ ._ Q O a) ::' Cal o o (a) C] O O . _ 4— ~ O' 3 Q - o o <1) ~ ~ _ a) 1 r i Planning Design & Construction Process _ ~ 1 1 1 . ~ 0 . o . _ In o \ 1 1 \! 1 ~ 1 \ *_ In o c: c, In ~ ~ / co It co o Construction Cost Data Bases Figure 1 The Design and Construction Process BILE—~,~—~ or,_ V, :~ ~—~ ~ i2hP'~ A_ ~r,,.~_,,r~ ; ~ C' . ~ Cost Information A ._ it' ,~, ,:,". ,~_

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FACTORS OTHER TNANESIIMATES THAT CONTRIBUTE TO BUDGET-RELATED PROBLEMS He nature and magnitude of their needs for new facilities or for alterations to existing facilities. As a minimum, users ordinatily are required to indi- cate the size and type of facility needed and the reason for the need, and to provide an estimate of the approximate cost of the project (a pre-program- ming estimate). Preliminary Screening of User Requests In federal agencies, as discussed in Appendix B. the sum of user requests for funding for facilities each year usually far exceeds the amount of money available. A similar situation exists in most private organizations. Consequently, most federal agen- cies and private owners have a procedure for screen- ing user requests early in the facilities acquisition process to eliminate proposed projects that are not fully justified, not needed immediately, or not in accord with the long-range plans of the owner. This screening process avoids investing time and money in projects that have little prospect of near-term funding. Development of a Program of Requirements Once a project has been tentatively selected for inclusion in an owner's construction program, the next steps are to translate the user's statement of need into a detailed technical description of the facility to be constructed (or the alteration work to be performed) and to develop an estimate of the cost of the project. These steps in the process frequently are referred to collectively as program- ming. As noted in the preceding chapter, some federal agencies and many private owners use programs of requirements and associated estimates to seek an- proval of and funding for their projects from the appropriate authority (e.g., Congress in the case of a federal agency and top management or the board of directors in the case of a private company). Many federal agencies, however, do not do this because they are required by Congress to complete at least 35 percent of the design for a project before includ- ing it in a request for construction money.* *Federal agencies follow different procedures because their funding requests are reviewed by different congres- sional committees, each of which establishes its own rules. 9 Development of a Concept/Schematic Design The first task of an A-E firm that is awarded a design conuact is to develop preliminary design concepts that meet the criteria for the project and to prepare estimates of the cost of different concepts. Then the design firm and the user evaluate the alternatives and select the one that best responds to the program and budget. If the deadline for submit- ting funding requests to Congress is imminent, agencies may use a concept/schematic estimate as ehe basis for a request for a construction appropria- tion. Otherwise, the design effort is continued and the budget request is based on more complete plans and specifications and design development esti- mate~s. Agencies are most likely to treat program esti- mates as fairly fixed when they have been used to apportion a finite amount of money among a num- ber of projects. In such situations, if the cost of one project increases, an agency must compensate in some way, for example, by cutting the scope of the project or cutting the cost of other projects, which is often a difficult task. Development of Contract Documents and a Final Estimate After the design development estimate has been approved by the user, the design organization be- gins development of contract documents (i.e., work- ing drawings and specifications). These documents, when completed, are used for procurement of the construction and become part of the construction contract." In the course of preparing plans and specifications, the design organization periodically develops cost estimates to check whether the de- sign is still within budget. If an estimate indicates that construction costs will be over budget, the designer and/or the owner can take various actions to reduce costs, such as performing a value engi- neering analysis, eliminating some nonessential items, making some items bid alternates, or reduc- ing the size or level of quality of the facility. Esti- mates based on relatively detailed plans and speci- fications are called construction document estimates. Of an agency is uncertain about congressional approval of a project, it might defer initiation of work on detailed plans and specifications until funding for construction is assured.

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10 The final estimate that is prepared when the plans and specifications are complete is a 100 percent construction document estimate; it is often referred to as the "government estimate." Award of a Construction Contract Some private owners routinely select a construc- tion contractor and award a construction contract before the plans and specifications for a project are complete (e.g., see Appendix C). Other owners, including some federal agencies, occasionally award construction conuacts on the basis of incomplete plans and specifications when there is a compelling need to save time. However, most owners, and certainly most federal agencies, ordinarily defer selection of a construction contractor until com- plete plans and specifications are in hand. Many private owners routinely select construc- tion contractors through negotiation.* However, most federal agencies and a significant number of private owners usually select construction contrac- tors on the basis of competitive bids. The contract is awarded to the lowest bidder who is "respon- sive" (i.e., complies with the terms of the invitation for bids) and "responsible" (i.e., is capable of per- forming the work). If the lowest bid from a responsive and respon- sible bidder exceeds the amount budgeted for the project by more than a certain amount stipulated by Congress (e.g., the lesser of 20 percent or $1.5 million for military projects) a contract cannot be awarded, and the project must be re-bid, usually after the design has been modified to reduce costs. Agency managers try very hard to avoid such situ- ations because they are disruptive and embarrass- ing and because design changes made to reduce costs are often ill-considered. KEYS TO A SUCCESSFUL PROJECT Success in construction can mean m1lerent things to different people. An architect, for example, may consider any project for which he receives the praise of his client and his fellow practitioners to be suc- * Both federal agencies and private owners procure con- struction in a variety of ways that are too numerous and varied to discuss here; for example, owners sometimes use "construction managers" in lieu of a general contrac- tor to coordinate and manage projects. Construction managers perform marry of He functions of a general contractor, but on a professional services basis. EARLY COST ESTIMATES FOR FEDERAL CONURU=IONPROJE=S cessful. A real estate developer ordinarily meas- ures success in terms of the return on his invest- ment. Most construction contractors consider a project to be successful if it runs smoothly and is profitable. The agencies that are responsible for procuring federal facilities generally have three cri- teria for measuring the success of a project: (1) does the completed facility meet the needs of the user, (2) was the project completed on time and within budget, and (3) did the project run smoothly without excessive change orders or claims. Inas- much as this report is being prepared under the Federal Construction Council Program, the com- mittee has adopted the success criteria of the fed- eral agencies. As discussed above, many individuals and or- ganizations are involved in construction projects and countless decisions and actions are taken in the course of a project, all of which contribute to its success or failure. However, the committee be- lieves that the success of a construction project (as defined by federal construction agencies) is espe- cially dependent on five factors: (1) a clear and accurate statement of users needs, (2) accurate esti- mating, (3) effective management of the design process, (4) well-prepared and coordinated construc- tion documents, and (5) an effectively executed construction effort. While a deficiency in any one factor will not necessarily ensure failure, it will certainly increase the likelihood of difficulties. The second of the five factors (accurate estimat- ing) is covered in detail in subsequent chapters. The other four factors are discussed below. Accurate Definition of User Needs Inasmuch as the ultimate objective of a con- struction project is to obtain a facility that satisfies the needs of one or more user organizations, a clear understanding of the needs of prospective users obviously is one factor in the success of a project. Until an accurate statement of user needsT has been developed, any design work performed on a project is likely to be of little value, and in the absence of compensating errors, estimates based on erroneous assumptions about user needs inevitably will be wrong. The importance of having an accurate statement of user needs is recognized by most owners who fAs noted previously, statements of user needs are some- times called architectural programs, programs of require- ments, or simply programs.

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FACTORS OTHER THAN ESTIMATES THAT CONTRIBUTE TO BUDCET-REI~TED PROBLEMS have continuing construction programs. It is the practice of most federal agencies, for example, to develop a project brochure that includes an analysis of user needs for each major construction project. Nevertheless, owners in general and federal agen- cies in particular continue to experience difficulties with construction projects due to incomplete, ~nac- curate, or insufficiently detailed statements of user needs, as discussed in two recent reports prepare under the Federal Construction Council Program (see Committee on Improving Preliminary Plan- ning/P~gramming in the Building Delivery Cycle, 1986, and Standing Committee on Contract Man- agement, 1982~. As noted in the Introduction and as discussed in Appendix A, the agency liaison members of the committee estimated that poor defi- nition of user needs has been a contributing factor about 60 percent of the time when agencies have experienced budget-related problems. The committee believes that federal agencies skill experience problems caused by inaccurate state- ments of user needs, in spite of their good inten- tions, for one or more of the following reasons: · Insufficient time to perform a proper analysis. The budget preparation cycle in the federal govern- ment requires agencies to submit budget requests by specific dates. If a project is not in the proposed budget for a particular fiscal year as of the cut-off date, chances are it will have to be deferred until the following year. To avoid such situations, a.gen- cies sometimes take shortcuts in various phases of the process, including the all-important user-needs- definition phase. · Inadequate analysis. Developing an accurate statement of user needs for a construction project can be a very difficult and time-consuming task. Sometimes it is not done at all, but more often it is done poorly. It is a difficult task because it requires a thorough knowledge of both construction tech- nology and the user's operations. Since a knowl- edge of both areas is not generally found in one individual, the development of a statement of needs must be a collaborative effort involving representa- tives of the user organization and~the construction agency, with the latter serving to translate the func- tional needs of the former into specific facilities requirements. The problem is that, in many cases, neither of the parties fully understands the lan- guage and concerns of the other. Consequently, there are numerous opportunities for miscommuni- cations, and the errors that result may not be no- ticed until detailed drawings have been prepared, 11 or possibly even until the facility is under construc- tion or occupied. · -Changes in the needs or wishes of the using organization. Even when ample time and talent have been devoted to developing an accurate state- ment of user needs, the construction agency may still face problems since users can and frequently do change their minds during design or even during construction. Such changes can be caused by vari- ous factors, for example, changes in personnel in the user organization, changes in technology, changes in the basic mission of the facility in ques- tion, or changes in the wishes of an important offi- cial in the user organization. Sometimes changes are necessary and/or desirable; sometimes they are merely arbitrary. Regardless of the reason for user- dictated changes, they serve to invalidate previ- ously developed statements of user needs, which can have a major impact on the design and cost of a project. Consequently, agencies try to limit nones- sential user-requested changes once an agreement has been reached. Effective Management of Design As noted previously, when the low bid for a project exceeds the amount of funding available, those responsible for the project tend to attribute it to an inadequate budget. However, the problem may be the result of an overly elaborate or unduly conservative design. That this is often the case is demonstrated by the fact that in high-bid situations, budget problems frequently are resolved by rede- signing the project to cut costs and/or by making certain features optional bid items, as discussed in Appendix A. Such steps usually result in lower bids, and a contract award; however, when a project is read- vertised, users often complain that the actions taken to reduce costs were ill-considered and that the quality or usefulness of the facility has been sacri- ficed excessively. Unfortunately, such complaints are often valid. The problem is that when bids are too high, design firms usually are required to do redesign work at no additional cost to the client. Naturally, design firms want to minimize the amount of work performed in such circumstances; conse- quently, they tend to deal with high-bid situations by expedient means. It is generally agreed that it is much better to design a project to stay within funding limits from the start than to cut costs in a completed design.

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12 The concept of controlling costs during design is often referred to as 'designing to budget." In es- sence, with the designing-to-budget concept, budget estimates are treated as design criteria or design parameters rather than mere predictions of what the low bid will be when the design is completed. The designing budget concept can work be- cause there are an infinite number of ways of com- bining building materials, products, and systems to create a building or facility to satisfy a particular need. Even with constraints imposed by the size and shape of the building site and other factors, the needs of the owner may be satisfied by a variety of different designs whose costs cover a broad range. When designing to budget, the designer uses the budget not merely as a constraint but also as an indicator of the level of quality, permanence, and sophistication desired. However, designing-to-budget is not easy to apply. Users always want the largest, most elegant facility possible for Be available funding, and de- signers are naturally inclined to try ~ comply with a clients wishes whenever possible. This inclina- tion is reinforced by the widespread but erroneous belief that expensive buildings are well-designed buildings. Consequently, an upward pressure on cost is inherent in the design process and designers can resist it only if they have a very good knowl- edge of construction costs and exercise great re- suaint and discipline. Therefore, federal agencies need to consider cost coning and management ca- pabilities when selecting A-E design firms. How- ever, it is probably unrealistic and unfair to expect a private design firm to assume the full burden of controlling costs. Federal construction agencies also need to play an active role in managing the design process if the designing-to-budget concept is to succeed. Well~prepared Construction Documents A satisfactory project also depends on having a well-prepared and coordinated set of construction documents (drawings, specifications, and general contract provisions). Clear and accurate construc- tion documents are essential for controlling con- s~uction costs because construction contractors invariably react to contract ambiguity either by increasing their bids to cover their uncertainty about the precise nature of products or services desired or by submitting numerous requests for contract changes and extra money after the contact is awarded. EARLY COST ESTIMATES FOR FEDERAL CONSTRUCTION PROJECTS Effective Construction Execution Most federal construction is performed by pri- vate construction firms under fixed-price contracts, which include detailed drawings and specifications describing the work to be done. It is often assumed that once a contract has been awarded, an agency can stop worrying about budget overruns and de- sign problems and instead concentrate on checking to ensure Bat the contractor satisfies the terms of He contract. This is an erroneous and dangerous assumption. In fact, the construction phase is sim- ply the last and by far the most costly step in a long process aimed at acquiring a facility to meet the needs of the expected occupants within a budget established by Congress. Even with excellent ulan- n~ng, programming, designing, estimating, and conuacting, situations can occur during the con- struction phase that in the absence of good manage- ment by an agency can result in cost overruns and/ or construction of an unsatisfactory facility. Among the developments that can cause problems unless handled properly are requests for change orders by the contractor or the user, poor supervision and management by the contractor, unexpected condi- tions at the construction site, and value engineering proposals from the contractors. The committee is convinced that agencies must pay careful and continuing attention during the entire construction phase to bring a project to satisfactory completion within the budget. COMMITTEE SUGGESTIONS FOR IMPROVING THE PROCESS The central message of this section is that the design and construction process is complex and involves many individuals and organizations, all of whom play an important part in the success of a project. The committee believes that a successful construction project depends on good construction documents, which are the end product of the design process. The success of the design process in turn depends on having an accurate statement of user needs, an accurate budget estimate, and good proj- ect management. Finally, the process must be sup- ported by the policies, procedures, and personnel of the owner (the responsible construction agency in the case of federal projects). In federal agencies, the most important consid- erations are policies, procedures, and personnel because, in a sense, they fonn the foundation of the entire process. In addition, in most federal agen-

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FACTORS OTHER THAN ESTIMATES THAT CONTRIBUTE TO BUDGET-RELATED PROBl~MS cies they are the only factors under the direct con- trol of agency managers since detailed aspects of the process usually must be delegated to lower echelons in the organizations or to outside fogs. The various federal agencies operate so differ- ently and have such different missions that the committee cannot comment on their policies and procedures in detail. However, the committee can offer the following general comments on the subs ject. Involvement of Federal Personnel In recent years federal agencies have come to rely heavily on the private sector to perform most of the work associated with the design and con- s~uction of federal facilities, and in general private fogs have done a satisfactory job for the agencies. However, the committee believes there is a limit to how far the policy of relying on the private sector can or should be earned. The committee believes, for example, that fed- eral agency personnel must be directly involved from the beginning in translating user needs into facility requirements and in developing program estimates. The committee notes Hat most large private owners rely on their own personnel for pro gramming work. These owners apparently have concluded that their own personnel know more about their operations and related facilities needs than do professionals from the outside. Similarly, the committee believes that govern- ment personnel must be directly involved in over- seeing the design and construction of federal facili- ties. Many questions arise during both the design and construction phases Hat can only be answered by responsible government officials who are thor- oughly familiar with the particular project. To the committee's knowledge, most federal agencies recognize the importance of involving their employees in the planning and management of construction projects. However, the committee also Is aware that agencies are under continuous pres- sure to reduce staff levels and to rely on the private sector as much as possible, and the committee be- lieves that some federal agencies might in the fu- ture be tempted to reduce federal employee in- volvement in their design and construction pro- grams below the minimum levels needed for effec- tive control. To help preclude this, agencies must establish a policy that recognizes the need for some minimum level of federal employee participation in the process. 13 Procedures to Ensure Accurate Statements of User Needs As discussed previously, there are two proce- dural matters that seem to be causing budget-re- lamd problems for federal agencies: (1) failure to provide sufficient time in the planning and budget- ing process for proper analysis of user needs, and (2) failure to obtain the agreement of the user or- ganization on statements of user requirements that are used as the basis for design. The importance of proper analysis of user needs and avoidance of last minute changes in user re- quirements are generally recognized by federal agencies, as discussed previously. Therefore, the fact that federal agencies still sometimes fail to provide sufficient time for analysis of user needs or to get the formal concurrence of users on state- ments of need suggests that there are limitations in the facilities planning process of federal agencies that sometimes preclude them from carrying out the steps in the process as thoroughly as they would like. In all likelihood, such limitations are inherent in He facilities planning processes of most large organizations and the problems they cause cannot be avoided entirely. The committee can only sug- gest that federal agencies emphasize to all person- nel involved with the design and construction proc- ess the paramount importance of developing accu- rate statements of user needs. The planning and management of a construction program require considerable time and talent. They cannot be performed by inexperienced personnel and they cannot be performed without careful thought. In order to maintain an adequate staff of experienced professionals to plan and manage their construction programs, agencies must continually recruit, train, and reward personnel, just as most large private corporations do. Skimping on the number and/or grade levels of construction pro- gram planners, estimators, and managers inevitably shows up in budget-related problems. Agencies need good personnel of all types, but they have a special need for estimators with good conceptual skills to review estimates prepared by others. Good conceptual estimators are of great value because they can determine cost impacts and pinpoint cost problems much more quickly than other estimators. However, individuals with such talents are rare and in great demand, and agencies need to make special efforts to attract, main, and keep ~em.

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