Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction (2007)

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88 Introduction This Guidebook is intended to assist in creating a strategic change in agency estimation and cost management approaches. It aligns strategies with identified problem areas and can be used to create organizational structures for achieving consistent and accurate project estimates. Additionally, it presents detailed methods and tools to support the strategic approaches. While individual strategies, methods, and tools should be implemented, they should not be used in an “al la carte” fash- ion. Implementation must occur within the context of a greater vision for integrating cost estimation practice and cost estima- tion management processes across all agency programs and with agency consultants. Although the estimation approach transformation can begin at any organizational level, ultimately all levels must partici- pate to create a cultural change in addressing the challenges of cost estimation practice and cost estimation management throughout planning and the project development process. Table 8.1 summarizes the implementation goals at the orga- nization, program, and project levels. Some of the goals may require organizational change, and all of the goals will require a commitment of resources. This chapter describes each of the implementation thrusts in Table 8.1 and concludes with an integrated approach to their implementation. Step 1: Implementation of Strategies— Organizational Change Successful control of project cost escalation may require a strategic change in the organizational approach that many state highway agencies have toward cost estimation practice and cost estimation management. Project cost estimation practice and project cost estimation management should be viewed as inter- dependent processes that span the entire planning and devel- opment process. Chapter 3 of this Guidebook presented eight strategies that were developed by observing and synthesizing practices from highway agencies around the country: • Management strategy—Manage the estimation process and costs through all stages of project development; • Scope and schedule strategy—Formulate definitive pro- cesses for controlling project scope and schedule changes; • Off-prism strategy—Use proactive methods for engaging external participants and assessing the macroenvironmental conditions that can influence project costs; • Risk strategy—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 strategy—Apply appropriate delivery methods to better manage cost because project delivery influences both project risk and cost; • Document quality strategy—Promote cost estimate accu- racy and consistency through improved project documents; • Estimate quality strategy—Use qualified personnel and uniform approaches to achieve improved estimate consis- tency and accuracy; and • Integrity strategy—Ensure that checks and balances are in place to maintain estimate accuracy and to minimize the impact of outside pressures that can cause optimistic biases in estimates. The implementation of these strategies will require a long-term commitment to change. Implementation should be approached as a continuous process of assessing, planning, assigning responsibility, and measuring performance. Honest assessment of the strategies is imperative at the beginning of this process. Planning requires a thoughtful approach to staffing and resource commitment in those areas that need the most improvement. The outcome of assessment and planning is the assignment of responsibility—executive managers must champion the implementation of specific strategies. Finally, C H A P T E R 8 Implementation

89 the party that is assigned the responsibility for implementa- tion should measure the performance of the implementation effort and periodically report on the status of progress. The process will create a loop of continuous improvement, as depicted in Figure 8.1. Establish Steering Committee An effective initial effort in the implementation process is to form a cross-cutting steering committee with mem- bers from all affected disciplines. This steering committee should be familiar with the Guidebook and with current operating practices within the state highway agency. The committee’s charge is to examine current practice in detail and guide the implementation of new strategies. This includes three of the activities discussed previously: assessing, plan- ning, and assigning of responsibilities. The last section in this chapter provides an integrated approach for the committee to use in its charge. A list of possible steering committee members was devel- oped from steering committee experiences in Connecticut, Florida, Georgia, and Virginia: • Program Manager, • State Construction Engineer, • Director of Project Development, • Director of Information Technology, • Transportation Planning Administrator, • Value Engineering Coordinator, • Director of Preconstruction, • District/Region Preconstruction Engineer, • State Estimates Engineer, and • Senior Project Manager. In Connecticut, design consultants often prepare project estimates and have a place on the committee. Other commit- tee members included representatives from other areas in the state highway agency, such as maintenance, utilities, traffic engineering, right-of-way, real estate services, and environ- mental. External partners included the FHWA, local govern- ments, MPOs, counties, cities, and local governments. Conduct Agencywide Workshop To launch this effort, an agencywide workshop on the subject of cost estimation practice and cost estimation man- agement can be very useful in identifying problems and understanding the roles of the many disciplines within the state highway agency structure that support efforts to accu- rately estimate project cost. The Minnesota Department of Transportation (MnDOT) organized such a workshop on the subject and found it to be extremely beneficial for guiding a proposed agencywide imple- mentation effort that includes issues addressing cultural change within MnDOT. The MnDOT workshop, which was called a peer exchange, involved both internal agency employees and invited peers from other state highway agencies. The format of Implementation Thrusts Implementation Focus Implementation Goals Organization Level Strategies Implement strategies across the agency: Assess current status of strategy implementation Plan for long-term implementation Assign responsibility for implementation Measure results of implementation Program Level Methods Implement methods across programs: Assess current status of method implementation Develop policies and procedure manuals Develop training and education Project Level Tools Implement tools across projects: Assess current status of tool implementation Determine subject matter experts Conduct pilot studies for new implementation Develop or revise agency-specific tools Table 8.1. Implementation goals. Assessing Planning Assigning Responsibility Measuring Performance Figure 8.1. Strategy implemen- tation process.

90 the workshop loosely followed the organization of this Guide- book and is outlined as follows: • Introduction – Strategic goals of cost estimation practice and cost esti- mation management – Presentations and perspectives from state highway agency peers and program managers • Discussion of current and available strategies, methods, and tools – Planning – Programming and preliminary design – Final design • Discussion of strengths, weaknesses, opportunities, and threats • Discussion of strategies for a path forward The steering committee and workshop examples are pro- vided to demonstrate two initiatives that will assist in the implementation of estimation strategies at the organiza- tional level. The key is to address the problem in a systematic manner. Step 2: Implementation of Methods— Programmatic Change The second implementation step involves change at the program level with the institution of methods. Chapters 5, 6, and 7 of this Guidebook describe the methods that support the strategies for producing consistent and accurate estimates. This step involves an assessment of current practices, devel- opment of policies and procedures, and development of education and training. Assess Current Practices The first task for implementation of the methods is an assessment of the current state of practice within the state high- way agency. Table 8.2 can be used to assess an agency’s current use of the methods described, for example, in Chapter 5 of this Guidebook. The table should be used in a group setting to assess the current application of methods. Develop Policies and Procedures The assessment of current methods will provide a frame- work for the development of policies and procedures concern- ing cost estimation practice and cost estimation management. As a reminder, this research discovered that many agencies did not have policies or estimation manuals that specifically address issues that impact estimate accuracy. Some agencies did have policies that were very compartmentalized within specific program areas, such as long-range planning or final engineering estimates (PS&E), but these policies did not include a systems approach to integrating these program areas. It is imperative that policies and procedures specifically address the issue of cost estimation and cost management across the entire planning and project development process. The following list of items should be considered in the development of cost estimation and estimation management policies and procedures. The list is a compilation of documents and procedures provided by state highway agencies during this Method Currently in Use Comments on Future Implementation Budget Control Buffers Communication Computer Software Conceptual Estimation Document Estimate Basis and Assumptions Delivery and Procurement Method Estimate Review—External Estimate Review—Internal Identification of Risk Identifying Off-Prism Issues Project Scoping Recognition of Project Complexity Right-of-Way Risk Analysis Table 8.2. Assessment of planning methods.

research. While the list is not intended to be comprehensive, it can be used as a starting point for the development of policies and procedures: • Project scope definition and estimate basis, • Project baseline definition, • Estimate timing/milestones, • Scope change process, • Project cost containment, • Communication of estimates, • Cost risk assessment process, • Application of contingency, • Estimate quality control and quality assurance, • Effects of inflation and year-of-construction costs, • Appropriate estimation methods, • Available estimation tools, and • Historic data maintenance and use. Develop Education and Training Cost estimation education and training are a critical com- ponent in achieving consistent and accurate estimates. Engi- neers at all phases of project development should be educated about the pitfalls of project cost escalation and the strategies, methods, and tools available to address the issue. Education and training should be developed from an organizational per- spective, but it will likely need to be delivered at the program level because of the varying skill sets of engineers within the different agency programs. For example, as new conceptual estimation software is developed, education and training will be needed for the planning and programming staff. Similarly, if new software is developed for unit price estimation, edu- cation and training will be needed for the planning and esti- mation staff. However, if a new risk-based methodology for determining the contingency included in estimates is deployed throughout project development, implementation of this methodology will require education and training components across a broader cross section of disciplines. Because, in many states, consultants prepare project esti- mates, there is also a need to train consultant engineers con- cerning the state highway agency’s cost estimation standards and procedures. Step 3: Implementation of Tools— Project Change The third level of implementation involves the application of tools at the project level. Tools should be developed and evaluated on a trial basis before they become agency practice or are incorporated into agency policy. The majority of tools described in Appendix A were developed by state highway agencies and have been tested on projects. Assess Current Practices Similar to the implementation of strategies and methods, the first activity in the implementation of tools involves an assessment of the agency’s current practices. Table 8.3 pro- vides an example for how to assess tool use and identify the subject matter experts with respect to the tool within an agency. The table is based on a partial list of methods and tools for the planning phase described in Chapter 5 of this Guidebook. The group that completes Table 8.3 should represent per- spectives from all project staff disciplines. For the full poten- tial benefit of this approach, the table should be used in Method/Tool Examples of Use Subject Matter Experts Comments on Future Implementation Budget Control B1.1 Budget by Corridor B1.2 Constrained Budget B1.4 Summary of Key Scope Items (Original/Previous/ Current) B1.5 Variance Reports on Cost and Schedule Buffers B2.1 Board Approvals B2.2 Constrained Budget B2.3 Management Approvals Additional Methods Additional Tools Table 8.3. Assessment of planning phase tools. 91

92 conjunction with a detailed review of the tools in Appendix A and the methods described in Chapters 5 through 7. Rather than simply noting a yes or no answer for the assessment of tools, the table suggests noting examples of use. This is nec- essary because the detailed application of the tools can vary from agency to agency and even within an agency. For example, the tool B2.3, “management approvals,” can take many dif- ferent forms throughout an agency. The key in this example would be to note where the management approvals exist and discuss whether there is a need for this tool in other places in the planning and project development process. Where tools are already in use by an agency, it is helpful to identify a subject matter expert. Subject matter experts can also be assigned to investigate and develop tools that are not currently in use. Comments for future use should describe whether the tool has potential for implementation and how the agency should begin to implement the tool. Test New Tools The adoption of new estimation tools, or the revision of existing estimation tools, should involve testing and verifica- tion of the tools’ effectiveness. The consequences of imple- menting inappropriate tools or tools that do not support estimate consistency and accuracy can be significant in terms of cost and schedule impacts. Two methods that experienced estimators often use when implementing new tools are test- ing new tools in parallel with existing tools and conducting pilot studies on appropriate projects. For example, if an agency wishes to implement new con- ceptual estimation software, it might first test the software by running it in parallel with the existing method to deter- mine if the software will yield reasonable results. The agency can continue to run this software in parallel with their existing approach until consistent results are achieved and the staff is trained on the new software. If the change to this new conceptual estimation software is a significant depar- ture from the agency’s standard practices, it can consider implementation through a formal pilot study. The pilot study should be conducted on an appropriate project, and the study should produce an objective review of the soft- ware’s performance, benefits, deficiencies, and perspectives on future implementation. This effort will take time and resources. Develop Agency-Specific Tools The final activity in project-level implementation involves the development of agency-specific tools. Each agency has its own unique cost estimation practice and cost estimation management needs because of issues as diverse as the phys- ical, geographic, and climatic conditions of the state or its local and stakeholder involvement. Some of the tools pre- sented in Appendix A were developed through national ini- tiatives sponsored by AASHTO or the NCHRP, but the majority of tools were developed within individual agencies. State highway agencies should strive to continuously develop and improve on their suite of cost estimation practice and cost estimation management tools. When, due to a specific project requirement, new tools are developed, agency man- agement should consider implementation of the tool across projects. Step 4: Integrating the System— A Strategic Plan Implement the Long-Term Strategic Plan The previous sections described the implementation of strategies, methods, and tools at the organization, program, and project levels. While each of these elements is individu- ally important, success will only be completely realized when the agency integrates these elements as a long-term strategic initiative. Table 8.4 provides an implementation framework to integrate the strategies, methods, and tools. The previously mentioned cost estimation practice and cost estimation management steering committee can use this framework and update it on a periodic basis, as depicted in Figure 8.1. Table 8.4 provides an example of the framework for only the man- agement strategy. A template for Table 8.4 can be found in Appendix B. The first column of Table 8.4 is simply a listing of the strate- gies. All eight strategies should be considered. If the steering committee believes that some of the strategies are more criti- cal than others, they may wish to delay immediate implemen- tation of certain lower-ranked strategies to conserve resources, but all strategies should be considered. The second column of Table 8.4 is a listing of performance improvement opportunities as generated by an assessment of the methods that need to be addressed. These opportunities should be generated from an evaluation of the agency’s cur- rent practices, as described in Table 8.2. When considered in conjunction with the strategies, the methods can be used as a checklist of performance improvement opportunities. For instance, Table 8.4 provides an example of an opportunity to improve estimate communications as part of an overall man- agement strategy. Chapter 5 provides the details on the vari- ous methods under that management strategy, one of which is communication. The third column of Table 8.4 provides for implementation steps through a strategic organization of tools. The list of tools should be assembled from an assessment of current agency practices, as previously described in Table 8.3. The list of tools

will form a set of implementation activities that provide an actionable path forward. For example, Table 8.4 provides a set of three tools that can be implemented to improve the communication of estimates. The fourth column of Table 8.4 provides for the assign- ment of responsible parties, which will most likely come from the subject matter experts identified in Table 8.3. This col- umn also provides for a noting of performance measures. While all tools should contribute to greater estimate consis- tency and accuracy, the performance measures should be spe- cific to each tool. For example, a performance measurement for the management plan tool could be the percentage of management plans that contain specific references to cost management procedures. Using a structure similar to that shown in Table 8.4 pro- vides a framework for implementing the strategies, methods, and tools described in this Guidebook. But agencies can develop alternate approaches or frameworks as dictated by their needs and resources. Summary This chapter illustrates a purposeful approach to integrating and implementing the concepts found in this Guidebook. The framework proposed in the previous section is one method for creating a strategic path forward with the goal of improving cost estimation practice and cost estimation management. There is no one correct path to success. Agencies can develop other approaches that use the methods and tools presented in this Guidebook. However, to repeatedly achieve accurate and consistent cost estimates, agencies should adopt a systematic approach to cost estimation practice and cost estimation man- agement that addresses cost escalation factors across the entire planning and project development process spectrum. Cost Management Strategy (Strategies) Performance Improvement Opportunity/Action (Methods) Implementation Steps (Tools) Responsible Party and Performance Measurement Management—Manage the estimation process and costs through all stages of project development. Communication—Develop estimate communications tools. Management plan—Develop a definitive management plan for the oversight of estimates. Public information plan— Develop a definitive public information plan for communicating cost estimates to the public. Training—Develop estimation training modules for all branches of the agency that communicate (1) the importance of accurate cost estimate communication and (2) uncertainty involved in cost estimation. Program or party responsible for implementation with performance measurement Continue with Strategies 2 to 8… Continue with opportunity/actions from methods… Continue with implementation steps from tools… Continue with assignment of responsibilities and measures… Table 8.4. Implementation framework. 93