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

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1State highway agencies face a major challenge in controlling project budgets over the time span between project initiation and the completion of construction. Project cost increases, as reflected by budget overruns during the course of project development, are caused by fac- tors that have been identified through a large number of studies and research projects. These factors, the root causes behind estimation problems, differ with project development phase and project complexity. This Guidebook presents cost estimation management and cost esti- mation practice approaches to address the root causes of cost escalation and to support the development of consistent and accurate project estimates. These approaches are aligned with project development phases and project complexity. The Guidebook provides appropriate strategies, methods, and tools to develop, track, and document realistic cost estimates dur- ing each phase of project development. A Strategic Approach Agencies will have to do more than simply institute changes in estimation practices if they are to achieve consistent and accurate estimates. Project cost estimation management and cost estimation practice should be viewed as interdependent processes that span the entire project development process. An analysis of estimation literature and exhaustive data provided by state highway agencies led to the development of eight global strategies to address state high- way agency estimation problems. These strategies focus on the critical causal factors behind project cost escalation and support the objective of consistent and accurate estimation: • Management strategy—Manage the estimation process and costs through all stages of project development; • Scope and schedule strategy—Formulate definitive processes 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 man- age cost because project delivery influences both project risk and cost; • Document quality strategy—Promote cost estimate accuracy and consistency through improved project documents; • Estimate quality strategy—Use qualified personnel and uniform approaches to achieve improved estimate consistency 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. S U M M A R Y Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction

In this Guidebook, these eight strategies are linked to over 30 recommended methods for implementing the strategies and to over 90 tools for executing specific methods. Keys to Success Disciplined cost estimation management and cost estimation practice should be applied in the context of the eight global strategies. This research has determined that 10 key principles— 5 cost estimation management principles and 5 cost estimation practice principles—must be focused on to ensure creation of consistent and accurate estimates. Each individual principle by itself can help improve cost estimation management and cost estimation practice. How- ever, maximum improvement of these two processes will only occur if the 10 key principles are incorporated into the agency’s business practices throughout the organization. The key principles, in prioritized order, are as follows. Cost estimation management: 1. Make estimation a priority by allocating time and staff resources. 2. Set a project baseline cost estimate during programming or early in preliminary design, and manage to this estimate throughout project development. 3. Create cost containment mechanisms for timely decision making that indicate when projects deviate from the baseline. 4. Create estimate transparency with disciplined communication of the uncertainty and importance of an estimate. 5. Protect estimators from internal and external pressures to provide low cost estimates. Cost estimation practice: 1. Complete every step in the estimation process during all phases of project development. 2. Document estimate basis, assumptions, and back-up calculations thoroughly. 3. Identify project risks and uncertainties early, and use these explicitly identified risks to establish appropriate contingencies. 4. Anticipate external cost influences and incorporate them into the estimate. 5. Perform estimate reviews to confirm that the estimate is accurate and fully reflects project scope. Challenges Implementing new concepts involves facing the challenges that accompany change. State highway agencies must consider several challenges when deploying this Guidebook: • Challenging the status quo and creating a cultural change requires leadership and men- toring to ensure that all steps in the cost estimation management and cost estimation pro- cesses are performed. • Developing a systems perspective requires organizational perspective and vision to inte- grate cost estimation management and cost estimation practice throughout the project development process. • Dedicating sufficient time to changing agency attitudes toward estimation and incorpo- rating the strategies, methods, and tools from this Guidebook into current state highway agency practices is difficult when resources are scarce. • Dedicating sufficient human resources to cost estimation practice and cost estimation man- agement beyond the resources that have previously been allocated to estimation processes. Meeting these challenges will ultimately require a commitment by the agency’s senior man- agement to direct and support change. The benefit of this commitment will be manifested in projects that are consistently within budget and on schedule and that fulfill their purpose as defined by their scope. This benefit will also improve program management by allowing for better allocation of funds to projects to meet the needs of the ultimate customer, the public. 2