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

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7To successfully address transportation needs and deficien- cies, state highway agencies must have reliable cost estimation practice and cost estimation management processes that sup- port the spectrum of costing from early conceptual alternatives through to definitive project PS&E. This Guidebook focuses on the cost estimation practice and cost estimation management processes required to achieve this result. This chapter frames these two processes by estimate type and purpose in broadly defined phases common to how state highway agencies develop solutions to transportation needs. The approach is from an agency-level viewpoint. Additional, more specific materials rel- evant to cost estimation practice and cost estimation manage- ment will be covered in Chapters 5, 6, and 7. Transportation Development Phases Cost estimates are made at various times during the devel- opment of solutions to identified transportation needs and deficiencies. These estimates support funding and program decisions. The estimation approach that is used at these vari- ous times must conform to the information available when the estimate is prepared. For example, when only concept infor- mation is available, then conceptual estimation practice meth- ods are used to determine planning-level cost projections. Cost estimation management is practiced as projects are identified and developed. Cost estimation management methods will also vary depending on the level of project scope definition and cost details provided in the estimates. An understanding of the phased progression to developing a solution for a transportation need is critical to the strategies, methods, and tools that can be used for cost estimation prac- tice and cost estimation management. The terms used to describe the development phases can vary slightly, or even sig- nificantly, from agency to agency. Therefore, the development phases and their descriptions in this Guidebook, as presented in Table 2.1, were adapted from NCHRP Synthesis of Highway Practice 331: Statewide Highway Letting Program Management (Anderson and Blaschke, 2004). The planning, programming and preliminary design, and final design phases are discussed throughout this Guidebook. The Guidebook does not cover the advertise-and-bid and construction phases. The planning, programming and preliminary design, and final design phases are depicted as overlapping in Figure 2.1. This overlapping indicates the cyclical nature of these four phases, as trans- portation needs are identified and developed into projects that move to construction. Cost Estimation Practice and Cost Estimation Management Overview Figure 2.2 provides a summary flowchart representing an agencywide view of cost estimation practice and cost estimation management. As shown in Figure 2.2, there is a relationship between the cost estimation practice and cost estimation man- agement processes. There is also a relationship between cost estimation practice and cost estimation management and the phases followed in addressing transportation needs. These two sets of relationships are portrayed by key information flows. Further, Figure 2.2 shows typical estimate types and key pur- poses of the cost estimates as related to each development phase. Cost estimates are prepared to support funding decisions as planning documents, program documents, and specific proj- ects are developed. Cost estimation management is performed to support the work of preparing estimates and to ensure that program funding levels are in line with planned funding levels and project budgets. When cost estimation practice and cost estimation management processes are integrated, the trans- portation agency should have the capability to effectively man- age its overall capital program as well as individual project budgets. As shown in Figure 2.2, the development phases are gener- ally categorized into “planning” and “project development process.” The planning phase has a longer time horizon and includes both plans that do not identify projects and plans that C H A P T E R 2 Agency Cost Estimation Practice and Cost Estimation Management Processes

8Development Phase Typical Activities Planning Determine purpose and need, determine whether it’s an improvement or requirement study, consider environmental factors, facilitate public involvement/participation, and consider interagency conditions. Programming and Preliminary Design Final Design Acquire right-of-way; develop plans, specifications, and estimates (PS&E); and finalize pavement and bridge design, traffic control plans, utility drawings, hydraulics studies/drainage design, and cost estimates. Advertise and Bid Prepare contract documents, advertise for bid, hold a pre-bid conference, and receive and analyze bids. Construction Determine the lowest responsive bidder; initiate contract; mobilize; conduct inspection and materials testing; administer contract; control traffic; and construct bridge, pavement, and drainage. Conduct environmental analysis, conduct schematic development, hold public hearings, determine right-of-way impact, determine project economic feasibility, obtain funding authorization, develop right-of-way, obtain environmental clearance, determine design criteria and parameters, survey utility locations and drainage, make preliminary plans such as alternative selections, assign geometry, and create bridge layouts. Figure 2.1. Typical transportation need development phases for highway projects. Table 2.1. Development phases and activities. identify projects. In this Guidebook, the project development process begins with the programming phase, in which specific projects are developed and prioritized for inclusion in shorter- range capital programs based on target letting dates for construction. The purpose of planning for both statewide areas and met- ropolitan areas is to identify the set of the most cost-effective projects and approaches that achieves the stated goals of the planning process. Federal law requires that state highway agen- cies develop a statewide transportation plan (STP) and that MPOs develop a regional transportation plan (RTP). The hori- zon year for these long-range plans is usually 25 years into the future. While some states do identify major projects, or even unique minor projects, most STPs do not identify specific proj- ects, but rather establish strategic directions for state invest- ment in its transportation system. The RTP is very different from the STP. The RTP identifies specific projects that are to be implemented over the next 25 years, usually defined in short-, medium-, and long-term implementation stages. Fed- eral law also requires that the statewide and metropolitan plans be consistent and that plan development include the partici- pation of both groups, along with many other stakeholders. A long-range plan is considered to be the output of the planning phase for purposes of this Guidebook.

9Figure 2.2. Agency-level flow chart for cost estimation practice and cost estimation management. Cost Estimation Practice and Cost Estimation Management Estimate Type Purpose Transportation Need Development Phases Conceptual Estimation Estimate Potential Funds Needed and Prioritize Needs for Long-Range Plans Design Estimation Estimate Baseline Cost for Projects and Program Projects Design Estimation Estimate Funds for Projects in STIP PS&E Estimate Construction Costs to Obligate Funds and Compare with Bid Planning Cost Estimates [Recycle Loop] Scope [Concepts & Complexity] Planning (Projects) Cost Estimates Release Planning (Project) Cost Estimates Project Scope- (Schematics/Alternatives Project Complexity) Baseline Estimates Project Scope [% Milestones & Complexity] Design Development/Project Conditions (as Design Progresses) Periodic Cost Estimates Changes (Scope/Cost/Time) Final Design Advertise & Bid CONSTRUCTION Cost Estimation Practice Cost Estimation Practice Cost Estimation Management Cost Estimation Management Project Scope (Final Plans/Specs & Complexity) Engineer’s Estimate Bid Data Recommendation Needs/Deficiencies AWARD Preliminary Design Cost Estimate Updates for STIP Priority Program STIP Long-Range Plan *represents the dynamic nature of the milestone dependant on the practices of the state highway agency * Programming * Project Development Process PS&E = plans, specifications, and estimates STIP = statewide transportation improvement plan Cost Estimation Practice Cost Estimation Management

As depicted in Figure 2.2, cost estimates that are prepared to support these long-range plans have, as their fundamental pur- pose, to provide a gross estimate of the funds needed over the 25-year planning horizon. These cost estimates are also often used in benefit-cost analysis for prioritizing dollars in long- range plans. Planning-phase cost estimates are most often developed using the conceptual estimation method with a cost- per-mile tool. During the planning phase, cost estimation management is focused primarily on updating planning dollar amounts and determining how these dollars are communi- cated to the public. The programming and preliminary design phase starts the project development process, as shown in Figure 2.2. In pro- gramming, federal law requires the transportation improve- ment program (TIP) for a metropolitan area to become part of the state’s transportation improvement program (STIP). It is thus very common for state highway agencies and MPOs to work closely on identifying the likely costs associated with candidate projects. Project cost estimates can have a signifi- cant affect on the overall transportation program and, thus, on the ability of states and metropolitan areas to meet their transportation needs. Thus, estimates prepared during pro- gramming are critical in terms of setting a baseline cost, sched- ule, and scope for managing project development. The baseline cost sets the budget used to develop a 5- to 10-year authorized priority program, as shown in Figure 2.2. Authorization allows for preliminary design to begin, and it typically includes a target date for a construction letting. The first 3 to 5 years of the priority program form the basis for the STIP. When preliminary design falls within this minimum 3-year period and federal funds are used, the preliminary design cost is included in the STIP. Right-of-way and con- struction costs will be added to the STIP later, as the STIP is updated regularly. In some cases, if the project needs to be let for construction within 3 years, the entire project cost cov- ering preliminary design, right-of-way, and construction will be included in the STIP. Once preliminary design begins, this baseline cost estimate becomes the basis for cost estimation management. Preliminary design develops the project scope at ever increasing levels of detail, as shown in Figure 2.2 (e.g., the per- centage milestones such as 15%, 30%, and 60%). At various times during preliminary design, project cost estimates are pre- pared to ensure that scope changes have not increased cost above the baseline and for management control of the budget. During preliminary design, design estimation approaches are based on both conceptual estimation and design estimation methods. When the project is within 3 to 4 years of the con- struction letting, an updated cost estimate is prepared so that current construction costs are reflected in the STIP. This esti- mation is critical because the STIP is fiscally constrained, and costs for each project in the STIP must be closely monitored. Cost estimation management is an important activity dur- ing preliminary design. Periodic estimation updates should be constantly compared with the project baseline estimate included in the authorized priority program. Further, to effec- tively manage overall project cost, changes in scope, in design development, and in project site or market conditions must be evaluated in relation to cost and time impact. Cost estimation management is a process for evaluating changes in scope or other issues that affect project cost. The final design phase typically represents that point in the project development process when plans and specifications are nearing completion. Prior to final approval of the project design, PS&E is initiated, and the engineer’s estimate is pre- pared, as shown in Figure 2.2. The basic purpose of this esti- mate is to provide cost data for comparing bid prices with estimated costs. The estimate provides management with a ref- erence for determining whether a project should be awarded for construction and whether, if a project is awarded, to obligate funds for construction. The engineer’s estimate is a detailed line-item estimate of project costs based on a schedule of work items and their corresponding quantities. The line items that make up this estimate are the same as those in the contract documents that serve as the basis for bidding the proj- ect. Cost estimation management at this phase focuses on com- paring the engineer’s estimate with the current STIP estimate and the contractor’s bid. Cost Estimation Practice and Cost Estimation Management Steps Cost estimation practice and cost estimation management processes can be described in terms of a number of steps. For purposes of this Guidebook, a small number of steps are iden- tified for each of these two processes. Methods and tools asso- ciated with these steps are elaborated in later chapters. Cost estimation practice is described in terms of four basic steps. The four steps and a brief description of each step are provided in Table 2.2. The descriptions are general and, therefore, applicable to the estimation process across each development phase. While the steps and their descriptions in Table 2.2 could be shown in greater detail, the four steps are sufficient to provide guidance on cost estimation. The four steps must be imple- mented in each of the development phases. However, the man- ner in which these steps are performed varies depending on the development phase. These variations are reflected in the meth- ods and tools that are implemented during each project phase. The performance of each step is supported by historical data- bases; input from different project disciplines (e.g., planners, roadway, structures, right-of-way, real estate services, utilities, environment, and construction); and input from third parties, such as MPOs, environmental agencies, local agencies, and the 10

public. The types of information provided through databases and diverse entities also vary depending on the phase. Cost estimation management is described by a number of steps. Five steps and a general description of each step are provided in Table 2.3. Again, the descriptions are general and, therefore, applicable to the cost estimation management process across each development phase. Implementation of these steps varies by phase. Similar to the cost estimation practice steps, the cost estima- tion management steps and their descriptions could be shown in greater detail, but five steps are sufficient to provide guid- ance on cost estimation management. The required number of steps performed in each phase varies. The manner in which the steps are performed also varies depending on the devel- opment phase. These variations are reflected in the strategies, methods, and tools that are implemented during each phase. Specific graphic depictions of the cost estimation practice and cost estimation management processes are presented and discussed in the introductory sections of the chapters that specifically discuss each phase: Chapter 5, “Guide for Plan- ning Phase”; Chapter 6, “Guide for Programming and Pre- liminary Design Phase”; and Chapter 7, “Guide for Final Design Phase.” Summary Cost estimates are created at various times during project development. There is a relationship and interaction between these phases and the cost estimation practice and cost esti- mation management processes. During the planning phase, cost projections are developed most often using the concep- tual estimation method. Design estimation methods include parametric estimation as well as line-item estimation. Detailed estimates are developed based on the final design. The appro- priate estimation approach will vary with the project’s scope definition, design development, and complexity. Chapter 3 identifies cost escalation factors and the strategies that a state highway agency can implement in the context of its cost esti- mation and cost estimation management processes to over- come project cost escalation. 11 Table 2.2. Cost estimation process. Cost Estimation Step Description Determine estimate basis Document project type and scope, including • scope documents; • drawings that are available (defining percent engineering and design completion); • project design parameters; • project complexity; • unique project location characteristics; and • disciplines required to prepare the cost estimate. Prepare base estimate Prepare estimate, including • documentation of estimate assumptions, types of cost data, and adjustments to cost data; • application of appropriate estimation techniques, parameters, and cost data consistent with level of scope definition; • coverage of all known project elements; • coverage of all known project conditions; and • checking of key ratios to ensure that estimates are consistent with past experience. Determine risk and set contingency Identify and quantify areas of uncertainty related to • project knowns and unknowns, • potential risks associated with these uncertainties, and • appropriate level of contingency congruent with project risks. Review total estimate Review estimate basis and assumptions, including • methods used to develop estimate parameters (e.g., quantities) and associated costs; • completeness of estimate relative to the project scope; • application of cost data, including project-specific adjustments; • reconciliation of current estimates with the baseline estimate (explain differences); and • preparation of an estimation file that compiles information and data used to prepare the project estimate.

12 Cost Estimation Management Step Description Obtain appropriate approvals Obtain management authorization to proceed by • review of current project scope and estimate basis; • securing of approvals from appropriate management levels; • approval of current estimates, including any changes from previous estimates; and • release of estimate for its intended purpose and use. Determine estimate communication approach Communication approach is dependent upon the stakeholder who is receiving the information, but should consider • mechanism for communicating the cost estimate for its intended purpose, • level of uncertainty to be communicated in the estimate given the information upon which it is based, and • mechanism to communicate estimate to external parties. Monitor project scope and project conditions Identify any potential deviation from the existing estimate basis, including • changes in project scope; • changes due to design development; • changes due to external conditions; • the nature and description of the potential deviation; and • whether the deviation impacts the project budget and/or schedule (potential increase or decrease). Evaluate potential impact of change Assess potential impact of change, including • cost and time impact of the deviation and • recommendation as to whether to modify the project scope, budget, and/or schedule due to change. Adjust cost estimate Document changes to the baseline estimate, including • appropriate approval of the deviation; • the new project scope, new budget, and/or new schedule; and • notification of the change to project personnel. Table 2.3. Cost estimation management process.