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

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22 Introduction For both states and metropolitan areas, the purpose of transportation planning is to identify a set of the most cost- effective projects and approaches that achieve the stated system goals. Federal law requires that state highway agencies develop a statewide transportation plan and that MPOs develop a regional transportation plan (RTP). The horizon year for these long-range plans is usually 25 years into the future. Approaches, or at least terminology, for statewide trans- portation planning vary across the country. While some states identify major projects, or even unique minor projects, most statewide transportation plans (STPs) do not identify specific projects, but rather establish strategic directions for state invest- ment in the transportation system and present future challenges that could constrain the ability of the state highway agencies to improve the performance of their systems. Statewide plans also often identify areas of the state where more detailed planning is required. One of the more common approaches to providing such focused planning is through corridor or subarea studies. These targeted study efforts usually identify specific projects and their associated costs that are considered during the pro- gramming process, when projects are prioritized. 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. Thus, for example, in a typical RTP, one would find projects that the agency expects to implement in the next 5 years, in the next 5 to 15 years, and in the next 15 to 25 years. Federal law requires the RTP to be “fiscally constrained”; that is, the sum of the total project costs in the plan cannot exceed the amount of funding that is expected over the next 25 years. This limit places great importance on having valid and realistic cost estimates for the projects in the MTO’s plan. Federal law also requires that the statewide and metropolitan plans be consistent and that plan development include the par- ticipation of the state; the MPO; and many other stakeholders, such as local government agencies. Planning-level cost estimates can have a significant effect on the overall transportation pro- gram and, thus, on the ability of the state highway agency and MTO to meet their area transportation needs. The term “con- ceptual estimation” is often used to describe the general method of estimating project costs during the planning phase. As indicated above, the role of cost estimation varies by whether one is developing a statewide plan or a metropolitan plan. However, it is important that, from the beginning of the planning process and through all planning and project devel- opment phases, the overall approach and management philos- ophy toward cost estimation (e.g., year-of-construction dollars, treatment of project risks, and quality control procedures) be consistent. Figure 5.1 provides an overview of the cost estimation prac- tice and cost estimation management processes that can pro- vide input into transportation planning and project-level planning. The level of cost estimate detail will likely vary between estimates prepared for transportation planning and those prepared for project-level planning and could easily vary from one jurisdiction to another. Cost estimates that are pre- pared during planning have, as their fundamental purpose, to provide an order-of-magnitude estimate of the anticipated funds needed to support long-range plans. These cost esti- mates are also often used in benefit-cost analysis for ranking projects and including them in the 25-year planning horizon. Key inputs into the cost estimation practice and cost esti- mation management processes are, where applicable, project scope and type, major project parameters, project complex- ity based on location, and anticipated size. Three sources of information and data on these inputs usually characterize the cost estimation process. The first of these is third-party stake- holders. For the development of estimates during the planning process, this source of information is usually the most com- mon. The second major source of cost estimation information comes from the planning or engineering staff. For example, when soil conditions require costly design solutions, geo- technical engineers should be consulted because they can C H A P T E R 5 Guide for Planning Phase

provide input based on experience even if they cannot con- duct extensive soil tests at this stage of need development. Historic cost data from similar works is the final source of cost estimation input. Because little if any engineering has occurred prior to the planning process, most estimates at this stage rely heavily on cost data from past works. The historical data form the basis for the conceptual cost estimates prepared during planning. The cost estimation process is frequently iterative in that initial cost estimates are prepared and used in the planning 23 Figure 5.1. Cost estimation practice and cost estimation management during planning. Determine Estimate Basis (Scope/ Location) Prepare Base Estimate Determine Risk/ Contingency Review Total Estimate Obtain Appropriate Approvals Determine Estimate Communication Approach Planners Traffic Pavements Structures ROW/RES Environmental Construction Utilities Historical Data Scope Types/Major Parameters Complexity Location/Size Planning (Projects) Cost Estimate Approved Planning (Project) Estimate Release Planning (Project) Estimate LONG- RANGE PLAN PL AN N IN G (Recycle Loop) COST ESTIMATION PRACTICE AND COST ESTIMATION MANAGEMENT Transportation Need Development Phase Input from Disciplines Input from Third Parties Input Step Database Document Milestone Ph as e Legend To Project Development ProcessROW = right-of-way RES = real estate services Needs/Deficiencies

process to form investment decisions. These same cost esti- mates become the point of departure for cost estimates pre- pared during programming, which are necessary when projects are placed in a state transportation improvement program (STIP), and are then further refined as projects make their way through preliminary design and final design. Because cost estimates used for the planning process include consid- erable uncertainty, it is incumbent upon engineers and plan- ners to understand the likely range of uncertainty associated with these cost estimates and to communicate this level of uncertainty to decisions makers (i.e., managers). Methodology This chapter is organized around the cost escalation factors and strategies presented in Chapter 3. A familiarity with the definitions of identified cost escalation factors and strategies is helpful in understanding the methods described in this chap- ter. Table 5.1 provides a link and quick reference between cost escalation factors and strategies to address estimation issues during planning. The table can be used to select appropriate strategies when systematic cost escalation problems are found in an agency. The remainder of this chapter describes methods for the application of the strategies, and Appendix A provides information on the tools used with each method. The strategies address cost escalation issues that arise early in planning. All of the strategies can address at least a portion of the cost escalation factors in the earliest development phases. As seen in Table 5.1, the management, scope and schedule, off- prism issues, and risk strategies address a large number of cost escalation factors. These strategies can and should be applied in the early stages of planning and continued throughout the project development process. The integrity strategy is also important in dealing with bias that can occur when projects are being developed without a definitive scope. The delivery and procurement strategy is only applied on those projects in which early decisions about procurement methods will be made. Generally, this strategy is not applicable during planning. The document quality and estimation quality strategies have less impact during planning than in the later phases of the project development process. However, these strategies can begin to be applied, particularly when consultants are being used, as is often the case, to develop concepts and related cost estimates. The faulty execution cost escalation factor is not considered an issue during planning. This factor is of greater concern during the project development process. 24 Table 5.1. Link between strategies and cost escalation factors in the planning phase. Strategies Cost Escalation Factors M an ag em en t Sc o pe a n d Sc he du le O ff- Pr ism Is su es Ri sk D el iv er y an d Pr o cu re m en t D oc u m en t Q ua lit y Es tim at e Qu al ity In te gr ity Section 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 Bias √ √ Delivery and Procurement Approach √ √ √ √ Project Schedule Changes √ √ √ √ √ Engineering and Construction Complexities √ √ √ √ √ Scope Changes √ √ √ √ √ Scope Creep √ √ √ √ √ Poor Estimation √ √ √ √ Inconsistent Application of Contingencies √ √ √ √ Faulty Execution Ambiguous Contract Provisions √ In te rn al Contract Document Conflicts √ Local Concerns and Requirements √ √ √ √ √ Effects of Inflation √ √ √ √ Scope Changes √ √ √ √ √ Scope Creep √ √ √ √ Market Conditions √ √ √ √ √ Unforeseen Events √ Ex te rn al Unforeseen Conditions √ √

Methods and tools presented in Chapter 6 but not pre- sented in this chapter could be used during planning if the state highway agency deems them appropriate to their culture and environment. Further, if the state highway agency must estimate a single project rather than a group of projects dur- ing the planning phase, the state highway agency is encour- aged to examine the methods and tools in Chapter 6 in addition to those in this chapter. 5.1 Strategy: Management Table 5.2 lists five different management methods along with their associated tools for use during project planning and, in the case of metropolitan areas, during the transportation plan development process. 5.1.1 Budget Control Why? The use of the budget control method can assist in providing a disciplined approach to project cost estimation. The method must begin early, even though project scopes are not fully detailed during the planning phase. Lack of budget control causes increases in project costs, which translates into a reduction in the number of projects that can be completed at any given time. The budget control method is an essential element in the “recycle loop” shown in Figure 5.1. A variance report of cost and schedule tool is necessary to control the budget in this loop. Estimates are based upon little more than a summary of key project scope characteristics at this point, but these char- acteristics and changes to them need to be tracked during the evolving scope definition process. Project Complexity There is a greater need to control the budget of complex projects due to the detrimental impact this type of project can have on an agency’s total program. Rising cost estimates for larger projects could ultimately affect many other projects, causing them to be down-scoped or be cancelled altogether. The budget by corridor tool provides agencies with an ap- proach to control their budgets on complex projects by making cost-benefit tradeoffs to the entire system rather than focusing on particular projects. Tips for Success To control a budget successfully, a disciplined cost estima- tion and monitoring system must be established early in planning and be used continually until a project is constructed. Budget Control must be an active endeavor rather than a passive attempt. 25 Table 5.2. Planning phase management strategy: Methods and tools. MANAGEMENT STRATEGY Manage the estimation process and costs through all stages of project development Cost Estimation Management Cost Estimation Practice Budget Control B1.1 Budget by Corridor B1.2 Constrained Budget B1.3 Standardized Estimation and CostManagement Procedures B1.4 Summary of Key Scope Items (Original/ Previous/Current) B1.5 Variance Reports on Cost and Schedule Communication C1.1 Communication of Importance C1.5 Proactive Conveyance of Information to the Public C1.6 Simple Spreadsheet C1.7 Year-of-Construction Costs C4.5 Major Project Estimation Guidance C4.6 Standardized Estimation and CostManagement Procedures Recognition of Project Complexity Consistency R1.1 Complexity Definitions Risk Analysis R3.2 Contingency—Idenfitied

Tools B1.1 Budget by Corridor B1.2 Constrained Budget B1.3 Standardized Estimation and Cost Management Pro- cedures B1.4 Summary of Key Scope Items (Original/Previous/Current) B1.5 Variance of Reports on Cost and Schedule 5.1.2 Communication Why? Because cost estimates used during the planning process can have such significant implications to the rest of the pro- posed investment program, it is important that the different organizations involved with planning, as well as units within these organizations, effectively communicate with each other during the cost estimation process. Because it is the policy boards and commissions of the transportation agencies that most often approve investment programs, it is important that the underlying uncertainties associated with the cost estimates be conveyed to these officials as well. This communication must center on the importance of the estimate and the confidence that the agency has with the esti- mate. What will this estimate be used for? If the estimate is being used in a feasibility study, its accuracy will be less impor- tant than if the estimate is used for establishing a project budget as part of the programming process. Communication can occur continuously as necessary in the recycle loop shown in Figure 5.1, but the estimators must be cautious about shar- ing incomplete estimates with stakeholders and even with their counterparts within the agency. If the estimate is to be shared with external stakeholders or will be used for executive man- agement decision making, it should go through a rigorous and appropriate review process. Communication relating to project estimates could include such factors as project engineering and construction com- plexities, local government concerns and requirements, the significance of the project, and the required accuracy of an estimate at the particular point in the process. The availability of information through project files, including documenta- tion and agency forms that are available to agency staff and to the public, will help to address questions that might be asked later during project development. The communication method is also discussed in Section 5.2.2. Project Complexity The more complex projects become, the greater the need for communication both within the agency and with external participants. The need to communicate the uncertainty sur- rounding the cost estimation also increases. As one might expect, larger and more complex projects typically include greater design uncertainty. Tips for Success Communication among all of the involved parties regarding expected project costs substantially increases the level of infor- mation associated with all of the projects being considered. Hopefully, this communication will lead to fewer surprises later in project development. Communication should include both verbal and nonverbal methods. Early stakeholder involvement with the project promotes ownership of the project that could possibly lead to increased acceptance. When possible, estimates, especially during planning, should be communicated as ranges of costs, because it is nearly impossible to predict accurately final costs with the limited information that is available in this phase. If point estimates are required, estimators must be cau- tious about including an appropriate contingency. Finally, always communicate estimates in inflated year-of-construction costs to all internal and external stakeholders to avoid any con- fusion or discrepancies in the later estimates. Tools C1.1 Communication of Importance C1.5 Proactive Conveyance of Information to the Public C1.6 Simple Spreadsheet C1.7 Year-of-Construction Costs 5.1.3 Consistency Why? An estimate is a permanent document that serves as a basis for business decisions. It must be in a format that can be understood, checked, verified, and corrected—there must be consistency. Consistency ensures that estimates are prepared following a single standard. Estimate consistency is important, even as early as planning, because estimates are easier to review and revise when they are prepared in a similar manner. Consis- tency is achieved by instituting standards that serve as a guide for cost estimation practices and cost estimation manage- ment. Agency management should ensure that the agency’s planners, or others involved in preparing planning estimates, follow standard practices and use procedures that are docu- mented. In Figure 5.1, the consistency method influences each step in the process and the types of information used to prepare planning-level estimates. Project Complexity At the planning level, estimates may be required for major projects or corridors. Specialized guidance is required for these larger and more complex facilities. Sound cost manage- ment practices are also needed because these major facilities are evaluated throughout the planning phase. 26

Tips for Success Adequate knowledge of agency procedures and practices is important for this method to be successfully implemented. When different organizations or agencies are involved in planning, common procedures must be implemented for consistency to be achieved. When this method is imple- mented during planning and carried forward into the project development process, improved estimation accuracy can be achieved over time. Tools C4.5 Major Project Estimation Guidance C4.6 Standardized Estimation and Cost Management Pro- cedures 5.1.4 Recognition of Project Complexity Why? Understanding project complexity will allow for the deter- mination of appropriate risk and contingency factors, as depicted in Figure 5.1. Agencies should estimate base (or known) amounts separately from risk and contingency (or unknown) costs. Also see the steps described in Table 2.2. Recognition of project complexity is a critical step in deter- mining the uncertainty of a project estimate. Project Complexity By defining and recognizing project complexity, a proper contingency estimate can be developed. Also, over time, les- sons can be learned for different levels of project complexity that will be useful for future project cost estimation. This “institutional memory” should eliminate some of the re- learning that often takes place during the development of many projects. Tips for Success Early recognition of a project’s complexity can aid in ensur- ing that all criteria for a project are met in the decision process. Criteria can include the size of staff required for the project; the necessary level of review; the level of definition at certain project milestones; the authorization level for the project; and the changes in scope, schedule, and quality. Complex- ity can also relate to factors associated with the project set- ting, either rural or urban. The definition levels and criteria should be established for use throughout the agency, and each project should be classified as belonging to a complex- ity level early in project development. Changes to the com- plexity should be noted and communicated as they become apparent. Tool R1.1 Complexity Definitions 5.1.5 Risk Analysis Why? Agencies should estimate base (or known) amounts sepa- rately from risk and contingency (or unknown) costs. Also see the steps described in Table 2.2. Understanding the risks associated with the project and having a clear definition of contingency coverage is very important. The definition of contingency helps in understanding what is or is not covered in the contingency amounts included in the planning-level cost estimates and can aid in managing costs. Project Complexity By defining and recognizing project contingency, a proper level of contingency can be incorporated into the cost esti- mate to account for the risks associated with the project. Tips for Success Each project is unique and reflects a specific situation; therefore, each project should be looked at individually. Lessons learned regarding risk and contingency from similar projects or previous projects should be considered; however, they should not be applied without careful analysis of the project-specific context. Tool R3.2 Contingency—Identified 5.2 Strategy: Scope and Schedule Under the scope and schedule strategy, at least three dif- ferent methods can be used during the planning phase. The methods and their associated tools are listed in Table 5.3. 5.2.1 Buffers Why? Buffers are designed to protect the estimators and project team against external and even internal agency influences that can cause the misrepresentation of project scope, estimate, and schedule. Buffers are used as a means to ensure integrity in the processes of developing and tracking the project scope, estimate, and schedule. Buffers are important in the re-estimation of costs as projects proceed through development and also in obtaining appro- priate approvals. For estimators to act objectively and create 27

accurate estimates, they must be shielded from pressures to make unrealistic cost estimates. Project Complexity High-profile projects may be more susceptible to manipu- lative pressures. Such pressures are typically present with the larger, more complex projects that affect a larger number of people or projects that have a greater impact on the environ- ment. However, the use of buffers at some minimum standard should also be considered for smaller, less complex projects. Tips for Success The successful use of buffers requires a minimum standard on all projects. However, more extensive protection features should be developed for projects judged by the agency to be of greater vulnerability. Projects should be continuously monitored for indications of increased demands to maintain a fixed estimate amount. Such demands are a sure indicator that there is a need for added buffer protection. Tools B2.1 Board Approvals B2.2 Constrained Budget B2.3 Management Approvals 5.2.2 Communication Why? As discussed in Section 5.1.2, communication is very impor- tant during planning. Communication regarding scope, estimate, and schedule uncertainty will help project partic- ipants understand the project and the confidence that can be placed in project cost estimates. Communication about the importance of the project and the accuracy of the esti- mate reduces confusion as the project moves into the project development process and as it establishes the need to develop the project scope, schedule, and estimate to appropriate standards. To manage the project scope and schedule, estimators must clearly communicate the level of uncertainty associ- ated with project cost estimates, especially those in the very early stages of planning. All too often, a cost estimate for a project or design component is quickly produced as a feasi- bility estimate, but then is later kept as part of the budget decisions as if it were an accurate prediction of cost. Planners must clearly communicate the importance and uncertainty of estimates. Project Complexity As projects become more complex, the need to maintain communication among all project participants increases. While larger projects require more extensive communication efforts, a minimum effort and standard should be set for smaller and less complex projects. Tips for Success The successful application of communication methods requires the involvement of all project participants, including MPOs, local government agencies, and the public. Success in project cost estimation is dependent on the lines of commu- nication remaining open, honest, and forthright. 28 Table 5.3. Planning phase scope and schedule strategy: Methods and tools. SCOPE AND SCHEDULE STRATEGY Formulate definitive processes for controlling project scope and schedule changes Cost Estimation Management Cost Estimation Practice Buffers B2.1 Board Approvals B2.2 Constrained Budget B2.3 Management Approvals Communication C1.1 Communication of Importance C1.2 Communication of Uncertainty Computer Software C2.1 Agency Estimation Software C2.3 In-House Conceptual/Parametric Estimation Software C2.4 Simple Spreadsheet

Tools C1.1 Communication of Importance C1.2 Communication of Uncertainty 5.2.3 Computer Software Why? Computer software can be used in a variety of ways to deal with a number of cost escalation factors. Computer software can be used to develop and track a project’s scope, schedule, and cost estimate and to highlight deviations or changes in project attributes. This capability permits immediate recognition of changes and their possible impacts. This will aid in the identifi- cation of changes that may remain hidden for prolonged peri- ods during project development. The use of computer software most commonly occurs in the preparation of base estimates and in the releasing of corridor- or project-level estimation tasks, as depicted in Figure 5.1. Placing a project in a database as early as possible increases the ability to effectively develop and track the project. The use of computer software for different strategies is also discussed in Sections 5.6.1, 5.7.1, and 5.8.1. Project Complexity All levels of project complexity can benefit from the use of appropriate computer software. More complex projects, with a greater number of attributes that are difficult to monitor closely, lend themselves to the use of computer software. Less complex projects can often be accurately estimated in the early stages of planning using parametric estimation software. Tips for Success The most successful application of computer estimation software occurs when the agency has dedicated staff assigned to maintaining both the software and the databases that support the software. Both commercially produced software and agency software can be successfully used if they are properly main- tained and updated. Use of a database management system for keeping track of project information and costs needs to occur from the earliest planning phase and throughout the project development process. Tools C2.1 Agency Estimation Software C2.3 In-House Conceptual/Parametric Estimation Software C2.4 Simple Spreadsheet 5.3 Strategy: Off-Prism Issues State highway agencies should be aware of two off-prism issues strategy methods that are described in this Guidebook for use during planning. The methods and associated tools are listed in Table 5.4. 5.3.1 Communication Why? Communication is a critical key to project development success. The communication of off-prism issues both within the agency and with outside parties can eliminate some of the problems that may be faced later in project development. Early communication can help manage the issues themselves, provide information to parties that will participate later in the project development process, and provide a general aware- ness to all involved. Project Complexity Projects of all levels of complexity should benefit from identification, management, and communication of relevant off-prism issues. Tips for Success Early introduction of communication regarding off-prism issues will increase the likelihood of project success. Inclusion of all parties that may be remotely involved in any off-prism issues encountered during project development should occur early in planning. This will help eliminate resentful actions that could occur as a result of parties believing that they were excluded intentionally. 29 Table 5.4. Planning phase off-prism issues strategy: Methods and tools. OFF-PRISM STRATEGY Use proactive methods for engaging external participants and assessing the macroenvironmental conditions that can influence project costs Cost Estimation Management Cost Estimation Practice Communication Identifying Off-Prism Issues C1.4 Definitive Management Plan I3.2 Percentage of Total Project Cost C1.5 Proactive Conveyance of Information to the Public

Tools C1.4 Definitive Management Plan C1.5 Proactive Conveyance of Information to the Public 5.3.2 Identifying Off-Prism Issues Why? The identification of off-prism issues during the planning phase enables the agency to address fully these issues during the scoping process and subsequently during design with a full understanding of impacts. Research has shown that deci- sions made early in project development usually have the greatest impact on final cost. Early identification and active participation of outside groups, which could negatively or positively impact the project, should result in more cost- effective ways for addressing the concerns of these outside groups. This identification should occur in the form of input from third parties and input from professional disciplines, as shown in Figure 5.1. Project Complexity Projects of greater complexity may experience the greatest benefits from proactive efforts to identify and mitigate off-prism issues; however, smaller projects can also experience benefits by involving participants with off-prism issues early in planning. More complex projects will require proactive management of off-prism issues, while straightforward projects will benefit from the use of checklists and peer reviews to identify such issues. Tips for Success To enhance project success, agencies must begin identify- ing off-prism issues and mitigating possible negative impacts early in project development. State highway agencies must be more aware of the macroeconomic environment of con- struction and consider the impact of such economic forces when developing planning-level estimates. Continuing this endeavor into the project development process will increase the effectiveness and accuracy of cost estimates. Tool I3.2 Percentage of Total Project Cost 5.4 Strategy: Risk Risk is inherent in any project. Three methods under the risk strategy provide tools for managing risk during early planning efforts and the planning phase of transportation need development. The risk management methods and asso- ciated tools are listed in Table 5.5. 5.4.1 Identification of Risk Why? As depicted in Figure 5.1, this Guidebook strongly pro- motes identifying project risks as early as possible and carry- ing contingency amounts that correspond to identified risk. Also see the steps described in Table 2.2. Risks can be identi- fied through comprehensive qualitative studies, qualitative team assessment, or risk checklists. A comprehensive quanti- tative risk analysis that assesses the likelihood and impacts of risks may not be the most cost-effective or meaningful meas- ure for planning; however, it should be considered for very large or highly complex projects. In general, the qualitative identification of possible risks will aid in developing a better understanding of the project and what constitutes an appro- priate contingency amount. Understanding the project will enable the agency to make better decisions throughout proj- ect development. Project Complexity A structured risk identification effort should be instituted by the agency for all types of projects. Comprehensive quan- titative risk assessments should be made on complex projects, 30 RISK STRATEGY Identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed Cost Estimation Management Cost Estimation Practice Identification of Risk Risk Analysis I2.1 Red Flag Items R3.1 Analysis of Risk and Uncertainty R3.2 Contingency—Identified R3.4 Estimate Ranges R3.5 Programmatic Cost Risk Analysis Right-of-Way R2.2 Advanced Purchase (Right-of-Way Preservation) Table 5.5. Planning phase risk strategy: Methods and tools.

and team studies or historical checklists should be used on less complex projects. Tips for Success An agency might consider developing a standard form, based on project complexity or type, that identifies common risks that should always be considered as a project is being developed. These lists would prompt the involved parties to identify and consider specific project risks. Decisions on what to do about the risks should be considered later in the project development process. Tool I2.1 Red Flag Items 5.4.2 Right-of-Way Why? Right-of-way issues are often a major cause of escalating project costs. By identifying and addressing the risks associ- ated with right-of-way issues and values early in project development, it is possible to correctly estimate these costs. As shown in Figure 5.1, right-of-way estimates should involve input from the agency’s right-of-way and real estate services section and must be continuously revisited as the scope is “recycled” through planning and later through the project development process. Project Complexity Project complexity is not always a good indicator of poten- tial right-of-way issues. In the case of project overlays or proj- ects using a similar type of right-of-way, requirements are often minimal; however, projects that involve new alignments or require a greater amount of additional right-of-way acqui- sition are likely to have higher risks. This problem is not nec- essarily limited to urban areas; rural areas also experience increases in land values and opposition to property takings. Tips for Success A key to success is to involve the right-of-way and real estate service sections of the agency actively and early in planning and keep them involved as project scope iterations occur. The specialized knowledge found in the right-of-way and real estate service units can provide a strong basis for cost estimates and for identifying potential problems. Another key to success is to educate right-of-way and real estate service staff on the importance of project planning estimates and provide them with resources to perform risk- based estimation. All too often, the duties of these staff involve only right-of-way acquisitions, and, as a result, these staff do not have resources to support project planning or to develop tools for developing long-range right-of-way estimates. Poor right-of-way cost estimates can have significant impacts on estimation accuracy. Tool R2.2 Advanced Purchase (Right-of-Way Preservation) 5.4.3 Risk Analysis Why? Every design and construction project contains uncertainty. Project uncertainty is even more prevalent when plans do not identify specific projects, but rather establish strategic direc- tions for state investment in the transportation system. Risk is uncertainty that negatively impacts a plan or a project. Uncer- tainty and risk can often be quantified and probabilistically modeled. These models can generate range estimates that more transparently convey risk and uncertainty than do single-point estimates. As specific projects are identified and more is known about a group of projects or an individual project, the level of risk and uncertainty decreases. Risk analysis is useful, and in many cases necessary, to identify and evaluate the impact of risks. Based on risk analysis, total cost ranges can be generated, the appropriate level of contingency can be added to the cost estimate and schedule, and sensitivity analyses can be used to focus planning and engineering efforts. Project Complexity Complexity is often correlated with additional project risks. Identification, assessment, and evaluation of risks on a macro level, or sometimes a project level, can assist in gener- ating more realistic planning estimates. Complexity of plan- ning estimates can stem from many issues, including project size; length of time until programming, design, and con- struction; and environmental or third-party uncertainty. Tips for Success Proper care and appropriate tools must be used to iden- tify, assess, and evaluate risk at the planning level. However, the proper communication of uncertainty in planning esti- mates may be the most important tip for success. A mis- interpretation of a range estimate can stop a project before it actually starts. There must be a clear description of what is driving the risk or uncertainty and a realization that these elements can be controlled and mitigated through proper planning and engineering. Additionally, risk analysis cannot end with planning. As described in Chapters 6 and 7 of this Guidebook, risk analysis must be continued throughout the entire project development process. 31

Tools R3.1 Analysis of Risk and Uncertainty R3.2 Contingency—Identified R3.4 Estimate Ranges R3.5 Programmatic Cost Risk Analysis 5.5 Strategy: Delivery and Procurement In most cases, the delivery and procurement strategy is not selected during planning. The vast majority of U.S. highway construction projects employ traditional design-bid-build proj- ect delivery with a low-bid procurement. However, agencies may wish to consider alternative project delivery methods when projects have unusual time constraints, market conditions, or financing needs. In these cases, project cost estimation practice and cost estimation management processes must account for project delivery and procurement strategies. Table 5.6 shows the delivery and procurement methods and associated tools. 5.5.1 Delivery and Procurement Method Why? Although design-bid-build project delivery is by far the most prevalent project delivery method in the U.S. trans- portation sector, planners and engineering have many alter- native delivery and procurement methods available to them. Design-build delivery, time-plus-cost bidding, and warranties have moved from alternative methods into the mainstream and are acceptable methods for federal-aid projects. With the advent of FHWA Special Experimental Project 15 (SEP 15), the private sector can participate in projects before environ- mental clearance and is also being encouraged to participate in financing projects. The impacts of these methods on project cost and time can be beneficial or detrimental, as explained below, but in any case, these impacts must be considered when preparing estimates and managing costs. The selected project delivery and procurement method impacts the risks that the state highway agency will assign to the contractor and that the contractor will have to price and manage. For example, large projects can be designated as design- build as early as planning. Eventually, when the project is pro- grammed, the design-build contractor will commit to a lump sum price for a project before design is complete and therefore take on nontraditional risks. These risks must be accounted for in the cost estimate. The state highway agency will, in turn, benefit from cost certainty earlier in the project devel- opment process because the design-build contractor will be committed to this price very early. Planners can begin considering the project packaging in terms of single or multiple contracts during planning. If multi- ple contracts are used, the dollar value of a single contract may decrease, so the contractor may have less risk to price. Smaller contracts tend to encourage a greater number of bidders and can reduce costs if the market conditions are right. If these deci- sions are made in planning, the state highway agency must remain consistent with them during the subsequent phases of the project development process or they could risk substantial cost escalation, as documented in Chapter 3 of this Guidebook. Project Complexity Project size and duration are perhaps the best indicators of complexity for project delivery and procurement decisions. Larger projects may require a greater effort to adequately identify the potential risks and how these risks will impact project costs in relation to proposed project delivery and pro- curement methods. If project delivery and procurement methods are selected to accelerate construction on any size project, then the use of the risk strategy must account for the potential impact of acceleration. Tips for Success Risk analysis should be closely tied to any alternative project delivery and procurement strategies. The risk strategy should include an evaluation of the impact that project delivery and procurement methods have on cost. Additionally, any project delivery or procurement decisions made during planning must remain consistent throughout the latter phases of project development, or their impact must be accounted for in the state highway agency’s cost estimation management systems. 32 Table 5.6. Planning phase delivery and procurement strategy: Methods and tools. DELIVERY AND PROCUREMENT STRATEGY Apply appropriate delivery methods to better manage cost because project delivery influences both project risk and cost Cost Estimation Management Cost Estimation Practice Delivery and Procurement Method D1.1 Contract Packaging D1.2 Delivery Decision Support

Tools D1.1 Contract Packaging D1.2 Delivery Decision Support 5.6 Strategy: Document Quality As shown in Table 5.7, three different methods can be used during planning to address the document quality strategy issue. 5.6.1 Computer Software Why? To increase the quality of project documents, a standard- ized set of document templates should be used as part of the project database. This template should include all of the infor- mation that should be known about the project at certain phases of need development. Using these templates to prompt project participants for project information will increase the quality of the project documentation. Computer software can be used to prepare the base estimate, as shown in Figure 5.1. The template establishes a minimum standard of quality. The use of computer systems is also discussed in reference to other strategies under sections 5.2.3, 5.7.1, and 5.8.1. Project Complexity The standard set of documents that must be available and incorporated into the computer software should have templates for each level of project complexity. Less complex projects, such as overlay work, will often include more known information earlier in planning than large or very complex projects. Tips for Success Successful implementation of computer software to encour- age quality documents requires the agency to identify accurately the minimum quality standard and to use a software system that portrays the information in a meaningful manner. Projects are not the same, so a method for handling exceptions needs to be built into the system. The software should allow for the incor- poration of additional information, even if the information is not required until a later stage of project development. Tools C2.1 Agency Estimation Software C2.4 Simple Spreadsheet 5.6.2 Document Estimate Basis and Assumptions Why? A well-documented estimate basis and comprehensive doc- umentation of the assumptions used in the development of a project estimate can eliminate the overlap of future estimate assumptions and provide a document trail regarding what is known about the project. This allows the project “knowns” as well as the “unknowns” to be clearly identified. This docu- mentation enables the agency to easily track changes to project scope, cost, and schedule. Documentation should occur dur- ing both the “prepare base estimate” and “determine project contingency” steps described in Figure 5.1. The importance of a comprehensive documentation of the basis and assumptions for an estimate cannot be overemphasized because transporta- tion projects often take years to develop and estimates must be completed multiple times during the needs development cycle. Project Complexity The documentation of the estimate basis and assumptions is important for all projects, but is particularly important on large projects. Multiple estimators may be engaged on a com- plex project. There needs to be a record of what one estima- tor has prepared and the basis and assumptions used to prevent overlap by the other estimators. There are also many factors involved in complex projects, and estimators may not be able to store and recall all of that information from memory; 33 Table 5.7. Planning phase document quality strategy: Methods and tools. DOCUMENT QUALITY STRATEGY Promote cost estimate accuracy and consistency through improved project documents Cost Estimation Management Cost Estimation Practice Computer Software Document Estimate Basis and Assumptions C2.1 Agency Estimation Software D4.1 Project Estimation File C2.4 Simple Spreadsheet Identifying Off-Prism Issues I3.1 Environment Assessment I3.2 Percentage of Total Project Cost

therefore, documentation is vital in reducing the need to repeat estimation efforts. Tips for Success To be successful, the documentation of the estimate basis and assumptions needs to be consistent throughout the agency. Consistency can be achieved by developing a set of forms or a manual that outlines the documentation require- ments. Additionally, both the base estimate and the incorpo- rated contingency amount must be documented to properly communicate the accuracy of the estimate. Tool D4.1 Project Estimation File 5.6.3 Identifying Off-Prism Issues Why? Planning involves statewide planners, metropolitan plan- ners, and a wide host of other stakeholders. Projects are influ- enced by the views of external participants and other conditions that impact project scope and cost. Cost estimation practice and cost estimation management issues are communicated in documents given to these external participants. The impor- tance of valid cost estimates in environmental documentation, and any other documents concerning off-prism issues, must not be overlooked. The identification of off-prism issues, particularly in the environmental area, can greatly increase the accuracy of cost estimates and assist in cost estimation man- agement. Assumptions about off-prism conditions made during planning can be validated, and their impact on cost should be reevaluated. Project Complexity Projects of greater complexity may gain the most benefits from proactive efforts to identify off-prism issues and assess their cost impact. Tips for Success Off-prism issues are, by nature, uncertain. Their identifica- tion should be incorporated into the risk strategy. To enhance the success of identifying off-prism issues and mitigating possi- ble negative impacts, agencies must start this effort during plan- ning. Early involvement of environmental experts is critical. Continuing this endeavor throughout the project development process will ensure that the scope and cost reflect the impact of off-prism issues. Communicating off-prism issues to upper management should be accomplished quickly because most of these types of issues have or will have political implications. Tools I3.1 Environmental Assessment I3.2 Percentage of Total Project Cost 5.7 Strategy: Estimate Quality The estimation quality strategy will change with the different phases of need development. This Guidebook describes six different methods for use during planning. These methods and associated tools are listed in Table 5.8. 5.7.1 Computer Software Why? The development of a consistent estimate format that is used throughout the agency supports the ability to easily review, update, and modify estimates throughout all phases of need development. The use of computer software for developing estimates, even during planning, establishes a common stan- dard of care. Computer software can be used to track estimate development and highlight any changes that are made to cost values. Computer software can also be used to identify items, quantities, or costs that appear abnormal or have changed as estimates are revised. The use of computer software is also dis- cussed under other strategies in Sections 5.2.3, 5.6.1, and 5.8.1. Project Complexity Computer software will provide greater benefits when preparing estimates for highly complex projects. Less complex projects will also benefit, although it might be better to use less sophisticated software or even standard spreadsheets for very simple projects. Tips for Success The successful use of computer software to support estimate quality requires the agency to identify a minimum acceptable estimation standard and to provide accurate and adequate information for use in estimation development. Success is also dependent upon agency investment in maintaining and updating the software. Tools C2.1 Agency Estimation Software C2.3 In-House Conceptual/Parametric Estimation Software C2.4 Simple Spreadsheet 34

5.7.2 Conceptual Estimation Why? Conceptual estimation uses tools to account for the fact that very little information is known about the project in the early planning stages. Conceptual estimation should be per- formed only by experienced estimators because these esti- mates are based primarily upon the assumptions that are being made by the estimator from past experience. Concep- tual estimation techniques are used for both the base estimate and contingency estimate depicted in Figure 5.1. Various estimation tools are available for developing early project estimates. Agencies, project teams, and estimators should consider implementation of the appropriate tool for each project. It should be noted that the appropriateness of a tool may change throughout the project development process. Tools that may be appropriate at later phases may not be jus- tifiable during the planning phase. Alternatively, some tools used later, especially in the programming phase, might work in the planning phase (see Section 6.7.7). Project Complexity Routine or straightforward projects and projects that are less complex do not require the same estimation tools as those necessary for more complex projects. Tools may also be tailored to the various stages of project development as different levels of information detail and quality become known. Tips for Success Each estimator needs to be knowledgeable of the range of estimation tools available and be able to make an informed decision regarding the most appropriate tool to use in esti- mating a specific project. The estimator needs to have adequate information available for developing each project estimate or needs to have some basis for making reasonable assump- tions. Assumptions need to be documented for later review, justification, and revision. Tools C3.3 Cost/Parameter Using Similar Projects C3.4 Cost/Parameter Using Typical Sections C3.5 Trns•port 5.7.3 Estimate Review—External Why? Planning estimates have a substantial range in terms of accuracy. These estimates should be reviewed for the validity of their basis; however, the formality and depth of the review 35 Table 5.8. Planning phase estimate quality strategy: Methods and tools. ESTIMATE QUALITY STRATEGY Use qualified personnel and uniform approaches to achieve improved estimate consistency and accuracy Cost Estimation Management Cost Estimation Practice Computer Software Conceptual Estimation C2.1 Agency Estimation Software C3.3 Cost/Parameter Using Similar Projects C2.3 In-House Conceptual/Parametric Estimation Software C3.4 Cost/Parameter Using Typical Sections C2.4 Simple Spreadsheet C3.5 Trns•port Estimate Review—External E2.1 Expert Team Estimate Review—Internal E3.3 In-House/Peer Project Scoping P2.1 Estimation Checklist P2.2 Scoping Document Right-of-Way R2.1 Acres for Interchange R2.2 Advanced Purchase (Right-of-Way Preservation) R2.4 Relocation Costs R2.5 Right-of-Way Estimator Training

will vary depending on the type of project and its size and com- plexity. In Figure 5.1, an estimate review is positioned after the project risk has been quantified and an appropriate contin- gency amount is included in the estimate. While this review is depicted as a single activity, it would normally be repetitive, taking place to some extent whenever a planning-level estimate is revised. Project Complexity At the planning phase, only cost estimates for large proj- ects or corridors in urban areas that are extremely complex will be subjected to an external review by qualified profes- sionals. There may be certain critical elements of these esti- mates that require a unique expertise to verify estimated costs. This external review should include the results of a risk analysis that identifies the risks associated with these critical elements, the high and low cost limits for each critical element, and the assigned probability that the risk will occur. Tips for Success Knowledgeable and experienced individuals who are independent of the project team must conduct this review. The review must closely examine the assumptions that form the basis of the estimate and the scope that is used to prepare the estimate of all critical elements. Tool E2.1 Expert Team 5.7.4 Estimate Review—Internal Why? It is always necessary to independently verify that an esti- mate is complete and that it matches the project scope and is consistent with known site conditions, even when this infor- mation is very limited, as is the case in planning. In Figure 5.1, an estimate review is positioned after the project risk has been quantified and an appropriate contingency amount is included in the estimate. While this review is depicted as a single activity, it is normally a repetitive step, taking place to some extent whenever a planning-level estimate is revised. Consulting peers and subject matter experts adds value to the cost estimation process. These individuals can identify possible errors, omissions, and clarifications in estimate basis and assumptions. Estimates are based on many assumptions, which need to be justified as the estimation is reviewed. Reviews provide feedback to planners about the completeness and accuracy of their work. Project Complexity The extent of the estimate review at this stage will vary depending on the type of project and project complexity. As project complexity increases, the reviewer or review team must devote more attention to probing the assumptions that form the basis of the estimate and ensuring that the scope is covered to the extent possible. Tips for Success To be successful, the review must closely examine the assumptions that form the basis of the estimation, and knowl- edgeable and experienced individuals from within the state highway agency must conduct the review. Conducting reviews at an appropriate time during the development of planning estimates provides some assurance that the estimates are reasonably accurate for the scope and site conditions known at the time. Tool E3.3 In-House/Peer 5.7.5 Project Scoping Why? Thorough and accurate scoping during planning enhances the quality of cost estimates. Definitive scoping efforts at the very beginning have been shown to be more cost-effective than scope control efforts in the later stages of the project development process. Scoping provides the input for the estimate basis, as shown in Figure 5.1. Project Complexity Projects of all levels of complexity will benefit from project scoping efforts, even in the earliest stages of project develop- ment. Larger, more complex projects will, however, greatly ben- efit from the project scoping effort. Good documentation of the project scope eliminates errors and omissions in the estimate. Tips for Success The agency should consider developing standard manage- ment practices and a standard set of forms to document proj- ect scope. Because project scope is often revisited during the planning phase, standard practices provide an audit trail of how the project’s scope was developed and changed. Scope forms need to be completed early and regularly updated as changes are made. This will allow agency management to track project scope, and estimators will always know what 36

should be included in the estimate. The forms are a graphic view of what has changed since the previous estimate was completed. Tools P2.1 Estimation Checklist P2.2 Scoping Document 5.7.6 Right-of-Way Why? Early efforts in identifying right-of-way costs can greatly improve the quality of an estimate. Right-of-way costs are often a significant unknown for planning-level estimates. History has shown that the potential cost of land acquisition can be much higher than predicted, especially when cases go to court for judgment. The ancillary costs of land acquisition, including appraisals, negotiations, consultants, court fees, potential judgment, and others, can be substantial and often have a great amount of uncertainty. In extreme cases, judg- ments can occur years after the project has been built and can require large program adjustments to compensate. Early identification and inclusion of accurate right-of-way costs in initial estimates will avoid difficulties later in project development process phases. As stated in Section 5.4.2, the involvement of right-of-way and real estate services staff with adequate resources is imperative to producing an accurate estimation. Right-of-way costs should also be considered carefully in the Risk Strategy. Project Complexity Projects that require little or no additional right-of-way will not need to consider higher levels of effort in estimating right- of-way cost. However, projects that require the purchase of more than the minimal amounts of right-of-way should bene- fit from increased efforts aimed at quantifying right-of-way cost. Right-of-way issues are not necessarily reliant on com- plexity, nor are they only a concern reserved for urban projects. Tips for Success The success of implementing additional right-of-way cost efforts is dependent in part on the inclusion of experts from the right-of-way and real estate service sections of the agency. This is particularly important during planning, as there are often issues relating to land value market condition projec- tions that are beyond the expertise of project developers and that should be part of the scope alternatives discussion. Right- of-way estimators must be conscious of escalating costs to the point at which right-of-way will be purchased in the project development process. They must realize that (1) right-of-way can be purchased early in some circumstances and (2) right- of-way is typically purchased before construction begins and should not be escalated to the midpoint of construction like the rest of the estimate. Additionally, these specialists need to be provided with training and resources to develop long-range right-of-way estimates. Tools R2.1 Acres for Interchange R2.2 Advanced Purchase (Right-of-Way Preservation) R2.4 Relocation Costs R2.5 Right-of-Way Estimator Training 5.8 Strategy: Integrity The integrity strategy is difficult to capture in terms of methods and tools. Keys to this strategy involve communica- tion, transparency, and good management. One method for the integrity strategy, shown in Table 5.9, is described in this Guidebook for use during planning. 5.8.1 Computer Software Why? The use of computer estimation software starting with the earliest phases of project delivery can increase estimation integrity. Computer software can be programmed to highlight abnormalities within an estimate. The integrity strategy can be 37 Table 5.9. Planning phase integrity strategy: Methods and tools. 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 Cost Estimation Management Cost Estimation Practice Computer Software C2.1 Agency Estimation Software C2.4 Simple Spreadsheet

applied in the base estimate, contingency estimate, or approval tasks shown in Figure 5.1. Such identification helps in recog- nizing errors and the existence of bias. One way to maintain estimation integrity is to control the bias that can be introduced into the estimation process. Computers are immune to pres- sures to introduce bias into the estimate and will use the appro- priate values such as average unit cost without feeling the need to change the value to appease others. The use of computer software is also discussed in Sections 5.2.3, 5.6.1, and 5.7.1. Project Complexity The use of computer software as a method to increase proj- ect estimation integrity even at early stages is important. How- ever, the need increases as project size and complexity increases. Higher-profile projects are often subject to increased integrity problems as pressure increases both within the agency and from external sources to meet a desired project budget. Tips for Success The availability of estimation software to consultants, MPOs, and the planning department of the state highway agency will help to increase the likelihood that appropriate values are used throughout project planning and later during the development process. Training personnel and consultants on the appropriate use of software will improve the integrity of the estimates. Tools C2.1 Agency Estimation Software C2.4 Simple Spreadsheet 5.9 Summary Table 5.10 lists all of the methods and tools presented in this chapter for possible use in planning. This list can be used as a quick reference to navigate directly to Appendix A for detailed descriptions of the tools. Tools are listed in Appendix A alphabetically by method as shown in Table 5.10. Table 5.10 can be used as a checklist for an agency estima- tion department or for project planners responsible for producing planning cost estimates. The checklist forms a self-assessment tool for agencies to benchmark against. The methods and tools were found in highway agencies through- out the country. While no one agency was found to use all of the methods and tools, all methods and tools are used and have the potential to be applied by any one agency. 38 Table 5.10. Planning phase methods and tools. Budget Control B1.1 Budget by Corridor B1.2 Constrained Budget B1.3 Standardized Estimation and Cost Management Procedures 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 Communication C1.1 Communication of Importance C1.2 Communication of Uncertainty C1.4 Definitive Management Plan C1.5 Proactive Conveyance of Information to the Public C1.6 Simple Spreadsheet C1.7 Year-of-Construction Costs Computer Software C2.1 Agency Estimation Software C2.3 In-House Conceptual/Parametric Estimation Software C2.4 Simple Spreadsheet Conceptual Estimation C3.3 Cost/Parameter Using Similar Projects C3.4 Cost/Parameter Using Typical Sections C3.5 Trns•port Consistency C4.5 Major Project Estimation Guidance C4.6 Standardized Estimation and Cost Management Procedures Delivery and Procurement Method D1.1 Contract Packaging D1.2 Delivery Decision Support Document Estimate Basis and Assumptions D4.1 Project Estimation File Estimate Review—External E2.1 Expert Team Estimate Review—Internal E3.3 In-House/Peer Identification of Risk I2.1 Red Flag Items Identifying Off-Prism Issues I3.1 Environmental Assessment I3.2 Percentage of Total Project Cost Project Scoping P2.1 Estimation Checklist P2.2 Scoping Document Recognition of Project Complexity R1.1 Complexity Definitions Right-of-Way R2.1 Acres for Interchange R2.2 Advanced Purchase (Right-of-Way Preservation) R2.4 Relocation Costs R2.5 Right-of-Way Estimator Training Risk Analysis R3.1 Analysis of Risk and Uncertainty R3.2 Contingency—Identified R3.4 Estimate Ranges R3.5 Programmatic Cost Risk Analysis