Procedures Guide for Right-of-Way Cost Estimation and Cost Management (2009)

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To successfully plan and execute projects, SHAs must have reliable ROW cost estimates. The foundation for achieving accurate, consistent cost estimates is a structured estimate development process. This Guide focuses on the two major functions necessary to successfully support the development of ROW cost estimates: cost estimating processes and cost estimating management. This chapter frames these two functions within a broadly defined set of project development phases common to SHA practice. The approach is from an agency-level viewpoint. Chapters 4, 5, 6, and 7 present material more specific to ROW cost estimating and ROW cost estimating management for each phase of an agency’s project development process. Transportation Project Development Phases To support program and project funding decisions, ROW cost estimates are made at various times during the development of solutions to transportation needs. Estimate approaches must conform to the project information available at the time of estimate preparation. When only concept information is available to describe a transportation program or project, the agency has to apply conceptual estimating techniques when preparing a ROW cost estimate. This is the typ- ically the situation for program-level ROW estimates. Similarly, cost estimate management tech- niques will vary depending on the level of project scope definition, organization of the project team, and cost detail presented in the estimate. An understanding of project development phases is necessary to discuss the rationale behind a structured ROW cost estimating and cost estimating management approach. The terms used to describe project development phases may vary slightly among agencies; therefore, this Guide presents a generic set of phase designations consistent with NCHRP Report 574: Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Precon- struction. To ensure the applicability of terms, SHAs from across the country participated in vet- ting the development phases described in NCHRP Report 574. For purposes of discussing ROW estimating in this Guide, the project development phases of concern are 1. Planning, 2. Programming, 3. Preliminary design, and 4. Final design. Timeline of Cost Estimating and Cost Management Agencies prepare cost estimates to support program and project funding decisions. Estimates including probable ROW costs are part of planning documents and program documents and are 14 C H A P T E R 2 Integrated Estimating Process

continually updated during project development. Agencies perform cost estimation management to support the work of preparing estimates and to ensure that program funding levels are in line with planned funding levels and project budgets. By integrating cost estimation practice and cost estimation management processes, an SHA can manage individual project budgets effectively and, in turn, overall capital programs. Planning Phase The planning phase of project development has a significantly longer time horizon than the other phases—usually longer than 20 years. Individual agency approaches to this phase vary sig- nificantly. Although some SHAs identify major projects, or even unique minor projects, most long-range plans do not identify specific projects, but rather establish strategic directions for state investment in the transportation system. Statewide plans often identify areas where more detailed planning is required. The fundamental purpose of planning cost estimates that support long-range plans is to pro- vide a gross estimate of the funds needed over a 20-year planning horizon. Planning phase cost estimates involve the use of conceptual estimating techniques. In some SHAs, planning phase ROW estimates are developed by planning staff without consultation with the agency’s ROW staff. In other SHAs, ROW staff prepare a gross real estate estimate based on a line drawing and general location knowledge. During the planning phase, cost estimation management focuses primarily on updating planning dollar amounts and communicating the cost updates through the long-range plan. Programming Phase Project cost estimates significantly affect the overall transportation program and, thus, the ability of SHAs and MPOs to meet transportation needs. Producing accurate programming phase cost estimates is critical to successful project development; however, at this early stage, the ROW estimate must be produced based on limited knowledge of real estate requirements and future property values. Programming phase estimates are predicated on a baseline project scope and, therefore, in many SHAs, they become the baseline cost for managing project development. The baseline cost sets the project budget for inclusion in the priority program. The priority program has a 10-year or less time horizon to the project construction letting. When a project is included in the priority program, authorization is often given for preliminary design to begin. The first 4 years of the priority program form the basis for the Statewide Transportation Improvement Program (STIP). Once preliminary design begins, this baseline cost estimate becomes the basis for cost estimation management, par- ticularly monitoring project scope and the effect of changes. Management must control design changes that affect real estate requirements, particularly those having significant cost impacts. Preliminary Design Phase During preliminary design, the agency transforms the project scope from general requirements to detailed physical components. The preparation of costs estimates at various times throughout preliminary design validates project cost against design detail and scope changes. Any later estimate indicating cost growth above the baseline triggers cost management procedures to bring the proj- ect cost back in line with programmed amounts (e.g., value engineering studies, creation of a new revised baseline with additional funding, consideration of design alternatives that mitigate ROW cost.). These estimates are important because they support management monitoring and control of the budget. Integrated Estimating Process 15

Cost management using revised or updated estimates is essential during the preliminary design phase when scope is transformed into construction details. Agencies should systemati- cally compare periodic cost estimate updates. If estimates are not preformed regularly during project design, the department will experience “cost blackout periods” (Clark and Lorenzoni, 1997); these can lead to major budget problems when cost increases are identified later in proj- ect development. To manage overall project cost effectively, agencies must constantly evaluate changes in scope, design, and project site or market conditions in relation to cost and time impacts. Management uses estimate updates to evaluate scope changes and other issues that affect project cost. Any deviation from budget and schedule must have documented manage- ment approval. Final Design Phase In the final design phase, plans and specifications typically are nearing completion. Agencies do not typically restate ROW requirements by an estimate update at this point because appraisal and parcel acquisition has begun. During this phase, estimate management typically involves the tracking of appraisals and acquisition costs against the last baseline ROW cost estimate. Cost Estimating Process In NCHRP Report 574, nine steps are used to describe the fundamental elements of cost esti- mation and cost estimation management practice. Four basic steps describe cost estimation prac- tice. Table 2.1 presents the four steps, with a brief description of each step. The descriptions are general and, therefore, apply to the estimation process across each development phase. These four steps are sufficient to convey the idea of a structured approach to cost estimation. The oper- ational manner in which the steps are performed will vary depending on the project develop- ment phase. The level of completeness in the project scope and refinement of project design will drive these variations. These four steps are combined with two cost estimate management steps (discussed in the next section) so as to correspond to the ROW cost estimating practices dis- cussed in detail in Chapters 3 through 6. Illustrations of the ROW cost estimation process steps in the introductory sections of the chapters that follow present and discuss more specific items for each project development phase: Chapter 4, “Conceptual ROW Cost Estimation” for the planning phase; Chapter 5, “Baseline ROW Cost Estimate” for the programming phase; and Chapter 6, “Update ROW Cost Estimate” for the preliminary design phase. Cost Management Process Five steps describe the cost estimation management process (NCHRP Report 574). Table 2.2 describes each of these steps. Again, the descriptions are general and, therefore, apply to the cost estimation management process across project development phases. Implementation of these steps will vary by development phase. Similar to the cost estimation practice steps, the cost esti- mation management steps and their descriptions could be shown in greater detail, but five steps are sufficient to outline a structured approach to cost estimation management. As with the esti- mating steps, the project development phase dictates some level of variation in which the steps are performed. The introductory sections of the chapters that follow present illustrations of the cost estimate management process with more specific items for each project development phase. These five steps are customized to fit ROW cost estimating management practices discussed in detail in Chapters 3 through 6 and cost management in Chapter 7. 16 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

A Strategic Approach Numerous research studies document the fundamental causes of project cost escalation (Merrow, 1988; Touran and Bolster, 1994; Ripley, 2004). Each cause is a challenge to every agency seeking to produce accurate project cost estimates. Although every factor will not cause problems on every project, the only way to consistently mitigate the factors is to use a strategic approach to cost estimation and estimate management. Incorporating an extensive review of estimating literature and discussions with SHAs, NCHRP Report 574 defined eight strategies to address the principal causes of project cost escalation: 1. Management strategy—Manage the estimation process and costs through all stages of project development. 2. Scope and schedule strategy—Formulate definitive processes for controlling project scope and schedule changes. 3. Off-prism strategy—Use proactive methods for engaging external participants and assessing the macro-environmental conditions that can influence project costs. 4. Risk strategy—Identify risks, quantify their effect on cost, and take actions to mitigate the effect of risks as the project scope is developed. Integrated Estimating Process 17 Cost Estimating 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; ROW requirements 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; document land use and improvements and any assumed damages; application of appropriate estimating techniques, parameters, and cost data consistent with level of scope definition; coverage of all known project elements; coverage of all known project conditions; and check to ensure that estimate is consistent with past experience. Determine risk and set contingency Identify and quantify areas of uncertainty related to project knowns and unknowns; possibility of real estate escalation or changes in land use; potential risks associated with these uncertainties; and appropriate level of contingency congruent with project risks. Review total cost estimate Review estimate basis and assumptions, including methods used to develop estimate parameters (e.g., quantities) and associated costs; gross land price assumptions or evaluation of parcels; completeness of estimate relative to project scope; application of cost data, including project-specific adjustments; reconciliation of current estimate with the baseline estimate (explain differences); and preparation of an estimate file that compiles information and data used to prepare the project estimate. Table 2.1. Cost estimating process (NCHRP Report 574).

5. Delivery and procurement strategy—Apply appropriate delivery methods to better manage cost because project delivery influences both project risk and cost. 6. Document quality strategy—Promote cost estimate accuracy and consistency through improved project documents. 7. Estimate quality strategy—Use qualified personnel and uniform approaches to improve esti- mate consistency and accuracy. 8. Integrity strategy—Ensure that checks and balances exist to maintain estimate accuracy and to minimize the effect of outside pressures that can cause optimistic biases in estimates. The most important strategies, in respect to ROW estimating, are those that address manage- ment, scope and schedule, off-prism, risk, estimate quality, and integrity issues. Management Strategy Manage the estimation process and costs through all stages of project development. SHA lead- ership must advance an estimation management strategy that fosters and supports estimate accu- racy and consistency through all phases of project development. The highest levels of SHA leader- ship are responsible for publicly explaining how the project development process works and, most 18 Procedures Guide for Right-of-Way Cost Estimation and Cost Management Cost Estimate 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 estimate, including any changes from previous estimate; approval of ROW estimate; 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 establishment of continual communication between design and ROW staff responsible for cost estimating; 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 to scope; changes due to design development including different ROW requirements; 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; can design change mitigate impact to ROW requirements; and recommendations 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 notifiy project personnel of the change. Table 2.2. Cost estimate management process (NCHRP Report 574).

important, ensuring that cost estimation practice and cost estimation management processes are transparent. To produce accurate estimates, SHAs must train their personnel properly, use estab- lished estimation processes, and ensure critical reviews of all estimates. Senior management must be active in advancing strategies to increase estimator knowledge and estimate consistency. Scope and Schedule Strategy Formulate definitive processes for controlling project scope and schedule changes. Scope control ensures that project changes are identified, evaluated, coordinated, controlled, reviewed, approved, and documented. Scope control requires that the proposed scope of a project be con- tinually evaluated against the essential functions necessary to accomplish its intended purpose. Projects often take years to move through the development process. As the time frame is extended, there are more opportunities for external and internal parties to suggest changes in scope. Addi- tionally, if the schedule is extended, cost impacts will result from increases in land values and other inflation effects. The cost effect of a change depends on when it is introduced. Early in project development, before definitive baseline estimates are prepared, a change in scope does not cause significant problems. Scope changes during the later stages of engineering/design have ripple effects and can increase project cost exponentially. Off-Prism Strategy Use proactive methods for engaging external participants and assessing the macro- environmental conditions that can influence project costs. In projects with significant cost esca- lation, engineers have often focused on technical solutions with little attention to community inter- est or concerns. These cost drivers are termed “off-prism” in the literature because they are not within the roadway prism. Engineers frequently discuss technical alternatives at early stages of proj- ect development before embarking on community outreach efforts and do not address concerns relating to the external effects until later in the development cycle. Additionally, how environmen- tal compliance and the acquisition of ROW affects individual parcels must be considered when addressing off-prism issues. Risk Strategy Identify risks, quantify their effect on cost, and act to mitigate the effect of risks as the proj- ect scope is developed. Rather than a single deterministic forecast of project cost, many variables contribute to a range of probable cost. In the case of SHA project estimates, any one cost number represents only one result based on multiple assumptions. Variables that influence project costs are not all directly controllable or absolutely quantifiable. Therefore, cost estimation must con- sider uncertainties and related risks. Management should use these identified risks and uncertain- ties to structure management procedures that mitigate, eliminate, or account for the possible vari- ation in the outcomes. Estimate Quality Strategy Use qualified personnel and uniform approaches to achieve improved estimate consistency and accuracy. Apparently, SHAs base their estimation practices solely on the experience of the personnel in charge of preparing estimates, usually the section head. Agencies must approach estimate development in the same manner as design and construction—with documented processes to guide cost estimation practice and cost estimation management throughout proj- ect development. Structured approaches to quality control (e.g., internal estimate reviews) and quality assurance (e.g., external estimate reviews), together with approvals and documentation, are essential to achieving accurate cost projections. Integrated Estimating Process 19

Integrity Strategy Ensure that checks and balances exist to maintain estimate accuracy and minimize the effect of outside pressures that can cause optimistic biases in estimates. The potential for esti- mate error can result from pressure by project sponsors who seek the approval of their projects. In a conceptual estimate, judgment replaces straightforward material takeoffs and costing; there- fore, it is difficult to justify estimates quantitatively. Agencies should protect estimators from internal and external pressures to produce estimates that are less than some pre-established budget amount. Inflation Adjustments Each project cost estimate is a “snapshot” of projected cost based on information available at a specific point in time and is a forecast of what things will cost at a future time. It is common to make economic comparisons between options in present value amounts during planning and pre- liminary design. However, for budget purposes and when communicating with stakeholders, cost should be “expressed in year-of-expenditure dollars” (FHWA, 2007b) because that is the actual dollar expense number stakeholders will use to measure success. Agencies, therefore, adjust proj- ect construction estimates by an inflation factor to the most likely midpoint of construction. This inflation factor represents the anticipation of cost growth for construction labor and materials. However, a general construction inflation factor is not an appropriate factor for adjusting ROW estimates because it does not reflect real estate appreciation or changes in land use. The ROW estimate represents the future cost to purchase real estate; therefore, the inflation factor use to adjust a ROW estimate should correlate with value appreciation due to market conditions over time. The time durations over which agencies apply the construction inflation factor and the real estate inflation factors will also differ because real estate is normally pur- chased before construction commences. Three agencies that use a separate inflation factor to adjust their estimated real estate cost are the Florida DOT (FDOT), the Washington State DOT, and the City of Phoenix. In Phoenix, the City’s Budget and Research Department pro- vides estimators with inflations factors specific to the land, construction, and equipment com- ponents of a project. One SHA has procedures specifically directing estimators to communicate ROW estimates in present-day cost amounts, exclusive of inflation/appreciation. The estimator is allowed to include a contingency to cover unknowns in the estimate, but the manual explicitly states that these amounts are to be exclusive of inflation. The agency’s computer estimating program, which tracks ROW information, has an internal table for inflation rates. That table is maintained by the agency’s ROW division in the central office. These default inflation rates are, for the most part, based on a 10-year rolling average taken from county property appraiser records as reported to the State’s Department of Revenue. These inflation rates are automatically applied to the net esti- mated value. Nevertheless, the agency’s ROW estimating guidance allows the estimator to enter inflation/appreciation rates for a particular estimate when local conditions are significantly dif- ferent than the county experience. When the estimator prints an estimate document for a requestor in the agency, the program printout will provide the present-day costs, along with annual compounding for 10 years. Therefore, the requestor receiving the estimate, usually the project manager, must decide when in the future the ROW purchase will take place and use the appropriate inflated cost. The project manager is assumed to have better insight concerning the project time line and is consequently the appropriate individual for selecting the ROW cost to be used in the total project estimate. 20 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

ROW Cost Management Cost estimation management should occur continuously throughout the project development process. Some efforts are exclusive to a particular stage of development; others go on through- out the process. The phases of planning, programming, preliminary design, and final design require different cost management methods because of the level of project information available and how the estimate must be communicated internally and externally. Even early in project development, agency management is responsible for reviewing, approv- ing, and communicating the ROW estimate. Communication is very important in the case of early estimates, and management must make all users aware of an estimate’s precision and its limits of accuracy. These management actions, the use of conceptual estimating techniques, and proper communication of estimate uncertainty can significantly improve proper use of early ROW cost estimates. During this NCHRP project and the two previous NCHRP estimating projects (NCHRP Proj- ects 20-07/Task 152 and 8-49), the research team found individual ROW cost estimate manage- ment steps being used in individual SHAs, but no agency had a structured management process. Supportive Institutional Environment The 2006 Best Practices in Right-of-Way Acquisition and Utility Relocation scan-tour report stated that a common trait of those agencies that “experienced considerable success in improv- ing their right-of-way acquisition and utility relocation processes” (Cambridge Systematics, 2006) was a supportive institutional environment. A critically important characteristic of a sup- portive institutional environment is executive management support. The scan-tour revealed that, in successful states, “upper management provided the authority along with the responsi- bility and financial resources to accomplish assigned tasks.” The execution side of cost estimation—cost estimation practice—depends heavily on how an agency manages project development and the support management provides to engineers exe- cuting project development, including estimate and schedule preparation. Senior SHA managers should view themselves as investors, developers, and strategists. Management is responsible for investing in and developing project staff and providing staff with the resources to perform effec- tively, including funding for training and attendance at ROW conferences such as those con- ducted by the AASHTO Subcommittee on Right of Way and Utilities. Senior management can create an environment for success. An initial investment in project development resources pays dividends in improved project scoping, which translates into delivery of projects that are consis- tently within budget and on schedule. To achieve accurate estimates consistently, agencies must do more than institute changes in esti- mating practices. Senior management must view project cost estimate management and estimate practice as interdependent systems that span the entire planning and project development process. Project managers must be given the authority to manage their projects, particularly in terms of con- trolling scope, and, with that authority, project managers must accept responsibility for results. Management Support for ROW Estimating Many estimating problems can be fostered by management’s attitude toward the importance of accurate cost estimates. “Need to focus on getting work done and not let estimating dominate the process” was a comment made in one SHA district office. There is an attitude that acquisition Integrated Estimating Process 21

is the only important function of a ROW office. In many SHAs across the country, ROW estimat- ing is considered a secondary function, and the institutional processes lack structure. The focus in many other agencies is primarily on creating tools to improve cost estimates with no recognition of the importance of the cost estimation management function. Successful esti- mating is not so much about “computers and data” per se as it is about an organizational cul- ture and an environment that supports those in charge of producing the estimate. During the interviews with SHAs, many in management positions seemed not to appreciate the need for accurate ROW cost estimates. Conversely, the staff members responsible for developing the esti- mates realize the importance and were sincerely trying to provide credible cost estimates. It is management’s responsibility to assume the lead in propagating organizational change that rec- ognizes the importance of (1) a structured strategic approach, (2) the use of risk analyses in set- ting contingency, (3) reviewing and approving all estimates, and (4) communicating the impor- tance and accuracy of each estimate with internal and external stakeholders. This Guide presents a strategic approach to implementing ROW cost estimating and estimate management that will help agency management understand the importance of its role in pro- ducing accurate ROW cost estimates. All estimates should be subjected to management approval before being accepted—this enable management to control project cost by using the baseline estimate to measure performance. Chapter Summary Because SHAs operate in a fiscally constrained environment, it is inevitable that difficult proj- ect decisions have to be made. This chapter argued that SHAs should adopt a structured, strate- gic process for ROW cost estimating and cost estimate management. A structured ROW estimat- ing and estimate management process is more important to estimate accuracy than any individual estimating tool. Management policies need to be propagated that will demonstrate support and commitment to improving the agency approach to ROW cost estimating. 22 Procedures Guide for Right-of-Way Cost Estimation and Cost Management