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

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The preliminary design phase often is considered the start of the design process. The starting point for this phase depends on the level of project definition achieved during the programming phase. On major or complex projects where a significant design effort is required to identify the preferred alternative and ensure that environmental regulations are met, design completion may reach 25- to 30-percent by the end of the programming phase. On moderately complex projects, design is probably less than 25-percent complete when programming is complete. Preliminary design moves the project forward to approximately 60- to 80-percent design completion. Introduction When acquisition of right-of-way is necessary to support the project scope, the completion of final ROW plans is a key milestone that transitions ROW activity from cost estimating to appraisal and acquisition. This milestone generally initiates the appraisal and purchase of real estate. If the SHA’s policy is to have right-of-way purchased before the start of construction, which is common, this milestone must often occur several years before the project letting date if acquisition of a significant number of parcels is necessary. In the case of a moderately complex project or a project of limited extent, the time duration, between when ROW acquisition must begin and the letting date, would probably be much shorter than that required for a complex project because fewer parcels are required. Before the start of appraisal and acquisition, the Updated ROW Cost Estimates are prepared periodically as project design progresses. These updated estimates are critical to controlling proj- ect cost because they ensure that the project does not experience a cost blackout period where the cost effect of design decisions is unknown. The driving focus of these updates is to compare an updated cost estimate to the baseline cost estimate. The purpose of this comparison is to aid in managing the ROW budget by identifying potential design decisions that affect cost. This is espe- cially important when real estate costs are increased by design changes or because of changed market conditions. Identifying cost increases early allows the design team to consider changes in design details that can reduce the amount of ROW required or reduce the cost effect on existing structures if a partial take is required. If ROW estimates indicate a potential reduction in the ROW budget, then project management will have the option of using such reductions to support changes in project design features or can apply the funds to other projects. This requirement of updating estimates is a cost estimate management method that aids in managing program budgets related to right-of-way. 67 C H A P T E R 6 Update ROW Cost Estimate

68 Procedures Guide for Right-of-Way Cost Estimation and Cost Management Update ROW Cost Estimation Flowchart Figure 6.1 is a generic flowchart for the Update ROW Cost Estimating process. As shown in Figure 6.1, these cost estimate updates for right-of-way are prepared repeatedly during the pre- liminary design phase of project development and follow the same structured process used to create the baseline and conceptual estimates. This cyclic estimate effort occurs periodically as project design evolves. The output of each update is a confirmation or an indication of the neces- sity for a potential revision to the baseline estimate set in the programming phase. Figure 6.1 shows the cost estimating and cost estimate management steps for updating the ROW cost estimate and then comparing the Updated ROW Cost Estimate with the Baseline ROW Cost Estimate. A decision point is shown on Figure 6.1 after the review estimate step because the comparison of the updated estimate versus the baseline cost may require action, especially when there is a significant increase in estimated cost over the baseline estimate or budget. This comparison might initiate a cost management loop in which the project design team analyzes different design details to determine if ROW costs can be reduced by design changes. The cost estimate management loop also serves as an approach to studying changes in right-of- way that might affect design in a positive way. ROW/design tradeoff analysis can be used to deter- mine what types of changes should be made and what value the changes bring to the project. Value engineering or some similar method is used to evaluate proposed changes. An example would be the choice between the cost of a retaining wall against that of increased ROW cost resulting from the slope requiring more land area. The decision can be considered from both points of view. A retaining wall may be the right choice if the slope creates a high cost of dam- ages to an existing business. A slope typically requires acquiring a larger portion of an affected piece of property. This issue can be considered in reverse if the wall is extremely expensive com- pared with the piece of property that would be necessary for the slope. ROW personnel can pro- vide valuable insight to project design that can combat the cost escalation problem and may reduce the overall cost of the project. Once a change decision is made, the updated cost estimate is approved and communicated to the project development team. Changes in the cost estimate may initiate changes in the priority program budget and/or the STIP budget. The estimate updating process is initiated with input from the preliminary design phase through the project manager or other design disciplines. This input is in the form of ROW requirements, and, as shown in Figure 6.1, it is typically reflected in preliminary ROW plans and other design documents. As these process steps are performed by the ROW estimator, various additional inputs are needed. Although the categories of inputs are the same as discussed in the programming phase, the types of data used for each category can be different. For example, the preliminary plans will have parcels identified so that land values can be estimated on the basis of comparable sales and/or market surveys specific to the compatible property. The asterisked wavy line in the right side rectangle of Figure 6.1 indicates the dynamic nature of this STIP milestone. As discussed in the programming phase, some SHAs only program a proj- ect when it is ready to be included in the STIP. In this case, the STIP becomes the priority pro- gram. In such a case, preliminary design commences in the outyear of the STIP such as in year four. Whether or not right-of-way is already included in the STIP depends on SHA policy and approach. Further discussion of the Figure 6.1 information is provided in the following sections. Update ROW Estimate Basis Step Once preliminary design begins on the preferred project alternative and a baseline cost estimate has set a project budget for right-of-way, the ROW cost estimate must be updated periodically as design progresses. As shown in Figure 6.1, the first step is to update the ROW estimate basis. The

Update ROW Cost Estimate 69 PRELIMINARY DESIGN ROW Project Development: Refine ROW Scope per preliminary plans and refined overall Project Scope Develop preliminary ROW plan Approve & Communicate Updated ROW Cost Estimate Review Impacts of changes Obtain management approval Authorize communication internally and externally Review Updated ROW Cost Estimate Review estimate changes (basis and assumptions) Verify completeness and cost data for changes Review effect of changes on contingency amount Updated ROW Cost Estimate To Final Design ROW Requirements (Preliminary ROW Plans) Revised ROW Required (Revised Plans) Estimate on Budget? YES NO Update ROW Estimate Basis Review current ROW plans and compare to previous requirements Identify changes Update ROW Estimate file Update ROW Risks & Contingency Review risks Update risks as necessary Update contingency value Document update to risk and contingency Input from Environmental, Utilities, Railroad Update ROW Base Estimate Review updated estimate basis to understand changes Document observations of field visit to confirm modifications Review changes to existing estimate assumptions/limitations Calculate total area of land for each parcel Revise cost basis to update estimate for each element Convert cost basis to update estimate for each element Update estimate documentations include uncertain items Summarize all estimate elements for updated total ROW cost Real Estate Appreciation Rate Land Market Values Field Visit by Estimator (Improvements, Damages, Existing Conditions, etc.) Condemnation Rate Historical Data -Removal of Improvements -Relocation Assistance -Support Costs Future Development (Community Planning) * STIP 4 years Represents the dynamic nature of the milestone dependent on the practices of the State highway agency. * From Programming Potential Design/ROW Trade offs Cost Estimation Management Loop Modifications Figure 6.1. Update right-of-way cost estimate.

objective of this step is to update the estimate basis section of the ROW Cost Estimate File to reflect changes in the ROW requirements and to include new information received from the environmen- tal, utilities, and railroad sections of the agency. Project Complexity During preliminary design, project complexity was defined in terms of the design requirements. The items are listed in Tables 3.4 and 3.5. At this point in project development, complexity should be defined in terms of the required ROW actions. The estimator now thinks in terms of individ- ual parcels. The parcel impacts–criticality/complex–influences the level of effort required to maintain the data that document the ROW estimate basis. For example, with complex parcel actions, more time is needed to assess differences in ROW requirements compared to those requirements identified during programming. This increased effort is defined by the number of parcels affected and effects such as partial takes, damages that require compensation, and relocations. Preliminary Design Inputs At this stage in design, preliminary plans are developed and continued to be developed through preliminary design. These plans will evolve as design details are characterized. The preliminary plans will begin to depict sufficient detail so that parcel can be identified with confidence. Envi- ronmental commitments should be summarized and included as plan notes. Needed utility adjustments will be identified and their effect on ROW requirements can be established. Other documents that might be used to update the cost of right-of-way include property map sheets and project profiles. Process Step Description The ROW estimator should 1. Review the preliminary ROW plans and compare these with previous ROW requirements from the programming phase. The main focus of this comparison should be on the parcels now identified and whether or not a parcel is a partial take or a whole take and if structures are involved. This review should characterize each parcel needed for the project. 2. Identify changes and the potential magnitude of the change (e.g., more area is required for a parcel then previously determined, potential damages are higher than previously indicated, or temporary easement is now needed). 3. Request clarification from the project manager and/or design team leader regarding uncer- tain ROW requirements that may require discussions with other project development team members such as environmental, utilities, and railroad. 4. Update the estimate basis component of the ROW Cost Estimate File by documenting known changes in ROW requirements. Tools Project ROW Cost Estimate File, Tool D4.1, will support this process step. This file should be created in the planning phase and then modified during programming to support the Baseline ROW Cost Estimate. Tips The scope and cost baseline of every project should be the reference to which all changes are compared. Throughout project development and construction, the baseline is used to evaluate 70 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

performance. Most agencies that practice baseline development for their projects report doing so usually at the point when an identified need becomes a “real” project and is budgeted. By identifying the effect of changes early, the cost estimate file can be updated with the new information in those areas, thus focusing the estimate updating work and reducing the time requirement for updating the base estimate. Outputs The output of this step is an updated and more detailed summary of ROW requirements. This summary forms the basis for updating the base estimate. This summary is included in the ROW Cost Estimate File for the project. This file will be modified with additional information as sub- sequent steps in the process are performed. Update ROW Base Estimate Once the estimate basis is updated, the ROW estimator can update the ROW base estimate. This estimate is considered the most likely or best estimate of costs, given normal project con- ditions. This updated estimate does not include contingency to cover identified risks due to unknown events or information unknowns. The focus should be only on actual ROW cost ele- ments included in this base estimate update. Project Complexity During preliminary design, project complexity influences the level of effort to update the ROW base estimate. For example, in the case of complex projects, more time is needed to modify the estimate when changes in the estimate basis are required. This increased effort is due to the larger number of parcels affected and, in many cases, the multiple types of effects (e.g., partial takes where improvements are taken and damages that require compensation). Inputs The first and most important input for updating the estimate is the estimate basis description documented in the ROW Cost Estimate File (Tool D4.2 or R2.8). This would include the latest version of the ROW plans. The information contained in the file is used by the ROW estimator to modify the cost projections for the various elements of the base estimate. As shown in Figure 6.1, several critical inputs are needed to support the development of a cost basis for each element that composes the updated ROW cost estimate. The four main elements are • Land Market Values. Cost ($) per acre by parcel (land only or with structures) and influenced by type of use—residential, commercial, industrial, or agricultural. Values should be based on detailed market surveys with verified market data. Experts in the field should provide these data. These values can be verified through an agency ROW tracking system. • Historical Data. Such data can support the determination of representative cost for the following: – Removing improvements from purchased real estate; – Damages to residue property; – Relocation assistance program costs. Use pre-acquisition survey data to help determine these cost data as well as time necessary for relocation services; – Support costs to include external labor for titles, appraisals, appraisal reviews, negotiation, and so on. Use current cost data for these items based on known values. Update ROW Cost Estimate 71

• Real Estate Appreciation Rate. ROW cost index to capture expected real estate appreciation in value between the time when the updated cost estimate is prepared and when acquisition will occur. • Condemnation Rate. When right-of-way must be secured by condemnation through eminent domain procedures, this typically involves the transition of control of the settlement from the agency’s ROW section to its legal department. The estimator should be able to draw informa- tion concerning those parcels likely to go to condemnation from the agency’s legal department and knowledge of the owners of the property. As shown in Figure 6.1, a field visit by the ROW staff may be helpful to clarify specific charac- teristics of individual parcels. This type of field visit may be particularly beneficial in providing insight about the potential effects of whole or partial takes of existing structures. Process Step Description The ROW estimator should complete the following eight steps: 1. Review the updated estimate basis to understand changes in the ROW requirements based on parcels and knowledge of whether the parcel requires a whole take or a partial take. 2. Document observations from a field visit to confirm modifications to the ROW requirements based on individual parcels. 3. Review changes in existing assumptions and limitations and review new assumptions and limitations. The effect of any changed assumptions should be covered when developing the area for each parcel and the cost basis for each ROW cost element. 4. Calculate total area of land for each parcel. This calculation should consider whether or not the parcel is a whole take or a partial take. It should also note effects to existing structures. 5. Revised cost basis for various cost elements of each affected parcel such as land values, relo- cation assistance, support costs, improvements, and damages including condemnation rates and related costs. Land values should be based on verified market data for highest and best use. Cost data for the other ROW estimate elements should be reviewed and updated by pro- fessional ROW staff (in-house or outsourced such as appraisers). 6. Convert the cost basis to updated estimate of costs for all pertinent ROW cost elements by each parcel and adjust for the appropriate inflation/appreciation rate to obtain the estimated cost at time of purchase. The parcel number, amount of land, cost data for all elements, and other information is input in the Cost Estimating System. This system will make the appro- priate calculations. 7. Update estimate documentation including uncertain items. All previous documentation should be updated to reflect estimates by parcels. If certain risks have been mitigated or cov- ered in the updated base estimate, this should be noted. 8. Summarize all estimate elements for a total updated base cost estimate of project right-of- way. The Cost Estimate System will provide totals for all estimate elements and a revised total base cost estimate for right-of-way. Tools A basic tool used to prepare ROW cost estimates is a Cost Estimate System (Tool R2.8). This system should be structured so that it can be tailored to fit the level of information available. The system should allow easy input of updated information on parcel acreage and cost data for var- ious estimate elements. The system should automatically mark changes for easy estimate review. The ROW Cost Estimate File should be populated with changes noted and additional informa- tion beyond what is included in the Cost Estimating System. 72 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

Another tool is a Formal Database (Tool R2.9) that captures relevant historical data on actual costs of the acquisition of properties [e.g., the Minnesota DOT’s (MnDOT’s) Right of Way Elec- tronic Acquisition Land Management System (REALMS) or the Virginia DOT’s (VDOT’s) Right of Way and Utilities Management System (RUMS) systems]. REALMS and RUMS provide ROW managers with a single, comprehensive view of project and land parcel status. These are database systems for tracking parcel information. Similarly the Utah DOT (UDOT), ROW Division has Electric Project Management (ePM) for tracking ROW purchases. An issue that some SHAs have when developing databases is the question of public access to the information. This will depend on state law, but should be considered. A second type of database is the Purchase Values Database (Tool R2.10), which identifies pur- chase values for the proposed location of the project where right-of-way will be acquired (e.g., Ohio Sales Data Book). There are also commercial real estate databases available. Such tools can be used to revise the cost data basis for estimating purposes (Sub-step 5 above). Tips The ROW estimator should consider the following • Other information when preparing the updated estimate such as data on local health depart- ment regulations for sanitary/sewer and water/well, as well as maps depicting locations of any sanitary or water lines in the area, zoning regulations, and local building codes relating to set- backs from property lines/right-of-way lines. • Using skilled eminent domain staff for estimating the value to improvements taken and dam- ages to residue as well as skilled staff when estimating relocation costs. • Time needed for relocation process and acquisition of parcels given that a schedule impact can affect the start of construction. The ROW estimator must carefully document changes made to the updated cost estimate basis in the ROW Cost Estimate File. • Create parcel impact notes. • Compare updated estimate to baseline cost estimate and note changes in cost and relate these changes to changes in ROW requirements and/or cost basis. • Continue to consider the effect of environmental issues, potential utility relocations, and interface with railroads. Outputs There are two main outputs related to this step. The first output is the updated ROW base esti- mate. This output is generated by the Cost Estimate System tool. The second output is the updated ROW Cost Estimate File. The updated ROW Cost Estimate File is populated with details of noted changes and additional information related to the cost basis for each estimate element and any changes to or new assumptions and limitations regarding the cost values derived from the revised cost basis. Updated detailed costs of each element and a total cost for all required project right-of-way would be included in the file. Update ROW Risks and Contingency After updating the ROW base estimate, the ROW risks and contingency element must also be updated to obtain an accurate total Updated ROW Cost Estimate. As the project progresses through preliminary design, risks will be either resolved or remain; therefore, the contingency Update ROW Cost Estimate 73

must be adjusted accordingly. The contingency should generally be reduced as the preliminary design progresses. There will be cases where new risks are recognized and the project contingency cannot cover the changes, but the norm should be a reduction in contingency as the design pro- gresses and better design and scope information becomes available. Inputs The ROW Cost Estimate File, along with the experience and judgment of the ROW estimator and that of the project team, are the key inputs for the risk and contingency analysis. Depend- ing on project complexity, the ROW Cost Estimate File should contain a list of red flag items or a formal risk register from when the Baseline ROW Cost Estimate was prepared. However, the ROW estimator cannot rely solely on the red flag list or the risk register. The estimator must actively seek to identify new risks that may be apparent since the creation of the Baseline ROW Cost Estimate. These new risks can be found through (1) review of estimator or project team assumptions, (2) study of the estimate basis uncertainties, and (3) analysis of project issues and concerns as explained in Chapter 5, Baseline ROW Risk and Set Contingency. Lastly, the analy- sis should carefully note any risks in real estate appreciation, condemnation rates, or possible future development that could affect highest and best use and, therefore, the contingency dol- lars. As was explained in Chapter 5, these are common risks in ROW estimating that should not be overlooked. Process Step Description The ROW estimator should complete the following five steps: 1. Review identified risks from the previous estimate with the goal of identifying (1) the risks that have changed, been resolved, or have materialized; and (2) any new risks that have been discovered. 2. Update the list of risks as necessary to reflect the current state of estimate uncertainty. 3. Update the contingency amount based on the new risks and how the previously identified risks have changed, been resolved, or materialized. 4. Document the updates to the risks and contingency in the ROW Cost Estimating File. 5. Update the total cost estimate (base plus contingency) using the Cost Estimating System. Tools The tools applied to update ROW risks and contingency will be a function of risk and project complexity. The tools should be consistent with those used in the baseline ROW risk and con- tingency analysis, unless a new level of project complexity has been realized. As explained in Chapter 5, risk identification can be accomplished using Red Flag Lists (I2.1), Risk Workshops (see R3.5—Table R3.5.3), Risk Registers (I2.2), and Risk Checklists (I2.3). Two risk assessment/analysis tools are (1) Analysis of Risk and Uncertainty (R3.1) and (2) Programmatic Cost Risk Analysis (R3.5). For assigning contingency, the tools of Contingency Percentages and Programmatic Cost Risk Analysis apply for updating as they did in setting the baseline estimate as described in Chapter 5. Finally, the ROW Cost Estimate File tool should be used in all cases, no matter the level of project complexity. The primary difference, in tool use, from developing a baseline estimate to creating an updated estimate involves active risk management. The project team should shift from simply identify- ing risk and setting contingency to actively managing and seeking to mitigate risks. The project team should seek ways to avoid project risks or to mitigate the effect of a risk on project cost. The ROW cost estimator is a vital team member in the risk management approach. The Risk Char- ter tool provides a guide for risk management. In addition to maintaining a list of risks with risk 74 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

assessments, the Risk Charter can be used to actively manage risks. Risk management items typ- ically found on the Risk Charter include • Response actions, • Responsibility (Task Manager), and • Risk resolution schedule. Tips Although there will be a list of risks identified from the previous estimate, be sure to “invite” the project development team to a discussion of the possibility of new risks. Do not rely solely on the current list of risks as the project evolves—new risks may arise or, in the previous reviews, an existing risk may have been overlooked. When updating the list of identified risks, consult with the project development team mem- bers who can mitigate the risk. A formal risk management process will assign an “owner” to each risk for purposes of risk planning and risk reduction. Obtain updated information from the development team members most closely associated with the risks. As risks are realized or mitigated, risk costs should be removed from the contingency and known costs should be included in the base estimate. Be sure to verify that risk costs removed from contingency are included in the base estimate. Be sure to carefully document changes in risks and contingency in the ROW Cost Estimate File. Output The two key outputs to the updated ROW risks and contingency are (1) a revised list of red flag items or a revised risk charter and (2) a revised ROW contingency amount. The revised red flag items or risk charter should be documented in the ROW Cost Estimate File. The revised contingency should be combined with the base estimate to complete the Updated ROW Cost Estimate. The ROW contingency should generally be reduced or resolved as the preliminary design pro- gresses. The contingency resolution can take three general forms: 1. Identified risks are realized  baseline is intact. When an identified risk is realized, the con- tingency is reduced but the base estimate is increased at the cost of the risk that is realized. 2. Identified risks are avoided  reduction in current baseline. When identified risks are avoided through good engineering analysis (cost estimate management loop in Figure 6.1) or fortunate circumstances, there is a reduction in the contingency and a corresponding reduc- tion in the project baseline because no resolved contingency is added to the base estimate. 3. New risks are identified or realized  increase in current baseline or decrease in scope. If risks were missed in earlier estimates and subsequently realized during an estimate update, the project management process will need to allow for an increase to the current baseline or appropriate scope adjustment will need to be made to keep the project within the baseline (cost estimate management loop in Figure 6.1). Review Updated ROW Cost Estimate A cost estimate is a project cost control tool and the updated cost estimate is an important management resource for controlling project cost. Therefore, all estimates should undergo a rig- orous review process to ensure their accuracy and completeness. An estimate should be evalu- ated to ensure that it (1) is valid, (2) contains all required information, and (3) is presented in a Update ROW Cost Estimate 75

manner understandable to all project development team members. In Figure 6.1, an estimate review step is positioned after the Update ROW Risk and Contingency step. The review is a pre- sented as a one-time activity, but an estimate review is completed on the changed portions of each updated estimate. The accepted updated estimate is compared with the current baseline estimate. If the updated estimate is greater then the baseline estimate, management must con- sider the causes of the cost increase and if the requirement for increased funds is acceptable or whether changes should be made to reduce project cost. Inputs Reviewers need a copy of the Updated ROW Cost Estimate and the ROW Cost Estimate File with the supporting documentation. Any changes to project scope or design and the effect of these changes on ROW requirements and cost should be specifically noted in a documentation summary. If a copy of the latest scope document for the project is not contained in the estimated file, the reviewer also needs this document. Process Step Description All updated ROW estimates should be subjected to a structured review of all the changed por- tions of the estimate and a check of total estimate compatibility with the current project scope and design and environmental commitments. The first review of the estimate should be con- ducted by the estimating team that prepared the estimate. This review would be a screening to check (1) the mathematics; (2) that extensions of pricing are correct; (3) that the documenta- tion correlates with the assumptions; and (4) that the estimate adheres to agency guidelines. The documentation of the estimate basis should be carefully reviewed to ensure it is complete and reflects the current project scope. The overall scope should be summarized and the ROW require- ments detailed. All assumptions regarding the effect of scope on ROW requirements must be documented. All preliminary plan drawings that show ROW requirements should be documented to include the latest revision date and sheet number. On the Caltrans “RIGHT OF WAY DATA SHEET” the final block is for the District Division Chief/Regional Manager Right of Way to sign after performing a personal review. I have personally reviewed this Right of Way Sheet and all supporting information. I certify that the probable Highest and Best Use, estimated values, escalation rates, and assumptions are reasonable and proper subject to the limiting conditions set forth, and I find this Data Sheet complete and current. By this point in project development, the ROW section has begun to identify individual parcels, and the complexity of ROW issues will be clearly understood. Major portions of the updated estimate will be developed based on the expected cost of these parcels, instead of aver- age evaluations for general land type methods. The estimator should document the type of appraisal information used to price each parcel (e.g., comparable properties or market survey with verified market data). As with the earlier reviews, ROW complexity should determine the appropriate level of esti- mate probing. Complex projects can require considerable time to move through development and, therefore, demand greater attention to escalation factors and assumed real estate apprecia- tion. This examination of the updated ROW estimate should look at the (1) net ROW estimate without contingency or inflation; (2) risk analysis and assigned contingency value; (3) assignment of a real estate appreciation factor; and (4) supporting documentation in the cost estimate file. Tools Understanding the effect of ROW complexity of real estate cost drivers influences the choice of estimate review methods. The formality of a ROW estimate review and the depth of that 76 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

review will vary depending on the complexity of the ROW situation. As with the Baseline ROW Cost Estimate review, routine projects without complex ROW issues can be satisfactorily exam- ined by an internal review. Internal Review. Consultation with in-house peers and subject matter experts can identify possible errors, omissions, and clarifications in the estimate basis and assumptions. Descrip- tions of three types of internal review techniques, formal committee (Tool E3.1), in-house/peer (Tool E3.3), and round table (Tool E3.4), are presented in Appendix A. Right-of-way becomes an issue more often when adding system capacity, and the issues become more clearly defined as design proceeds. If a project is in a highly urbanized area, right-of-way may be costly, and acquisition of property can demand considerable time. Utilities can be a serious ROW issue in urban areas. Therefore, for projects with complex real estate issues, an external review is recommended. External Review. Cost estimates for large projects or corridors in urban areas that have extremely complex ROW requirements should receive an external review by qualified profession- als (Tool E2.1). Because certain critical elements of these estimates may require a unique expert- ise to verify estimated costs, agencies that fund their projects with bond money conduct reviews that consider the appraised value of each parcel and the associated costs for damages. This exter- nal 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 To be successful, the review must closely examine the assumptions that form the basis of the esti- mation. This review should be conducted by knowledgeable, experienced individuals. The com- plexity of the ROW situation is the most important driver controlling the level of estimate review. A ROW estimate for a small project affecting a few parcels can be reviewed internally by peers and supervisors. Larger and more complex projects, such as those in urban areas and affecting access to commercial properties, may require an increased level of scrutiny. Reviews for these projects would require special group participation and an increased level of management review time. Output If the review finds no issues with the cost estimate and the estimated cost is less than the base- line estimate or current ROW budget, the estimate moves to the approval step. If the estimated amount is greater than the budget, then this result must be communicated to management for pos- sible action to control project cost. All differences between updated cost estimates and the baseline estimate should be explained in a memorandum when the estimate is sent to management. Approve and Communicate Updated ROW Cost Estimate Budget control is critical to managing project costs as the design proceeds and there is increased pressure to expand the scope of a project. An authorized officer of SHA management must approved all cost estimates and certify that the project manager proceed with any change to scope that has affected cost. Some agencies place this approval authority with the Office of Financial Man- agement so that it is completely removed from those directly responsible for project development. Inputs A summary of the reviewed and acceptable ROW estimate package goes forward to management for approval before the cost amount is communicated to the project manager and the design team. Update ROW Cost Estimate 77

Process Step Description Completing all the cost estimation steps for updating a ROW cost estimate, as shown in Fig- ure 6.1, leads to an Updated Baseline ROW Cost Estimate. The approval step is therefore very significant. Approval of an estimated increase in ROW cost, caused by a change in project scope, signifies concurrence with the change. Requiring approval ensures that agency management is aware of the implications of the proposed modifications and understands how such modifica- tions will affect commitments. The approval process requirements should be structured to match the significance of the change as measured by the effect of project cost. Non-Significant Changes. Any change to a project resulting in an increase or decrease in the total cost of right-of-way that is greater than the currently approved baseline estimate by some nominal amount (Missouri DOT says the annual inflation factor) is considered non- significant and may be approved by the project manager. Any series or combination of mul- tiple non-significant changes that occur within the same fiscal year should be measured against the preceding baseline as a single change. Significant Changes. When the changes cause the total estimated ROW cost to exceed the amount of ROW funding (existing approved baseline estimate) by an amount greater than some nominal amount (Missouri DOT uses the annual inflation factor) approval should be required by the District Engineer or the district engineer’s designee. Additionally, approving the change will require coordination with and an approval from the agency’s finance office. Any change to the elements of a project that changes the delivery of a project in the currently approved STIP to a different state-fiscal year should be considered significant. With either change, the details of any proposed change, the reasons why the change is necessary, and the projected effects on the project’s budget and delivery schedule must be stated in the approval package. Scope changes are the primary contributors to cost escalation, and these changes have to be monitored closely as design evolves. Requiring management to be responsible for approving an estimate ensures that the senior levels of an agency are aware (1) of the expected ROW cost based on specified assumptions about project design; (2) that the total estimated cost is a deter- ministic number that will probably be affected by the identified risk factors; (3) that the con- tingency amount left in the estimate is appropriate to counter-act the occurrence of the specific risks events and not an add-on amount to be used for scope changes; and (4) that a specific per- centage has been used to account for real estate appreciation only to a specified date in the future. Tools Budgeting is a balancing act of meeting the agency’s objectives—responding to transportation needs—to the fullest extent possible within the limits of its financial capacity. To optimize the agency’s programs, it is better to establish budget constraints early in the project development process and to demand that estimate reviews and approvals be a critical component of all project decisions. Four budget control tools are presented in Appendix A: Constrained Budget (Tool B1.2), Standardized Estimation and Cost Management Procedures (Tool B1.3), Summary of Key Scope Items (Tool B1.4), and Variance Reports on Cost and Schedule (Tool B1.5). Tips As project design develops and more is known about project conditions, budget control is an important management function. Identifying changes and making necessary modifications to the project budget is reflected through the feedback loop shown on the right side of Figure 6.1. During design, scope definition is refined and there is clearer identification of cost affecting fac- 78 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

tors. Budget control is exercised by requiring different levels of approvals before a project can proceed in development. Communication is predominantly focused on keeping all project team members and external parties informed and updated with respect to the current estimated cost of project right-of-way. Communication channels must allow clear and succinct exchange of information. Efforts must be made to ensure that the significance of cost information is interpreted appropriately. Com- munication of uncertainty and any discrepancies observed must be brought to the notice of peers immediately for remedial procedures. Estimate inputs from disciplines, third parties, and driven by project requirements have to be communicated without ambiguity. Outputs The output of the approval step is an Updated ROW Cost Estimate. This estimate is now used to manage changes in project scope and cost as the design team proceeds to translate the trans- portation solution into contract documents. Chapter Summary Update ROW Cost Estimation during Preliminary Design was the focus of this chapter. The general process for updating, reviewing, and approving this cost estimate was presented. The updated cost estimate is generally determined for a preferred alternative where parcels have been identified based on preliminary drawings. Historical data are not used for land values because land values are based on a market survey and verified sales data to reflect current market values. The effect of structures and other improvement to properties are known. Historical data are mainly used to develop the cost basis for other ROW elements. The cost data are specific to the element being estimated and are developed by expert ROW professionals. ROW estimating staff should update ROW risks to modify the contingency value, based on whether or not the risks occurred. Similar tools are used to update cost estimates. Finally, the project manager, ROW staff, and design team should work together to manage costs against the baseline budget or the latest updated budget adjusted for changes. Update ROW Cost Estimate 79