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76 9.1 Industry Problem Project cost escalation is a serious problem facing SHAs. The failure to deliver individual projects and programs within established budgets has a detrimental effect on later programs and causes a loss of faith in the agencyâs ability to wisely use the publicâs money. Highway design and construction proj- ects can be extremely complex and are often fraught with uncertainty. However, engineers, project managers, and cost estimators often overlook or fail to recognize project uncer- tainty early in the project development process. As a result they do not communicate uncertainty and its effect to the stake- holders. A comprehensive risk management approach can help project teams identify, assess, mitigate, and control project risks. Among the benefits of a comprehensive risk manage- ment approach is the ability to generate range estimates early in the project development process and to establish justifiable contingencies that can be resolved throughout the design and construction process. This Guidebook presents a systematic process to apply risk analysis tools and management practices to aid SHA management in controlling project cost growth. The Guidebook addresses risk identification, assessment, analysis, mitigation, allocation, and tracking and control in a manner that is systematically integrated into the organizational structure and culture of SHAs. 9.2 Guidebook Development The Guidebook was developed as an extension to NCHRP Report 574: Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Precon- struction. That research presented a strategic approach to cost estimating and cost estimate management. However, the research team and the NCHRP research panel members iden- tified the need for more detailed tools and management prac- tices in the area of risk analysis and risk management practices. These needs were recognized as particularly crucial for the long-range transportation planning, priority programming, and preconstruction stages of the project development process. In the initial effort of this Guidebook, the research team conducted a survey of current SHA risk management prac- tices. It was revealed that while risk is indeed inherent in every capital transportation project, the survey found that only three of the 48 state agencies responding to the survey had formal, published project risk management policies or proce- dures. Additionally, the survey found that only eight of the 48 responding agencies have a formal published definition of contingency. Without a formal definition for contingency, agencies have a difficult time consistently calculating contin- gencies appropriate to project conditions. Therefore, this Guidebook is imperative to support SHA efforts to control project cost escalation. Given the current state of practice, the research team employed an approach to developing the Guidebook that included a critical review of the literature; in-depth case stud- ies with leading agencies, both inside and outside of the trans- portation sector; and a thorough industry validation of the work. The research team gathered and annotated more than 80 papers and reports on risk and risk management. In reviewing these articles and reports, the research team iden- tified important research terms and sought risk management methods and tools to assist in cost estimating, estimating contingency, or risk management related to cost control. Fol- lowing the literature review, the team closely analyzed eight in-depth case studies. The case studies were with the Caltrans agency, the Caltrans San Francisco-Oakland Bay Bridge proj- ect, WSDOT, the US DOE, the FHWA, the FTA, the New York Metropolitan Transit Agency, and the Ohio DOT. The research team used the knowledge gained from industry sur- veys, the literature review, and the case studies to develop the initial Guidebook. The Guidebook was then tested with the WSDOT, Mn/DOT, and the Colorado DOT and reviewed by the NCHRP Panel. The resulting Guidebook is founded on industry practice and was validated through industry review. C H A P T E R 9 Path Forward
77 9.3 The Risk Management Framework The risk management framework described in this Guide- book is based on best practices in the design and construction. In the Guidebook, those practices are adapted to the unique needs of highway project development. The overall frame- work of the Guidebook includes three main elements: â¢ Risk Management Process: risk identification; assessment; analysis; planning and mitigation; allocation; and monitor- ing and control; â¢ Project Development Phases: planning, programming, and design; and â¢ Project Complexity: project type, technical complexity, and management complexity. The interaction of the risk management process with the project development process and with project complexity is shown schematically in Figure 9.1. Of particular note in Figure 9.1 is the fact that the overall risk management process is cyclical. As the project evolves, some risks will be resolved or diminished, while others may surface and thus be added into the process. The five funda- mental risk management steps can be applied throughout the project life cycle. The extent of application of each step varies as the methods and tools used to support these steps are influ- enced by the project development phase and project com- plexity. The process is scalable from small and noncomplex projects to large and complex projects. There are five imper- ative steps to managing project risk. â¢ Risk identification is the process of determining which risks might affect the project and documenting their character- istics using such tools as brainstorming and checklists. â¢ Risk assessment/analysis involves the quantitative or quali- tative analysis that assesses impact and probability of a risk. Risk assessment assists in deriving contingency estimates. Quantitative and qualitative risk analysis procedures are applied to determine the probability and impact of risks. â¢ Risk mitigation and planning involves analyzing risk response options (acceptance, avoidance, mitigation, or transference) and deciding how to approach and plan risk management activities for a project. â¢ Risk allocation involves placing responsibility for a risk to a party, typically through a contract. The fundamental tenants of risk allocation include allocating risks to the party that is best able to manage them, allocating risks in alignment with project goals, and allocating risks to promote team align- ment with customer-oriented performance goals. â¢ Risk monitoring and control is the capture, analysis, and reporting of project performance, usually as compared to the risk management plan. Risk monitoring and control assists in contingency tracking and resolution. 9.4 Challenges and Keys to Success The challenges of implementing risk management processes to control project costs are similar to those identified by the research team for implementing new cost estimating and man- agement practices in NCHRP Report 574. State highway agen- cies must consider several challenges when deploying this Guidebook: â¢ Challenging the status quo and creating a cultural change requires leadership and mentoring to ensure that all steps in the cost estimation management and cost estimation processes are performed. â¢ Developing a systems perspective requires organizational perspective and vision to integrate cost estimation manage- ment and cost estimation practice throughout the project development process. â¢ Dedicating sufficient time to changing agency attitudes toward estimation and incorporating the strategies, meth- ods, and tools from this Guidebook into current state high- way agency practices is difficult when resources are scarce. â¢ Dedicating sufficient human resources to cost estima- tion practice and cost estimation management beyond the resources that have previously been allocated to estima- tion processes. Meeting these challenges will ultimately require a commit- ment by the agencyâs senior management to direct and support change. The benefit of this commitment will be manifested in projects that are consistently within budget and on schedule and that fulfill their purpose as defined by their scope. This Risk Management ProcessAllocate Monitor and Control Identify Assess/ Analyze Mitigate and Plan Figure 9.1. Risk management process framework (varies by project development phase and complexity).
78 benefit also will improve program management by allowing for better allocation of funds to projects to meet the needs of the ultimate customer, the public. NCHRP Report 574 provided 10 key principles to success- ful cost estimation management and cost estimation practices. The 10 keys to success are repeated in this Guidebook on risk analysis tools to control project cost. Cost estimation management: 1. Make estimation a priority by allocating time and staff resources. 2. Set a project baseline cost estimate during programming or early in preliminary design, and manage to this estimate throughout project development. 3. Create cost containment mechanisms for timely decision making that indicate when projects deviate from the baseline. 4. Create estimate transparency with disciplined communica- tion of the uncertainty and importance of an estimate. 5. Protect estimators from internal and external pressures to provide low cost estimates. Cost estimation practice: 1. Complete every step in the estimation process during all phases of project development. 2. Document estimate basis, assumptions, and back-up cal- culations thoroughly. 3. Identify project risks and uncertainties early, and use these explicitly identified risks to establish appropriate contingencies. 4. Anticipate external cost influences and incorporate them into the estimate. 5. Perform estimate reviews to confirm that the estimate is accurate and fully reflects project scope. Of particular note is Cost Estimating Practice #3, which deals directly with identifying risks and uncertainties. Lessons learned from the development of this Guidebook can be sum- marized in five additional keys to success for risk analysis tools to control project cost. 6. Employ all steps in the risk management process. 7. Communicate cost uncertainty in project estimates through the use of ranges and/or explicit contingency amounts. 8. Tie risks to cost ranges and contingencies as a means of explaining cost uncertainty to all stakeholders. 9. Develop risk management plans and assign responsibil- ity for resolving each risk. 10. Monitor project threats and opportunities as a means of resolving project contingency.