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72.1 Introduction Based on a projectâs level of definition, cost estimates are prepared by a SHA during each phase of project develop- ment to establish the projectâs probable cost. These cost es- timates are used by agency and external decision makers and management to support crucial project or program funding decisions. A number of factors affect the accuracy of these estimates and the estimation techniques used to arrive at the esti- mated cost figures. Some of the most significant will be dis- cussed further in detail later in this chapter: the available project information at the time of estimate preparation; the nature and magnitude of risks affecting the project cost; and the project complexity, project size, and timing. Contingency planning is a critical part of the estimate preparation process. It is the estimate process component that seeks to address uncertainties inherent to each cost es- timate. As a standard practice SHAs often provide some form of contingency in their cost estimates by allocating predetermined percentages of project cost as contingency or by performing some level of qualitative or quantitative risk assessment to determine risk impact on project cost and to thereby establish a contingency amount. This guidebook fo- cuses on risk management practices and risk analysis tools to better estimate and control project cost. Cost control is accomplished through consistent and accurate estimates, and through proper contingency planning and manage- ment. In this chapter, risk practices are considered within the context of the project development phases common to state highway agencies, cost estimation and cost manage- ment processes, and project complexity. 2.2 Transportation Project Development Phases Due to slight variations in the terms used by the state high- way agencies to describe their project development phases, a generic set of terminologies are presented in this guidebook consistent with the NCHRP Report 574: Guidance for Cost Esti- mation and Management for Highway Projects During Plan- ning, Programming, and Preconstruction project development phases: 1) Planning, 2) Programming, 3) Preliminary design, 4) Final design. These phases are described in Table 2.1 and shown in Figure 2.1. To ensure the applicability of terms SHAs from across the country participated in a vetting of the project development phases described in the Report 574. Typically, a SHA will prepare project cost estimates during each of the four phases of project development. Figure 2.1 depicts an overlapping approach in the Planning, Programming, and Preliminary Design phases. This overlap- ping indicates the cyclical nature of these phases as transporta- tion agencies identify needs and define projects to address those needs. 2.3 Cost Estimating and Cost Management Definitions A key to implementing any new process or procedure within an agency is to have a common vocabulary for the process. The following definitions were developed with the intention of developing a common vocabulary and set of practices that promote learning and the exchange of new tools, ideas, and innovations relating to cost estimating and cost management. Definitions for risk management are C H A P T E R 2 Project Cost Estimation and Management
provided in Chapter 3. The definitions rely heavily on published definitions from estimating and risk management standards to highway-specific risk management and cost control.1 2.3.1 Cost Estimating Terms Allowance. An amount included in the base estimate for items that are known but the details of which have not yet been determined. Base Estimate. The most likely project estimate, exclusive of project contingency, for known costs for all known design, engineering, cooperative agreements, right-of-way, environ- mental, utilities, preconstruction, and construction work. Contingency. An estimate of costs associated with iden- tified uncertainties and risks, the sum of which is added to the base estimate to complete the project cost estimate. Contin- gency is expected to be expended during the project develop- ment and construction process. Cost Estimate. A prediction of quantities, cost, and/or price of resources required by the Scope of a project. As a pre- diction, an estimate must address risks and uncertainties. The cost estimate consists of the base estimate for known costs associated with identified uncertainties and risks. Cost Estimating. The predictive processes for approximat- ing all project costs such as design, engineering, cooperative agreements, right-of-way, environmental, utilities, precon- struction, and construction work. As a predictive process, estimating must address risks and uncertainties. Project cost estimating generally involves the following general steps: determine estimate basis, prepare base estimate, determine risk and set contingency, and review total estimate. Estimate Basis. A documentation of the project type and scope for each cost estimate, including items such as drawings that are available (defining percent engineering and design completion), project design parameters, project complexity, unique project location characteristics, and disciplines re- quired to prepare the cost estimate. Range (or Stochastic) Estimating. A risk analysis tech- nology that combines Monte Carlo sampling, a focus on the few key variables, and heuristics (rules-of-thumb) to rank critical risk elements. This approach is used to establish the range of the total project estimate and to define how contin- gency should be allocated among the critical elements. 8 1 Over 500 definitions were reviewed to create the concise list of 40 definitions for this Guidebook. These referenced definitions have been integrated and mod- ified to specifically support highway project development processes, to incorpo- rate common transportation language, and adhere to current agency cultures. The following references were used to support definition development: â¢ Association for the Advancement of Cost Engineering International (2007). Cost Engineering Terminology: AACE International Recommended Practice No. 10S-90. AACE International, Morgantown, PA. â¢ Association for the Advancement of Cost Engineering International Risk Committee (2000). âAACE Internationalâs Risk Management Dictionary,â Cost Engineering Journal, Vol. 42, No. 4, pp. 28-31. â¢ Caltrans (2007). Project Risk Management Handbook. Report of the Califor- nia Department of Transportation (Caltrans), Office of Project Management Process Improvement. Sacramento, CA. â¢ Department of Energy (2003). Project Management Practices, Risk Manage- ment, U.S. Department of Energy, Office of Management, Budget and Evalua- tion, Office of Engineering and Construction Management, Washington, D.C. â¢ Molenaar, K.R., Diekmann, J.E. and Ashley, D.B. (2006). Guide to Risk As- sessment and Allocation for Highway Construction Management, Report No. FHWA-PL-06-032, Federal Highway Administration, Washington, D.C. â¢ Project Management Institute (2004). A Guide to Project Management Body of Knowledge (PMBOKÂ® Guide), The Project Management Institute, Newton Square, PA. â¢ Washington State Department of Transportation (2006). Cost Estimate Vali- dation Process (CEVPÂ®) and Cost Risk Assessment (CRA), Washington State Department of Transportation, Olympia, WA. <Viewed on August 1, 2007, ww.wsdot.wa.gov/projects/projectmgmt/riskassessment> â¢ Wideman, R.M. (1992). Project and Program Risk Management: A Guide to Managing Project Risks. Newton Square, Pennsylvania. Development Phases Typical Activities Planning Purpose and need; improvement or requirement studies; environmental considerations; right-of-way considerations; schematic development; public involvement/participation; interagency conditions. Programming (a.k.a. scoping, definition) Environmental analysis; alternative selections; public hearings; right-of-way impact; design criteria and parameters; project economic feasibility and funding authorization. Preliminary Design Right-of-way development; environmental clearance; preliminary plans for geometric alignments; preliminary bridge layouts; surveys/utility locations/drainage. Final Design Right-of-way acquisitions; PS&E development â final pavement and bridge design, traffic control plans, utility drawings, hydraulics studies/final drainage design, final cost estimates. Table 2.1. Development phases and activities (Anderson and Blaschke 2004).
Total Cost Estimate. The sum of the base cost estimate and contingency. 2.3.2 Cost Management Terms Baseline Cost Estimate. The most likely total cost esti- mate, which serves as the approved project budget and the basis for cost control. The approved budget must correspond to an approved scope of work, work plan, and an approved project schedule. Cost Control. The process of controlling deviations from the estimated project costs and monitoring the risks and contingencies associated with changes. Two principles apply: 1) there must be a basis for comparison (e.g., the baseline cost estimate); and 2) only future costs can be controlled. Cost Escalation. Increases in the cost of a project or item of work over a period of time. Cost Management. The process for managing the cost es- timate through reviews and approvals, communicating esti- mates, monitoring of scope and project conditions, evaluating the impact of changes, and making estimate adjustments as appropriate. Project Management. The process of organizing, plan- ning, scheduling, directing, controlling, monitoring, and evaluating activities to ensure that stated project objectives are achieved. Scope. Encompasses the elements, characteristics, and parameters of a project and work that must be accomplished to deliver a product with the specified requirements, features and functions. Scope Changes. Changes in the requirements, features or functions on which the project design and estimate is based. Examples would include changes to project limits, work types, or changes to capacity factors such as traffic loads, vehicles per lane, or storm water factors. Scope Creep. An accumulation of minor scope changes that incrementally change project scope, cost, and schedule. 2.4 Timeline of Cost Estimating and Cost Management The cost estimates prepared and the estimation tech- niques used at each of the project development phases must be consistent with the project information available at the specific point in time when the estimate is prepared. When only concept information is available to describe a trans- portation program and its projects, the agency will have to apply conceptual estimating techniques in preparing the es- timate. Subsequently it should be possible to prepare more detailed and accurate cost estimates as the project advances through the phases of project development with scope being defined in more detail and more definitive informa- tion becoming available. Similarly, cost estimate manage- ment techniques vary depending on the level of project scope definition, organization of the project team, and cost detail presented in the estimate. Cost estimation manage- ment ensures that program/project budgets are in line with budget projections and project goals through all phases of the development process. Cost estimates prepared by SHAs often include a base esti- mate and a separate contingency covering project uncertainties (e.g., project definition development, engineering complexi- ties, cost uncertainties, etc.). The level of project information available at the time of estimate preparation has a significant effect on the contingency value and, hence, the overall accu- racy of the estimate. The contingency amount added to the base estimate should reduce as more project information 9 Planning Construction Advertise & Bid Final Design Programming Preliminary Design Figure 2.1. Project development phases (NCHRP 8-49).
becomes available at each phase of project development. The availability of more definitive project information across the project development phases enhances the risk as- sessment effort and that enables project teams to identify more risks and their corresponding impacts, especially those that were not recognized during the earlier phases of project development. As a result, by the final design phase, most of the project risks are known, their likely impacts have been determined, and mitigation measures should have been set in place. Hence fewer project unknowns are left unresolved at this point. Typically the quantification of risk impacts from the assessment effort results in lower and lower contin- gencies applied to an estimate in the later phases of project development compared to the contingency used in the ear- lier phases. To achieve better accuracy in project cost esti- mates and to keep project costs within budget, risk assess- ment and cost estimation management must be made an integral part of the estimation processes used throughout project development. 2.4.1 Planning Phase The planning phase of project development has a signifi- cantly longer time horizon than the other phases, usually greater than 20 years. The individual agency approaches to this phase vary significantly. While 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 de- tailed planning is required. However, regional transportation plans are very different. These plans do identify specific proj- ects that are to be implemented over the next 20 years. The fundamental purpose of planning cost estimates that support long-range plans is to provide an order-of-magnitude estimate of the funds needed over a 20-year planning horizon. Planning-phase cost estimates by nature involve the use of conceptual estimating techniques due to the limited project information available at the point in time when they are pre- pared. Projects lack definition and their scope is not finalized; therefore, many project risks are unknown and cannot be readily identified. With this in mind, some SHAs often include a predetermined percentage of the project cost as contingency in the estimates to accommodate these unknowns. Other SHAs determine contingency percentages using historical data from similar past projects. In any case, planning cost estimates are best presented in a range of costs rather than a single number. A range more appropriately reflects the low level of definition associated with planning estimates. During the plan- ning phase, cost estimation management focuses primarily on updating planning dollar amounts and communicating the cost updates through the long range plan. 2.4.2 Programming Phase Project cost estimates have a significant effect on the over- all transportation program and, thus, on the ability of state highway agencies and metropolitan planning organizations (MPOs) to meet transportation needs. Producing accurate programming phase cost estimates is critical to successful project development; however, at this early stage the project cost estimate is still produced based on only limited knowl- edge of project scope and requirements. Programming phase estimates are often predicated on a baseline project scope and in many SHAs these estimates be- come the baseline project cost for managing project develop- ment scope and cost. The baseline cost estimate sets the proj- ect budget for inclusion in the agencies priority program. The priority program typically has a 10 year or less time horizon to the projected construction letting date. When a project is in- cluded in the priority program, authorization is often given for preliminary design to begin. The first four years of the priority program is considered the Statewide Transportation Improve- ment Program (STIP). Many SHAs prepare the baseline cost estimate just prior to incorporating a project in the STIP (year five from letting). This baseline cost estimate sets the budget for the project from which cost management is performed. Historical bid-based estimation techniques in combination with percentages are often used during the programming phase of project development due to the availability of only limited project information. However, cost estimation is en- hanced by the risk management process that involves the use of qualitative and quantitative techniques for determining the cost impact of the risks on the project base cost estimate and the corresponding contingency required. A risk management plan is prepared and used for managing risks throughout the project. The established contingency amount is typically lower than that used in the planning phase. Once preliminary design begins, this baseline cost estimate becomes the basis for cost management, particularly monitoring project scope and the impact of changes and new risks on the project contingency. 2.4.3 Preliminary Design Phase During preliminary design the agency transforms the proj- ect scope from general requirements to detailed physical components. The preparation of costs estimates at various times (usually a specific points in completion of design such as 30 percent, 60 percent, etc.) throughout preliminary design validates project cost against current design detail and scope. If these estimates indicate cost growth above the baseline cost, this triggers cost management procedures to bring the proj- ect cost back in line with programmed amounts (e.g., value engineering studies, consideration of design alternatives). Al- ternatively, creation of a new revised baseline with additional 10
funding approved by management may be required. These estimates are important because they support management monitoring and control of the project budget. Cost management based on revised or updated estimates is an essential activity during the preliminary design phase when scope is transformed into construction details. Agen- cies should systematically compare periodic cost estimate up- dates and compare them to the baseline cost. If estimates are not preformed regularly during project design the depart- ment will experience what is known as cost blackout periods (Clark and Lorenzoni 1997) and these can lead to major budget problems when cost increases are identified later in project development. To effectively manage overall project cost, agencies must continuously evaluate changes in scope, design, risks, and project site or market conditions in relation to cost and time impacts against the project baseline scope, cost, and schedule. During this phase of project development the risks identified in the planning and programming phases may have been mitigated, but new risks may be identified and their corresponding impacts on cost determined. Risk regis- ters are updated and the changes due to the resulting impacts are reflected in the overall contingency, which is then used to update earlier estimates. Management uses estimate updates to evaluate scope changes and other issues that affect project cost. Any deviation from budget and schedule must have doc- umented management approval. 2.4.4 Final Design Phase The final design phase typically represents that point in the project development process when plans and specifica- tions are complete. At this stage the project is well defined and any construction related risks are embedded into the project line or pay items. This approach is necessary as the final estimate is compared with contractorâs estimates by line or pay item. The contractor incorporates risk into its esti- mate of each pay item. 2.5 Cost Estimating Process A successful cost estimating process provides a structured and systematic approach to determining project costs. NCHRP Report 574 provides nine steps to describe the fundamental elements of cost estimation and cost estimation management practice. Four basic steps describe cost estimation practice. Table 2.2 presents these four steps together with a brief de- scription of each. The descriptions are generic and, therefore, applicable to the estimation process across each development phase. These four steps convey the idea of a structured ap- proach to cost estimation. The operational manner in which the steps are performed will vary depending on project devel- opment phase. The level of completeness in the project scope and refinement of project design will drive these variations. Further, the application of each step may change depending on the project component that is being estimated, such as costs for preliminary engineering/final design, right of way, and construction. In this four step cost estimation process, a separate step focuses specifically on risk and contingency at the time of estimate preparation. Determine risks and set contingency requires some level of risk analysis to set an appropriate con- tingency consistent with the impact of the identified risks. In the context of this Guidebook and the risk management process shown in Figure 1.1, identifying risks and assessing/ analyzing risks closely aligns with cost estimate step to deter- mine project risks and evaluate the contingency value consis- tent with the project risks. 2.6 Cost Management Process Cost estimation management should occur continuously throughout the project development process. Some efforts are exclusive to a particular stage of development, while others are inclusive throughout the process. The four phasesâplanning, programming, preliminary design, and final designârequire the application of different cost manage- ment methods due to the level of project information that is available and the manner in which the estimate must be com- municated internally and externally. Even early in project development, agency management has the responsibility of reviewing, approving, and commu- nicating the project estimate. Communication is very impor- tant in the case of early estimates and management must make both internal and external stakeholders aware of an es- timateâs precision and its limits of accuracy. Many times a cost for a particular project comes out early in the planning or programming phase and it is a number that stakeholders compare final costs to and judge the âsuccessâ of the project by, no matter how preliminary (and subject to further refine- ment) that initial estimate was. These management actions, the use of conceptual estimating techniques and proper com- munication of estimate uncertainty, have the potential to sig- nificantly improve proper use of early cost estimates. Five steps describe the cost estimation management process (Anderson et al. 2007). Table 2.3 provides a description for each of these steps. Again, the descriptions are general and therefore applicable to the cost estimation management process across project development phases. Implementation of these steps will vary by development phase and the project component (preliminary engineering/final design, right of way, and con- struction). Similar to the cost estimation practice steps, the cost estimation 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 11
the estimating steps, the project development phase dictates some level of variation in which the steps are performed. During the cost management process, potential changes are monitored. Changes may include retiring previous risks or adding newly identified risks. These risks relating to changes may result in plus or minus adjustments to contin- gency and the overall project estimate. The impact of changes must be evaluated and estimates reviewed. In relation to the risk management process shown in Figure 1.1, the steps in Table 2.3 align with risk mitigation and planning, risk alloca- tion, and monitoring and controlling risks. 2.7 Project Complexity and Impact on Estimation and Risk Management Process The level of effort expended for planning and developing projects varies depending on project complexity. A project is described in a number of ways, with some descriptions rely- ing on project attributes to convey the complexity of a project. For example, attributes related to roadways, traffic control approaches, structures, right of way, utilities, environmental requirements, and stakeholder involvement often are used to distinguish different levels of project complexity. This ap- proach is used in the NCHRP Report 574 and captured in that report as a tool, Recognition of Project Complexity. This same tool is included in the Appendix A of this guide (see Tool R1.1). Table 2.4 shows how the pavement attribute might change based on the three levels of complexity described in the Recognition of Project Complexity tool. The complexity sce- nario that describes a project will impact the need for and de- gree of the cost estimation, risk analysis and cost manage- ment efforts. Projects in the highest complex category (major projects), which includes new highways, major relocations or recon- struction, may require a comprehensive quantitative assess- ment of the project risks to determine their impact on the overall cost and an appropriate amount of contingency to in- clude in the cost estimate either at a project or program level. Moderately complex projects such as minor roadway reloca- 12 Table 2.2. Cost estimating process (Anderson et al. 2007). Cost Estimating Step Description Determine estimate basis Document project type and scope including â¢ scope documents; â¢ drawings that are available (defining percent engineering and design completion); â¢ project design parameters; â¢ project complexity; â¢ unique project location characteristics; and â¢ disciplines required to prepare the cost estimate Prepare base estimate Prepare estimate, including â¢ documentation of estimate assumptions, types of cost data, and adjustments to cost data; â¢ application of appropriate estimati ng techniques, parameters, and cost data consistent with level of scope definition; â¢ coverage of all known project elements; â¢ coverage of all known project conditions; and â¢ check to ensure that estimate is consistent with past experience. Determine risk and set contingency Identify and quantify areas of uncertainty related to â¢ project knowns and unknowns; â¢ potential risks associated with these uncertainties; and â¢ appropriate level of contingency congruent with project risks. Review total cost estimate Review estimate basis and assumptions, including â¢ methods used to develop estimate parameters (e.g., quantities) and associated costs; â¢ completeness of estimate relative to project scope; â¢ application of cost data, including project-specific adjustments; â¢ reconciliation of current estimate with the baseline estimate (explain differences); and â¢ preparation of an estimate file that compiles information and data used to prepare the project estimate.
13 Cost Estimate Management Step Description Obtain appropriate approvals Obtain management authorization to proceed by â¢ review of current project scope and estimate basis; â¢ securing of approvals from appropriate management levels; â¢ approval of current estimate, including any changes from previous estimate; and â¢ 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 â¢ mechanism for communicating the cost estimate for its intended purpose; â¢ level of uncertainty to be communicated in the estimate given the information upon which it is based, and; â¢ mechanism to communicate estimate to external parties. Monitor project scope and project conditions Identify any potential deviation from the existing estimate basis, including â¢ changes to scope; â¢ changes due to design development; â¢ changes in project risks; â¢ changes due to external conditions; â¢ the nature and description of the potential deviation; and â¢ 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 â¢ cost and time impact of the deviation; â¢ risk impact on project contingency; and â¢ 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 â¢ appropriate approval of the deviation; â¢ the new project scope, new budget, and/or new schedule; and â¢ notifiy project personnel of the change. Table 2.3. Cost estimate management process (Anderson et al. 2007). Most Complex (Major) Projects Moderately Complex Projects Non-complex (Minor) Projects â¢ New highways; major relocations â¢ New interchanges â¢ Capacity adding/major widening â¢ Major reconstruction (4R; 3R with multi-phase traffic control) â¢ Congestion Management Studies are required â¢ 3R and 4R projects which do not add capacity. â¢ Minor roadway relocations. â¢ Certain complex (non-trail enhancements) projects. â¢ Slides, subsidence. â¢ Maintenance betterment projects â¢ Overlay projects, simple widening without right-of-way (or very minimum right-of-way take) little or no utility coordination â¢ Noncomplex enhancement projects without new bridges (e.g., bike trails) Note: 4R is rehabilitation, restoration, resurfacing, or reconstruction Table 2.4. Example complexity classification (pavement attributes).
tions will typically require a less rigorous risk analyses. Quite often, a qualitative risk assessment will adequately capture as- sociated risks and their cost impacts on the project. Noncom- plex (minor) projects could include maintenance projects that may not necessarily require any major risk assessment efforts. Project complexity is also often described by location, that is, whether the project is located in an urban or rural environ- ment. Typically, urban settings tend to create more complex traffic control approaches. However, if a project is associated with an interstate roadway, even a noncomplex or minor road- way project may have increased traffic control requirements. This may change the perspective on a projectâs complexity. The level of risk analysis effort and the risk estimation tools used are dependent on the level of project complexity. For noncomplex projects, qualitative assessment techniques may be used to identify project risks and contingency set based only on the perceived magnitude of impacts of the listed risks. If the same qualitative method is applied to a highly complex project, the likely risk impacts may be under- estimated and the applied contingency inadequate to cover the probable cost consequences. Complex projects therefore would require the use of quantitative and probabilistic meth- ods, in combination with qualitative methods, to be able to more accurately determine the likely impact of the risks and to set a contingency appropriate to the magnitude of possible impacts. 2.8 A Strategic Approach A large number of research studies document the funda- mental factors that cause project cost escalation (Merrow 1988, Touran and Bolster 1994, Ripley 2004). NCHRP Report 574 identified 18 specific factors that lead to cost escalation. Each factor presents a challenge to every agency seeking to produce accurate project cost estimates and to manage costs. While every cause will not create problems on every project, the only way to consistently mitigate all of the causes is to use a strategic approach to cost estimation, risk analysis, and cost management. Through an extensive review of estimating literature and discussions with SHAs, NCHRP Report 574 defines eight strategies that converge to address the principal causes of project cost escalation. These eight strategies are: â¢ Management strategyâManage the estimation process and costs through all stages of project development; â¢ Scope and schedule strategyâFormulate definitive processes for controlling project scope and schedule changes; â¢ Off-prism strategyâUse proactive methods for engaging external participants and assessing the macro-environmen- tal conditions that can influence project costs; â¢ Risk strategyâIdentify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed; â¢ Delivery and procurement strategyâApply appropriate delivery methods to better manage cost because project delivery influences both project risk and cost; â¢ Document quality strategyâPromote cost estimate accu- racy and consistency through improved project documents; â¢ Estimate quality strategyâUse qualified personnel and uniform approaches to achieve improved estimate consis- tency and accuracy; and â¢ Integrity strategyâEnsure 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. The risk strategy is the primary driver for addressing issues related to project uncertainties and risks and in determining appropriate amounts of contingency for estimates prepared in different project phases. 2.8.1 Inconsistent Application of Contingencies Of the 18 factors identified in NCHRP Report 574, one fac- tor is directly related to uncertainty and risk. Inconsistent Ap- plication of Contingencies causes confusion as to exactly what is included in the line items of an estimate and what is cov- ered by contingency amounts. Contingency funds are typi- cally meant to cover a variety of possible events and problems that are not specifically identified or to account for a lack of project definition during the preparation of planning and project development estimates. Misuse and failure to define what costs contingency amounts cover can lead to estimate problems. In many cases it is assumed that contingency amounts can be used to cover added scope, and planners and engineers seem to forget that the purpose of the contingency amount in the estimate is lack of design definition. SHAs run into problems when the contingency amounts are applied in- appropriately. During project execution, contingency funds often are inappropriately used to cover project overruns instead of being applied to and available for their intended purpose. As a result, a risk strategy is suggested to address this inconsistent application of contingency among SHAs. 2.8.2 Risk Strategy Identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed. Rather than a single deterministic forecast of project cost, it must be understood that many variables contribute to a range 14
of probable cost. In the case of state highway agency project es- timates, any one cost number represents only one result based on multiple assumptions. These variables that influence proj- ect costs are not all directly controllable or absolutely quantifi- able. Therefore, cost estimation must consider uncertainties and related risks. Management should use these identified risks and uncertainties to structure management procedures that mitigate, eliminate or account for the possible variation in the outcomes. The risk strategy supports the need for a more specific focus on risk management practices and tools as presented in this Guidebook. However, implementation of new or improved management practices in such areas as risk requires commit- ment from top management. 2.9 Management Support for Estimating and Cost Management Practices Cost estimation practice is highly dependent on how an agency manages project development and the support agency management provides to engineers executing project devel- opment, including estimate and schedule preparation. Senior agency managers should view themselves as investors, devel- opers, and strategists. Management has the responsibility to invest and develop project staff and to provide the staff with the resources to effectively perform their jobs. To consistently achieve accurate estimates agencies must do more than institute changes in estimating practices. Senior management must view project cost estimate management and estimate practice as interdependent systems that span the entire planning and project development process. Risk man- agement plays a significant role in the project estimation process and should be embraced to ensure that estimates are accurate and consistent. Project managers must be given the authority to manage their projects, particularly authority to control scope, and with that authority acceptance of respon- sibility for results. It is managementâs responsibility to assume the lead in prop- agating organizational change that recognizes the importance of 1) a structured strategic approach to estimate preparation; 2) the use of risk analyses in setting estimate contingency; 3) re- viewing and approving all estimates; and 4) communicating the importance and accuracy of each estimate with internal and external stakeholders. This Guide presents a variety of risk assessment and analy- sis tools, and their uses and applicability across the phases of project development. These serve to support the cost estimat- ing and cost management processes and help senior manage- ment achieve their goal of producing accurate cost estimates. 2.10 Summary This chapter provides an overview of the cost estimation and cost management process with particular reference to risk management and contingency planning. The typical trans- portation project development phases are described with em- phasis on the use of estimating approaches consistent with available project information. The cost estimating process and cost management process are illustrated using four steps and five steps, respectively, while highlighting typical activities re- lated to each step. Project complexity scenarios are presented in view of the fact that their effect on the cost estimation and cost management processes must always be understood and addressed when considering the affects of project risk. Empha- sis is placed on the importance of management support in promoting a conducive working environment that can pro- duce accurate estimates. 15