Final Report for NCHRP Report 574: Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction (2006)

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122 CHAPTER 8 CONCLUSIONS AND RECOMMENDATIONS Cost escalation that occur over the course of project development constitute the major research problem that this project has addressed. This problem is manifested in cost estimation practice and cost estimation management approaches that do not promote consistency and accuracy of cost estimates over the project development process. This issue has been addressed through meeting the following research objective: Develop a Guidebook on highway cost estimation management and project cost estimation practice aimed at achieving greater consistency and accuracy between long-range transportation planning, priority programming, and preconstruction estimates. The contents of the Guidebook that was developed is based on an extensive review of literature, current industry practice, and inputs from experts in the area of cost estimation practice and cost estimation management. The Guidebook contents are structured around a strategic approach to addressing cost escalation. Eighteen cost escalation factors were identified. Eight strategies are proposed to address these cost escalation factors. Over 30 methods were identified and described to implement the strategies. Finally, over 90 tool applications are presented to support the execution of the methods. The Guidebook strategies, methods, and tools are aligned with three main project development phases: planning; programming and preliminary design; and final design. The Guidebook was critiqued by ten state highway agencies and reviewed in detail by the NCHRP Project 8-49 Panel. Finally, an implementation plan is proposed for state highway agencies and the industrywide application of the Guidebook. This chapter provides conclusions based on the totality of the research effort. Specific recommendations are provided. The chapter is concluded with “Ten Key Principles” that must be focused on to ensure consistent and accurate estimates. CONCLUSIONS General Industry Related Conclusions • Cost increases continue to be a problem facing SHAs especially in view of recent trends in increasing prices of steel, concrete, asphalt, and other materials. • Many of the current approaches to solving this problem appear to be unstructured and do not provide a comprehensive approach. • Most efforts have focused on creating tools to improve cost estimates with less emphasis on tools for cost estimation management. • There is a lack of comprehensive strategies for creating a systematic approach to the problem across the project development life cycle.

123 • Within some SHAs a variety of approaches to estimation often exist, thereby, creating a lack of consistency in preparing estimates, particularly as the responsibility passes between groups during development stages. • Planning and design personnel have primary responsibility for performing project development work. These professionals also are responsible for project estimation and cost management. This may influence the ability of these SHA personnel to produce accurate estimates with an appropriate level of research on unit costs and other factors impacting estimated costs. It can also promote an optimistic bias towards cost estimates as it is difficult to make objective cost assessments on one’s own design. • There appears to be a disconnect between cost estimates developed for planning and the cost estimate developed to program a project as different functional groups are responsible for these estimates. In some cases, planning estimates do serve as a basis for programming estimates that will set a baseline budget. Different states approach planning differently in terms of policy based versus project based planning. • There appears to be a significant lack of any structured analysis directed at uncertainty and associated risks with respect to cost estimates. This appears in the form of unsatisfactory risk assessments and corresponding risk management. • Many agencies do not set a baseline cost for individual projects, or if they do, they are often not set at consistent times in the project development process. The establishment of a baseline estimate is critical to proper cost management. • There is a general lack of consistency in how estimates are communicated both internally and externally. Key components include the communication of uncertainty and contingency in an estimate. Communication in year-of-construction dollars was also found to be inconsistent. • There is a lack of an integrated approach to cost estimation practice and cost estimation management. • Few SHAs have comprehensive documented process supported by flowcharts that describe cost estimation practice and cost estimation management covering these processes over the project development timeline. • Understanding the influence of market conditions on cost estimates and the tracking of changes in market conditions and the impact these changes have on budgets is lacking in many agencies. • Both external and internal estimate reviews appear to be underutilized.

124 Specific Issue Areas • Contingency is typically applied to SHA cost estimates but its application is still considered problematic. Very often the specific aspects of contingency dollars are not define—what do the dollars cover, they cannot be use later to add items to the project. • Risk-based estimation and management is used by only a small number of transportation agencies. Range estimates and risk charters are common practice in the other industries, but the highway sector is just beginning to apply these techniques. • Many SHAs inflate their estimates to the prospective date of construction by applying a factor that reflects the current economic situation. However, SHAs often do not usually consider the impact of inflation that results from a schedule change. • The issue of scope control is paramount to managing project costs. SHAs are attempting to use a variety of methods and tools to control scope changes and scope growth, but their use is not widespread and scope control practices are far from standard practice. • A system of cost validation points must be established if a project is to remain on budget. Few SHAs have a process, which is gated based upon continually updated estimated cost. • Most of the SHAs have informal reviews that are conducted by the project team. Frequently the individual preparing the estimate is responsible for the quality of the estimate. As a result, the SHAs rely on a single individual’s judgment to impartially review the estimate. The reliance on estimators who lack sufficient experience is another deficiency that SHAs must surmount. • Proper estimation documentation is a common deficiency, which causes accountability issues. • The SHAs also lack coordination and communication between the disciplines participating in the development of the project’s scope and estimate. • Many SHAs do not adequately consider project complexity and the impact complexity has on a project when the SHA creates a cost estimate. RECOMMENDATIONS Implementation • The Guidebook presents an industry-wide set of strategies, methods, and tools to combat the problem of cost escalation, but each agency will need to create its own unique “how to” procedural manual to change its own unique practices. • Find an agency that will champion the industrywide implementation plan. • SHAs should consider the following challenges to implementing the Guidebook:

125 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 practice are performed. Developing a systems perspective requires organizational perspective and vision to integrate cost estimation management and cost estimation practice throughout the project development process. Dedicating sufficient time to changing agency attitudes toward estimation and incorporating the strategies, methods, and tools from this Guidebook into current SHA practices is difficult when resources are scarce. Dedicating sufficient human resources to cost estimation practice and cost estimation management beyond those that have previously been allocated to estimation processes. Future Research • Assist in some aspects of implementation – longitudinal study on Guidebook Implementation with selected SHAs. • Develop more specific “how to” guidance in the form of procedures is some critical areas such as ROW, Utilities, Environmental, and Risk. • Study methodologies to assess future inflation and changes in market conditions. KEYS TO SUCCESS This research has determined that “Ten Key Principles” must be focused on to ensure creation of consistent and accurate estimates. Each individual principle in itself can help improve cost estimation management and cost estimation practice. However, maximum improvement of these two processes will only occur if the ten keys are considered as guiding principles that must be incorporated into the agency’s business practices throughout the organization. Within each group the keys are stated here in prioritized order. Cost Estimation Management 6. Make estimation a priority by allocating time and staff resources. 7. Set a project baseline cost estimate during programming or early in preliminary design and manage to it throughout project development. 8. Create cost containment mechanisms for timely decision making that indicate when projects deviate from the baseline. 9. Create estimate transparency with disciplined communication of the uncertainty and importance of an estimate.

126 10. Protect estimators from internal and external pressures to provide low cost estimates. Cost Estimation Practice 6. Complete every step in the estimation process during all phases of project development. 7. Document estimate basis, assumptions, and back-up calculations thoroughly. 8. Identify project risks and uncertainties early and use these explicitly identified risks to establish appropriate contingencies. 9. Anticipate external cost influences and incorporate them into the estimate. 10. Perform estimate reviews to confirm the estimate is accurate and fully reflects project scope. Implementing the “Ten Key Principles” ultimately will require a commitment by the agency’s senior management to direct and support change. The benefit of doing so will be manifested in projects that are consistently within budget and on schedule, and that fulfill their purpose as defined by the scope. This benefit will also improve program management in terms of better allocation of funds to projects to meet the needs of the ultimate customer, the public.