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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1 CHAPTER 1 INTRODUCTION Project cost escalation is a major problem for Departments of Transportation (DOT). Over the time span between the initiation of a project and the completion of construction many factors influence a project’s final costs. This time span is normally several years in duration but for highly complex and technologically challenging projects, project duration can easily exceed 10 years. Over that period, changes to the project scope and its definition can occur. During the early stages of a project, many factors, such as insufficient knowledge about right-of-way costs and project location, environmental mitigation requirements, traffic control requirements, or work-hour restrictions, influence project costs. Moreover, there are other process type factors that often drive project cost estimate increases. These factors can include, for example, unforeseen engineering complexities and constructability issues, changes in economic and market conditions, changes in regulatory requirements, local governmental and stakeholder pressures, and a transformation of community expectations. Some researchers state that there are systemic problems in the estimation process, even to the point that purposeful underestimation of projects is common to gain project funding.1 The impact of all of these issues is compounded if there is a lack of human resources with appropriate training in cost estimation practice or an institutional lack of cost estimation management processes. The cited factors create distinct challenges related to development of early project estimates and cost estimation management. These challenges are: • Difficulty in evaluating the quality and completeness of early project cost estimates; • Difficulty in describing scope solutions for all issues early in project development; • Difficulty in identifying major areas of variability and uncertainty in project scope and costs; and • Difficulty in tracking the cost impact of design development that occurs between major cost estimates. The primary objective of this research is the development of a Guidebook on highway cost estimation management and project cost estimation practice. STATEMENT OF PROBLEM Managing large capital construction projects requires the coordination of a multitude of human, organizational, technical, and natural resources. Quite often, the engineering and construction complexities of such projects are overshadowed by economic, societal, and political challenges. Within the transportation industry, project cost escalation has attracted management and stakeholder attention at federal, state, regional, and local levels. News reports of project cost escalation additionally cause the public to lose confidence in the ability of transportation agencies to effectively perform their responsibilities. Cost increases cause a disruption in priority programs where other projects have to be delayed or removed in order to accommodate higher 1 See Flyvbjerg, et al, 2002, Hammer 1976, Hufschmidt and Gerin, 1970, Pickrell 1992

2 cost estimates. This issue was cited as the number one factor that resulted in changes in statewide highway letting programs (Anderson and Blaschke 2004). The cost escalation problem is faced by every state highway agency, transit agency, and metropolitan planning organization (MPO) in the country as projects evolve from concept in the long-range planning process, are prioritized for programming, and are subject to detailed development prior to construction. Cost escalation or increases over the course of project development constitutes the major research problem that this project is addressing. 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 research is not suggesting wholesale changes to the estimation process, but rather it will provide a clear and concise collection of best practices organized into a Guidebook of strategies, methods, and tools that will result in improved cost estimation management. RESEARCH OBJECTIVE The transportation industry problem of accurately estimating project cost will be addressed by accomplishing the following main 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. SCOPE OF WORK The major goals required to address the research problem and meet the research objective are: 1. How are estimates usually developed and managed? Identify the core estimation assumptions that are the root causes behind cost escalation and the lack of project estimate consistency and accuracy. 2. What do we need to do to get a valid estimate? Formulate strategies to address root causes at both the: a) cost estimation practice level and b) at the cost estimation management level. Define methods and tools that are effective during the different phases of the project development process. 3. How do we develop a reliable cost estimation and validation process? Consider the impact of project complexity and uncertainty in developing estimation strategies, methods, and tools. 4. How will the estimation process deliver accuracy and consistency over the project life cycle in a logical and reasonable manner? Document key strategies, methods, and tools in a user-friendly structure and format. 5. How do we insure that the product is assimilated into industry practice?

3 Devise a workable plan to accelerate implementation of the research results in the transportation industry. These five goals will be met through performing the ten tasks listed below: Task 1 - Conduct State-of-Practice Review The main goal of Task 1 is to confirm our understanding of the problem, including all factors influencing cost escalation, and to characterize the current state of DOT practice as related to estimation practices and management of estimates. A three-element framework will be used to generally structure the information collected. Task 2 - Develop Critical Review of Estimation Practice and Estimation Management The main goal of Task 2 is to critically review current practices in the area of cost estimation practice and cost estimation management. Strategies for accurate programming estimates and consistent design estimates will be the focus of this task. A number of approaches will be identified that describe cost estimation practice and cost estimation management, including any innovative or successful approaches, key problems, issues, and deficiencies. Task 3 - Identify Potential Strategies, Methods, and Tools The main goal of Task 3 is to identify potential strategies, methods, and tools that will improve cost estimation practice and cost estimation management. Based on the framework, these strategies, methods, and tools will be tied to their use in the different phases of project development and project complexity. Task 4 - Prepare Preliminary Outline of Guidebook Task 4 has as its main goal the development of an annotated outline for a Guidebook on highway cost estimation practice and project cost estimation management. Task 5 - Prepare Interim Report The main goal of Task 5 is to prepare an Interim Report and deliver this report to the Panel for review and discussion of the work plan to complete the project. Task 6 - Develop and Evaluate Strategies, Methods, and Tools The main goal of Task 6 is to develop and evaluate in greater detail a range of preliminary strategies, methods, and tools applicable to different project phases and projects of different complexity. This task will develop a set of well-defined strategies, methods, and tools for both cost estimation procedures and management of cost estimates that are applicable across all phases of project development.

4 Task 7 - Present Strategies, Methods, and Tools to Industry The goal of Task 7 is to obtain input and feedback from professional practitioners on the preliminary strategies, methods, and tools from Task 6. A final set of strategies, methods, and tools will be identified for inclusion in the Guidebook. Task 8 - Develop Recommended Strategies, Methods, and Tools The goal of Task 8 is to develop the recommended strategies, methods, and tools in a format that can structure the content for the Guidebook. A draft Guidebook will then be developed. Task 9 - Develop Implementation Plan The main goal of Task 9 is to develop a practical implementation plan to help accelerate the use of the Guidebook in industry. Task 10 - Prepare Guidebook and Final Report The main goal of Task 10 is to finalize the Guidebook and prepare the final report. RESEARCH FRAMEWORK Successfully achieving the research objective requires a framework from which to conduct the study. The framework provides a basis for the research methodology. In this way, the research is conducted in a systematic and rigorous manner. Thus, the end result and subsequent product will be developed based on a solid research approach but, at the same time, will be described in a manner that is readily applicable to transportation agencies. The framework presented forms the structure behind the data collection, analysis, and results discussed under the tasks covered in this Interim Report. The overall framework that the research approach will follow includes three main elements: • Strategies, methods, and tools for project cost estimation practice and cost estimation management linked to; • Project development phases; and • Project complexity. The interaction of these three elements is shown schematically in Figure 1.1. Each element is briefly explained next.

5 Project Development Phases Strategies, Methods, and Tools Congruent with Project Phase and Project Complexity. Strategies, Methods, and Tools Figure 1.1. Schematic Illustration of Three-Element Interaction Strategies, Methods, and Tools A strategy can be defined as “a plan of action intended on accomplishing a specific goal.” 2 Strategies typically address a specific problem and are often formulated to address a root cause that leads to a problem. For example, a global strategy might be to identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks when controlling costs. This strategy would likely address a root cause of cost escalation such as when the scope of a project grows, as more external and internal stakeholders provide input. The strategy is implemented through a method. A method can be defined as “a means or manner of procedure, especially a regular and systematic way of accomplishing something.” 3 The procedure must support the strategy. A method for the strategy described above might be to use programmatic risk-based cost estimation procedures. The method is typically applied to early project estimates, as the scope is being defined and detailed, to narrow the range of uncertainty. A method is then implemented using a tool or technique. A tool can be defined as “something used in the performance of an operation.” 4 In this case, the operation would be the method. A newly developed tool for the method of programmatic risk-based cost estimates is the Washington State DOT’s Cost Estimating Validation Process (CEVP). At the core of this tool are systematic peer reviews, risk identification, risk assessment, and risk mitigation employed through software applications using Monte Carlo simulations, influence diagrams, and/or critical path scheduling. 2 From the American Heritage Dictionary of the English Language, 4th Edition, 2000. 3 Ibid. 4 Ibid.

6 Project Development Phases Project estimates are made at various times during project development. Different types of estimates will occur during different phases of a project. An estimation technique must fit the information available at the time the estimate is developed. Thus, certain types of estimates are used during project development phases. For example, conceptual estimation is commonly used in planning, programming, and even in the preliminary design phase of a project. A common understanding of the project development phases is critical for any discussion of strategies, methods, and tools used for cost estimation management and cost estimation practice. Each transportation agency has its own terms to describe the phases of this process. A National Cooperative Highway Research Program Synthesis on Statewide Highway Letting Program Management uses the phases shown in Figure 1.2 and described in Table 1.1 (Anderson and Blaschke 2004). These phases were developed for the Synthesis to illustrate the interaction between the letting program process and the project development process. Advanced Planning/ Preliminary Design Final Design Planning Programming Construction Award Letting Transportation Improvement Needs Pre-Construction Phases Figure 1.2. Typical Project Development Phases for Highway Projects

7 Table 1.1. Project Development Stages and Activities (Saag 1999 and Anderson and Fisher 1997) PROJECT DEVELOPMENT PROCESS PHASES TYPICAL ACTIVITIES Planning Purpose and need; improvement or requirement studies; environmental considerations; interagency coordination Programming Environmental determination; schematic development; public hearings; ROW plan; project funding authorization Advanced Planning/ Preliminary Design ROW development; environmental clearance; design criteria and parameters; surveys/utility locations/drainage; preliminary schematics such as alternative selections; geometric alignments; bridge layouts Final Design ROW acquisition; PS&E development – pavement and bridge design, traffic control plans, utility drawings, hydraulic studies/drainage design, final cost estimates Letting Prepare contract documents; advertise for bid; pre-bid conference; receive and analyze bids Award Determine lowest responsive bidder; initiate contract Construction Mobilization; inspection and materials testing; contract administration; traffic control, bridge, pavement, drainage construction Great value results by providing effective cost estimation and estimation-management techniques at the earliest stages in the project development process. Cost engineering research has proven that the ability to influence and manage cost is greatest at the earliest stages in a project. Figure 1.3 illustrates this concept. This concept has been fully endorsed by the Construction Industry Institute (“Pre-Project Planning: Beginning…” 1994). HIGH Influence Curve Cost Expenditure Curve HIGH LOW A B IL IT Y TO IN FL U E N C E C O S T Planning Programming Advanced Planning/ Preliminary Design Final Design Letting Award Construction C U M U LA TI VE C O S T LOW PROJECT PHASES Figure 1.3. Cost/Influence Concept Applied to the Highway Project Development Process (Adapted from “Pre-Project Planning: Beginning…” 1994).

8 As depicted in Figure 1.3, the ability to influence cost is greatest at the beginning of the project development process and declines as the project nears construction and administration. A project management oversight function definitely has the ability to help manage the process, especially in the area of controlling cost escalation, but it is imperative to examine the problems and solutions for cost management at the planning, programming, and preliminary design stages. To neglect the earliest stages of the project development process would diminish the practical application of this research. Cost estimation practice and cost estimation management strategies and methods must be implemented at the earliest stages of the process – even if the transparency of uncertainty in the engineering and political process is difficult to define and manage. Project Complexity Departments of Transportation are not all alike; thus, the research has to consider the strategies, methods, and tools in terms of their application to small projects, rehabilitation projects, major reconstruction projects, major new construction projects, and special situations such as when a DOT uses an innovative contracting method and does not prepare a complete set of plans and specifications. The project complexity also relates to the location of a project. For example, a project located in an urban area has to overcome obstacles such as the movement of existing utilities or traffic control that a rural project does not contain. The type of terrain and other environmental issues also affects the project’s scope and ultimately the project’s cost. The project complexity element of the framework is important as it may determine when to use what method and tool, and to what extent the method and tool should be implemented. REPORT OUTLINE The Final Report consists of a summary and eight chapters. The summary provides an overview of the entire final report. This first chapter provides basic background information concerning the research project and approach to conducting the research. It outlines the second phase of research which revolved around developing and testing the Guidebook before a final draft was produced. Chapter 2 focuses on the state of practice related to cost estimation practice and cost estimation management techniques in the transportation industry. Comments from the interim report reviews have been included as well. Chapter 3 provides a critical review of the state-of-practice. Chapter 4 identifies a preliminary list of strategies, methods, and tools that are recommended to improve cost estimation practice and cost estimation management in the transportation industry. Chapter 5 provides a short overview of the Interim Report results and how these results impacted the methodology for developing the Guidebook. Chapter 6 outlines the methodology adopted to develop the layout, structure, and content of the Guidebook for cost estimation practice and cost estimation management. Chapter 7 provides a summary of approaches and ideas for implementation of the Guidebook within a state highway agency and across the highway construction industry. Finally, Chapter 8 outlines industry related conclusions on current cost escalation problems and recommendations to address them through this Guidebook. The research process followed to complete this Final Report is summarized in the roadmap shown in Figure 1.4. The roadmap illustrates basic inputs and outputs of each focus area corresponding to Task’s 1 through 10.

9 Figure 1.4. Research Roadmap Highlighting Final Report Contents