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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55 CHAPTER 4 STRATEGIES, METHODS, AND TOOLS The main goal of Task 3 is to identify potential strategies, methods, and tools that will improve cost estimation management and cost estimation practice. The deliverable of this task is a set of strategies, methods, and tools. Based on our framework, these strategies, methods, and tools will be tied to their use in the different phases of project development and project complexity. Figure 4.1 highlights the basic inputs and outputs of Task 4. TASK 3 (CHAPTER 4) UNIQUE PRACTICE APPROACHES GLOBAL STRATEGIES TO ADDRESS COST ESCALATION METHOD/TOOLS TO IMPLEMENT STRATEGIESGENERAL DEFICIENCIES IN PRACTICE STRATEGIES, METHODS, & TOOLS FACTORS CAUSING COST ESCALATION Figure 4.1. Strategies, Methods, and Tools Inputs and Outputs METHODOLOGY The main methodology used to develop the potential list of strategies, methods, and tools was to first focus on causes of cost escalation and potential strategies that would address these causes. Creating this linkage between causes of cost escalation and strategies was based on literature, an assessment of current practice, and general deficiencies found in reviewing unique practice approaches. Eight overarching or global strategies were identified and then described. The research team believes that identifying a set of high-level strategies provides a stronger support base for promoting management action on implementing these strategies. The research team then identified the methods and tools that would likely be effective in implementing the global strategies. These methods and tools are those described in the previous chapter as unique practice approaches. In some instances, methods and tools were based on literature and other industry practices, especially in support of the general deficiencies. The strategies, methods, and tools were then placed in the project development phase where they are most likely implemented. Thus, a preliminary list of strategies, methods, and tools was created. Complete descriptions and application of the methods and tools will be developed in Phase II of this research.

56 COST ESTIMATION PRACTICE AND COST ESTIMATION MANAGEMENT STRATEGIES If DOTs are to produce accurate estimates, they DOT must have solid management plans in place that address the management of estimates, and consideration of project risk and complexity. The estimators who assemble the cost information must rely on the expertise and input from many individuals both within and outside the DOT if they are to develop an accurate project estimate. Preparation of accurate estimates is, therefore, the responsibility of many different divisions in the DOT and does not rest solely upon the estimators. The project development process consists of a series of incremental actions that often occur over a period of years (see Figure 1.2). As the project is developed: Initial estimates are prepared based on preliminary and incomplete information as to scope and structural features, and with an absence of definite environmental and geotechnical information. These estimates are not necessarily designed to be reliable predictors of a project’s final costs. These initial cost estimates are more useful in determining funding levels needed for long-range capital programs. Some DOT’s stated during the interviews that the expectation for these early estimates is in the plus or minus 40 percent range. Initial estimates are modified to reflect development of plans (design) and specifications. As the project scope is better defined and when the environmental impact statement is completed risk factors will still exist but they can be defined and should be mitigated if possible by the design or by contracting strategies. Add-on elements that are often considered beyond the control of the DOTs affect a project’s cost and the development of a project cost estimate. Some of these factors include community driven scope modifications, schedule changes that impact time value of money assumptions (inflation) and property values, and possibly even political mandates or pressures. Final project cost is only known when all construction work is completed and all change orders and claims are settled. The cost of a project is not established when bids are received. DOTs can develop strategies to produce accurate and consistent cost/schedule estimates that address all of the major factors influencing project cost and cause cost escalation. DOTs can also clearly explain the purposes and precision of estimates prepared during each stage of project development. The statement has been made in many forums that “initial cost estimates are not reliable” (Transportation Infrastructure Managing the Costs of Large-dollar Highway Projects 1997). DOT management has the responsibility to explicitly state the assumptions upon which an estimate is based and the purpose of the estimate. The purpose of many early estimates is not so much to be an exact predictor of future project cost but to provide gross cost numbers at the same level of specificity for the purpose of evaluating project alternatives. This is often necessary, as part of the environmental review, but the actual cost of environmental mitigation cannot be estimated with any level of precision until site testing is completed for the final design. Based on the review of literature concerning project cost estimation and from the interviews it is clear that there exist global strategies that can affect the accuracy and consistency of project estimates and costs. Eight strategies were identified. The definition of a strategy from Chapter 1,

57 “a plan of action intended on accomplishing a specific goal,” is used as the basis for developing short statements about each global strategy as follows: Management Strategy – Manage the estimation process and costs through all stages of project development; Scope/Schedule Strategy – Formulate definitive processes for controlling scope and schedule changes; Off-prism Strategy – Use proactive methods for engaging those external participants and conditions that can influence project costs; Risk Strategy – Identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed; Delivery and Procurement Method Strategy – Apply appropriate delivery methods to better manage cost, as project delivery influences both project risk and cost; Document Quality Strategy – Promote cost estimates accuracy and consistency through improved project documents; Estimate Quality Strategy – Use qualified personnel and uniform approaches to achieve improved estimate accuracy; and Integrity Strategy – Insure checks and balances are in place to maintain estimate accuracy and minimize the impact of outside pressures that can cause optimistic biases in estimates. These eight global strategies address the factors presented in Table 2.2 that cause cost escalation on DOT projects and within their capital programs. Table 4.1 illustrates the link between the global strategies and cost escalation factors.

58 Table 4.1. Link Between Strategies and Cost Escalation Factors Global Strategies M an ag em en t S co pe / S ch ed ul e O ff- P ris m Is su es R is k D el iv er y/ P ro cu re m en t M et ho ds D oc um en t Q ua lit y E st im at e Q ua lit y In te gr ity Bias √ Delivery/Procurement Approach √ √ √ Project Schedule Changes √ √ Engineering and Construction Complexities √ √ √ √ Scope Changes √ √ √ √ Poor Estimation √ √ In te rn al Inconsistent Application of Contingencies √ √ √ √ Local Government Concerns and Requirements √ √ √ √ Effects of Inflation √ √ Scope Creep √ √ Pl an ni ng Ex te rn al Market Conditions √ √ √ Inconsistent application of Contingencies √ √ √ √ Faulty Execution √ √ Ambiguous Contract Provisions √ √ Int er na l Contract Document Conflicts √ Local Government Concerns and Requirements √ √ √ Unforeseen Events √ √ Unforeseen Conditions √ √ C os t E sc al at io n Fa ct or s Ex ec ut io n Ex te rn al Market Conditions √ √ The interviews with DOTs identified many specific methods and tools that are currently being used to address most of these strategies. At the same time, it was also clear that no single DOT has a comprehensive approach for addressing all of these strategies. The strategies must be developed so that they provide an approach that spans those project development phases from the initial planning estimate to the engineer’s estimate at final design. The following discussion focuses on the overarching strategies but also presents major sub-strategies that can be addressed through specific methods and tools. Methods and tools frequently will impact more than one strategy. It should also be noted that the global strategies could be further separated into sub- strategies in management and operational categories. For example, the Scope/Schedule, Off- Prism, Risk, and Estimate Quality strategies have management sub-strategies, which overlap very closely with parts of the global Management Strategy. Where possible, these operational sub-strategies are discussed separately within each global strategy description.

59 Management Strategy Manage the estimation process and costs through all stages of project development. At the highest level within the DOT, DOT leadership can advance cost management strategies that foster and support estimate accuracy and consistency through all phases of project development. The DOT leadership has the responsibility to publicly explain how the project development processes works and most importantly ensure that cost estimation practice and cost estimation management processes are transparent. Therefore, the DOT must be able to produce accurate estimates. Personnel must be trained and there must be established processes and critical reviews of all estimates to achieve accurate estimate results. Currently, 40 DOTs use only on-the-job training (OJT) to train their estimators. Twenty-six DOTs have no published standard estimation procedures (Schexnayder 2003). Senior management must take a more active role in advancing strategies to increase estimator knowledge and consistency in estimates through management sub-strategies of organizational leadership and operational sub-strategies of estimator training and development of estimation procedures. Organizational Leadership Senior DOT management should view itself as investors, developers, and strategists. Management has the responsibility to provide project staff members with the resources to effectively perform their jobs, including gathering sufficient project information so that reliable estimates of cost and schedule can be developed. Senior management can: 1) create an environment for success; 2) insure that appropriate oversight processes are established and functioning; and 3) position the right people for the tasks. Estimate Communication The manner in which project estimates and estimate precision is communicated is imperative, particularly during the earliest stages of project development. Internally, senior management must convey the importance of a project estimate and the fact that cost is integral to project scope. Together cost and scope should drive many of the project team’s design decisions if cost is to be managed successfully. Communication of cost uncertainty is also important internally. Identification and communication of the project’s early stage uncertainty and the fact that unknowns can impact scope and costs will help in managing project expectations. The unknown elements of a project estimate can be communicated as cost ranges rather than as point values. Externally, these issues of estimate importance and estimate uncertainty are possibly even more critical to project success. To maintain creditability with stakeholders it is important to “tell the public the truth” about project cost and identify the precision of estimate values. Transparency in estimate communication is sometimes difficult because external stakeholders often want “one number” before an accurate estimate can be made by even the best estimators and engineers, but transparency of costs will be best over the duration of a project. Management of project cost through proper communication has implications on the other global strategies of Scope/Schedule, Off-prism, Risk, Delivery, Estimate Quality, and particularly the Integrity Strategy. Estimator Training DOT projects are becoming increasingly complex, both in design features and contracting procedures. As a consequence, producing an accurate estimate requires individuals with

60 extensive experience and expertise. DOTs must increase the knowledge, skills, and abilities of their employees and provide a cadre of well-trained professional estimators if they want to achieve estimate accuracy and quality. There could be a set of minimum core competencies for which all estimators are provided training. An important component of management’s estimation strategy must be providing comprehensive and rigorous training in project cost estimation and scheduling to their estimation staff. Estimation Procedures Estimation documentation must be in a form that can be understood, checked, verified, and corrected (Carr 1989). The foundation of a good estimate is the processes, procedures, and formats used to arrive at the cost. Most DOTs do not currently have a published estimation procedure for early estimation. DOTs would benefit greatly by producing their own guidelines of standard processes, procedures, and formats to be used by both DOT estimators and design consultants retained for estimation purposes. This guidance document should be specifically written for those responsible for preparing the State’s estimates. In preparing an estimation manual, members of the States heavy/highway construction industry can be asked to share with the department their knowledge of production rates, estimation techniques, and factors that increase project risk. Advice from local contractors can specifically be sought in regard to factors that they consider to be important cost drivers. Some considerations that are often made by contractors include (Estimating Guidelines 1989): Is this a labor-intensive project (Schexnayder 2001)? Does the project depend heavily on certain pieces of equipment? Is there a danger of material price increases due to shortages of key materials? What is the cash flow of the project? The availability of an easy to use guide, that prescribes the standard estimate format for the DOT, will greatly assist estimators in preparing estimates in less time, as many of their questions can be addressed simply by reading the manual and following standard procedures. The benefits of standardized procedures clearly explained in a manual should outweigh the cost of initial production and periodic updates. In order to reduce production costs and make changes less expensively, the manual could be published and maintained electronically. Scope/Schedule Control Strategy Formulate definitive processes for controlling scope and schedule changes. Scope control ensures that project changes are identified, evaluated, coordinated, controlled, reviewed, approved, and documented in a manner that best serves the defined need. Projects often take years to move through the development process. As the time frame is extended there are more opportunities for external and internal parties to suggest changes in scope. Additionally, if the schedule is extended there will be cost impacts resulting from increases in land costs and effects from inflation. The cost effect of a change depends on the point in time when it is introduced. Early in project development, before estimates are prepared, a change in scope does not cause

61 significant problems. Later scope changes, during engineering design and construction, have ripple effects and later changes can increase project cost exponentially. Scope Control Scope control is a management responsibility. Specific management methods and tools, all of which can be include in the management plan for scope control, are: 1) commitment to change control; 2) a defined point in the project development process when management freezes the design; and 3) a requirement of formal justification of changes (every change must be justified and reviewed by supervisors and affected parties). Scope Creep Scope and schedule strategies are also important at the operation level. The loss of scope control, particularly during engineering, ranks as a leading factor driving divergence of estimated project cost. This can be the result of a few major changes to the scope or by successive minor changes, often referred to as scope creep. The relationship between poor scope definition and scope changes is clear. A poorly defined project scope early in project development does not provide a clear baseline for estimating cost and then managing the project. There must be clear guidelines within the DOT as to scope change authority and for notification of management about the impacts of scope changes. As an example, in 1982 the initial cost estimate for the Boston Central Artery/Tunnel Project (CA/T) was $2.6 billion. That estimate was based on a preliminary concept that covered only a small fraction of what was eventually built. Features built but not anticipated in 1982 include: rebuilding of the Dewey Square Tunnels; new interchanges at Logan Airport; Fort Point Channel work; tunnel roofs for South and East Boston; and temporary ramps and supporting structures. The direct cost for those scope changes alone was $2.7 billion. Environmental compliance and mitigation requirements added another $3 billion. Design to Budget In order to ensure that designers are aware of how scope changes will affect project cost, it is advantageous to require submittal of a cost estimate along with each design submittal. When large differences between the conceptual estimate and the design estimate are reported (>10%), approval could be required from the supervisory level or higher before design proceeds to ensure sufficient funds will be available for construction. If estimated project cost exceeds the existing budget, then changes will have to be made to reduce the overall project cost. This issue may require project scope reduction. Another scope control method is design to budget, which forces designers to be constantly aware of the cost implications of their design decisions. Gated Process Some DOTs are delaying the incorporation of projects into the STIP until scope is clearly defined and there is sufficient data for developing an accurate cost estimate and projection of project schedule, including the time to fully design the project. Each DOT can use methods and tools, which will: Serve to anticipate and predict scope changes Evaluate the impacts of scope changes

62 Identify and control the consequences of scope changes Prevent unauthorized or unintended deviations to scope Ensure that each scope change is evaluated, and reviewed and approved at the proper management level. Time Value of Money The scope/schedule strategy must also directly address inflation. While the rate of inflation is uncontrollable, it is usually a foreseeable factor. Inflation engendered by the Vietnam War greatly affected the BART system’s cost. The original estimates provided for 3 percent per annum inflation, but the actual rate was 6.5 percent (Hall 1980). Many indexes are available that can aid the estimator in establishing inflation adjustments to an estimate. However, often the problem is not that an inflation rate was not incorporated into the estimate but that the project schedule has slipped and the time duration to midpoint of construction is much longer resulting in greater inflationary effects. Inflation’s effect must be accounted for both in terms of a rate and a time interval; it is a time value of money issue with the inflation rate being only the interest component. The lengthening of construction schedules will cause inflation to be a significant cost growth factor. The National Academy report (2003) on the CA/T project stated; “… the CA/T project management team indicated that about half of the cost growth was caused by inflation (the original estimates were in 1982 dollars, as required by FHWA) and that a portion of this could be attributed to the extended schedule.” Exposing capital outlays to a more prolonged period of inflation contributed to the cost overruns experienced. The effects of inflation must be addressed early. How inflation is treated in the estimate must be clearly stated. The FHWA recommends the cost estimates be prepared in year-of-expenditure dollars, inflated to the midpoint of construction, with some allowance for schedule slippage taken into account. Reporting the costs in year-of-expenditure dollars will greatly reduce the media and public perception of “cost growth.” Off-Prism Strategy Use proactive methods for engaging those external participants and conditions that can influence project costs. In the case of most projects, engineers focus on technical solutions with little attention to community interest or concerns, the off-prism items. This focus has been changing in some cases where DOTs are experimenting with context sensitive design and construction (A Guide to Best Practices for Achieving Context Sensitive Solutions 2002, Werkmeister and Hancher 2001). However, technical alternatives are frequently discussed at early stages of project development before community outreach efforts are undertaken. Concerns related to the external effects of projects are not addressed until later in the project cycle. Such an approach can “… lead to project changes at a stage when such changes are particularly costly (Bruzelius, Flyvbjerg, and Rothergatter 1998).” “Lack of public involvement also tends to generate a situation in which those groups who feel concern about the project … are inclined to act destructively…(Bruzelius et al. 1998).”

63 Operationally, every project is executed in the context of a particular political, economic, and cultural environment. Since the early 1970s, researchers who have studied the issue of actual project cost exceeding estimated cost have pointed to time lags and external factors as being significant cost overrun drivers. Merewitz (1973) stated, “The most significant fact is that the longer the project continues the greater is there likely to be cost overruns (Merewitz 1973).” Delay creates greater time opportunity for increases in scope. Studies of the estimates prepared by the Corps of Engineers, the Tennessee Valley Authority (TVA), and the Bureau of Reclamation found that exogenous⎯off-prism⎯factors caused large cost increases (Hufschmidt and Gerin 1970). In the case of the TVA 80 percent of the deviations could be characterized as exogenous. The macroenvironment can affect cost growth in two ways: 1) by being unknown to some degree to estimators and managers; and 2) by changes in the environment. Unlike other aspects of project planning and estimation, understanding the macroenvironment, the off-prism items, has never been standardized as a part of project estimation. It is therefore important to develop early stage planning processes that focus on community concerns, requirements, and other off-prism issues. Risk Strategy Identify risks, quantify their impact on cost, and take actions to mitigate the impact of risks as the project scope is developed. The actual cost of a project is subject to many variables, which can, and will significantly influence the range of probable projected costs. The Census Bureau does not present a single forecast population growth; it offers projections based on different assumptions of fertility, mortality, and migration rates. In the case of DOT project estimates, any one cost number represents only one possible result based on multiple variables and assumptions. These variables are not all directly controllable or absolutely quantifiable. Therefore, cost estimation and the validation process must consider probabilities in assessing cost. Four key functions that comprise the risk management process are: 1) planning; 2) assessment; 3) handling; and 4) monitoring. The overriding objective of the risk management process is to identify potential project risks and implement actions that will mitigate the impact of the identified risks. Risk planning is the process of developing an interactive strategy for identifying and tracking risks and performing continuous risk assessments to determine how risks have changed. Risk planning is iterative. There should be a requirement to develop a risk management plan for all projects having significant complexity. In order to establish accurate scope, schedule, and cost estimates for a project all risks can be assessed as to potential cost and schedule impacts. For each identified risk, there can be a risk handling strategy to ensure that the necessary mitigation actions are developed and implemented. Risk monitoring involves tracking risk-handling strategies, identifying new risks, and re-evaluating changes to previous risks and their impact on project cost. Risk management is concerned with future events, whose outcome is unknown, and how to deal with those uncertainties by identifying and examining a range of possible outcomes. The objective is not to avoid risks but to understand and control them. Understanding the risks inherent with each potential project alternative is important to controlling cost and developing estimates that reflect the cost of accepted risks. The project team, not solely the estimator, can

64 conduct a comprehensive risk analysis for all major projects. The purpose of such analyses is first to identify risks by likelihood of occurrence and consequences, and secondly to devise methodologies and strategies for avoiding or managing the risks. Risks must be defined to a level that an individual comprehends the causes and potential impacts. Managers can continuously update risk assessments and modify their management strategies accordingly. A successful risk management program: Must be a planned and structured process, integral to the acquisition process; Have continual re-assessment of project and associated risks; Have metrics to monitor effectiveness of risk handling strategies; and, Require approval of accepted risks at the appropriate decision level. The overriding objective of the risk management process is to identify potential project risks and implement actions that will mitigate the impact of the identified risks. Early risk identification and analyses should be “built-in” to the project development process. An event’s probability of occurrence and consequences/impacts may change as the project is development proceeds and additional information becomes available. Therefore, project managers and estimators must re-evaluate known risks on a periodic basis and examine the project for new risks. A risk assessment should consider: Requirements Definition. The sensitivity of the project to scope uncertainty. Environment, Safety, and Health. The impacts that the project has or will have on the environment directly when completed and during construction (noise, lights, dust) Design. The ability of the contractor to achieve the project’s engineering objectives based on the available technology and equipment. Technology. The degree to which the technology proposed for the project has been demonstrated as capable of meeting project objectives. Logistics. The ability to construct the project within the confines of the site based on the design, and required support resources. Concurrency. The sensitivity of the project to the uncertainty resulting from adjacent or overlapping work or activities. Capability of Contractor. The resources of the contracting community build the project. Some projects require specific experience, resources, and knowledge to be accomplished successfully. Management Capability. The degree to which a qualified management team can be placed on the project by the DOT or to which the DOT can sufficiently staff the project.

65 Funding and Budget Management. The sensitivity that the project has funding and budget changes. Schedule. The adequacy of the time allocated for performing the development, and construction of the project. This factor includes the effects of programmatic schedule decisions, the inherent errors in the schedule estimation technique used, and external physical constraints. Stakeholder, Legal, and Regulatory. The sensitivity and degree to which these areas will impact the planning, performance, scope, schedule, and cost of the project. Risk assessments can be deliberately performed prior to each phase of project development. For each identified risk, a risk handling strategy is formulated to ensure that the necessary actions are being developed and implemented. The method chosen to handle a risk is specific to that risk. There are no universal mitigation strategies except attempting to buy your way out of the problem. Handling strategies are intended to either avoid the event or to mitigate (minimize the impact) the event. Risk mitigation can be an active endeavor continually performed during project development and the estimators must know what risk mitigation strategies are being applied. Delivery and Procurement Method Strategy Apply appropriate delivery methods to better manage cost, as project delivery influences both project risk and cost. Delivery and procurement involves the process by which a construction project is comprehensively designed and constructed for an owner including project scope definition and determination of project size, organization and selection of engineers, constructors and various consultants, and determination of the contract types used to allocate risk and define payment. Open communication with the construction industry from initial project planning to contract award is the cornerstone for a successful project. Procurement documents tailored to project requirements improves source selection by focusing efforts on those features critical to a successful construction process. A project delivery and procurement strategy can be structured to achieve project stability of project costs by minimizing technical, schedule, and cost risks. The strategy involves the process of identifying and describing requirements and determining the best method for meeting those requirements. The approach should address market conditions (Summary of Independent Review Committee Findings Regarding the Woodrow Wilson Bridge Superstructure Contract 2002, Woodrow Wilson Bridge Project Bridge Superstructure Contract 2002), effective use of competition (encourage competition), and performance based contracting opportunities. Projects may require multiple contracts. Specific contracting methods should be tailored based on the size, risks, and complexity of the project. Documentation of the method should describe: 1) the key technical and performance parameters for the project; 2) funding profile that distributes the costs by fiscal year; 3) identify sources of funds, including those from outside sources; 4) discuss lifecycle costs; and 5) identify key milestone dates in the project development and contracting process (Chapter 5 Definition Phase 2003). In the case of major or complex projects there must be methods and tools in place that will: Formalize roles and responsibilities;

66 Provide a roadmap to project completion; Define process and strategy for each major project element⎯how you get to each milestone; Insure executive endorsement of the process; Rigorous industry outreach, (pre-bid plan availability at 60 percent design (Zanetell 2004), industry review meeting9); Provides opportunities for small and disadvantages businesses; and, Work to keep communications channels open. Determination of Contract Type Specific contract planning should be appropriate and proportionate to the complexity and dollar value of the project. The major types of contracts and incentives proposed should be based on an overall view of major project risk. Fixed-price type contracts are often not appropriate for complex projects where there is a high degree of uncertainty in the execution or DOT requirements. Fixed-price is appropriate where the level of risk permits realistic pricing and an equitable allocation of the risk consequences between the parties. Communication Early exchanges of information about future projects among the construction industry and other parties interested in the project can identify and resolve concerns regarding the procurement method and the work. Information concerning proposed contract type, terms and conditions, and schedules; and performance requirements provide feed back about the project and help to insure bidding competition. The purpose of exchanging information is to improve the understanding of DOT requirements and industry capabilities, thereby allowing potential presenters to judge whether or how they can satisfy the DOT’s requirements, and enhancing the DOT’s ability to obtain construction, at reasonable prices, and increase efficiency in proposal preparation, proposal evaluation, negotiation, and contract award. Some methods to promote competition and project feed back before bidding are: Industry or small business conferences Market research Presolicitation notices Requests for information Pre-solicitation or pre-proposal conferences 9 Nevada Department of Transportation, I-580 Freeway Extension Contractor Review Meeting, August 26, 2004.

67 Site visits Effects of Large Projects Funding and staffing issues are driving DOTs towards larger projects and these large projects are creating well documented problems with cost growth. FHWA has distributed information on lessons learned from major (Mega) projects. An important point that should be considered in addition to inflation is a project’s economic impact on the local economy. Cost estimates should consider the economic impact of major projects on the local geographical area. For example, material suppliers that would normally compete with one another may be “forced” to team together to meet the demand of a major project. Extremely large construction packages also have the potential to reduce the number of contractors that have the capability of bidding on the project, and may need to be broken up into smaller contracts to attract additional competition. Bid options (simultaneous procurements of similar scopes with options to award) should also be considered for potential cost savings resulting from economies of scale and reduced mobilization. A value analysis should be performed on the project to determine the most economical and advantageous way of packaging the contracts for advertisement. Large complex projects have characteristics that make them extremely challenging to estimate and which estimators should always consider when reviewing costs assumptions. These include: Large projects stretch available resources to the limit ─ labor, material, management skill, and information systems Large projects have a high profile with political subdivisions and the public Large projects are very noticeable by regulators Large projects are unusually long duration projects and there is less likelihood of maintaining continuity of management Document Quality Strategy Promote cost estimates accuracy and consistency through improved project documents. Contract documents must be clear and unambiguous as to what must be constructed and to what standard. The documents must clearly state the responsibilities of all parties; contractors, the DOT, and third parties. It is critical that all parties involved understand third party involvement in the project construction process. The design and documentation process has a major influence on the overall performance and efficiency of construction projects and on estimating the cost of the work. Designers provide the graphic and written representations, which allow contractors and subcontractors to transform concepts and ideas into physical reality. How well this transformation occurs will depend largely on the quality of the design and documentation provided. Inadequate design and documentation leads directly to contractors including their own contingency dollars in bids, to construction delays and to rework⎯contributing to increases in project schedule and cost (Tilley 1997). A Construction Industry Institute study found that design deficiencies are responsible for approximately half of all construction contract modifications (Burati, Farrington, and Ledbetter

68 1992). Therefore, a Quality Assurance Program for ensuring the quality of the project documents is an important strategy in controlling project cost and in achieving estimate accuracy. Document quality assurance begins at project conception and runs through all development stages and into construction. Document quality affects project cost first at the bidding stage and during construction when conflicts are discovered and change orders must be issued. Therefore, document quality needs to be given careful consider during all phases of project development. It has been recommended that owners have tools in place to assess and control: Timeliness of documents (designs) – When designs are not completed in a timely manner (as scheduled) the project is delayed and inflation cost is increased. Accuracy – Errors, conflicts, and inconsistencies cause bidder confusion and adds to perceived project risk. Completeness – When information is lacking, the result is possibly project delay or doubts by bidders as to exactly what is required (how do I price the work?) Coordination – Design disciplines must be coordinated if the final result is to be efficiently constructed. Conformance – The design must meet the requirements of performance standards and statutory regulations. Estimate Quality Strategy Use qualified personnel and uniform approaches to achieve improved estimate accuracy. Significant differences exist among the estimation practices of individual DOTs. It appears that the estimation practices of many DOT are often determined solely by the experience of the personnel in charge of estimation, usually the head of the estimation section or the chief of design. Because DOTs do not share bidding and pricing information with their neighboring DOTs, some potentially valuable insights are lost. It seems that the DOTs would benefit from collaborative discussions of bidding trends, habits of bidders that are in common bidder pools, and potentially on estimation practices for large projects. Many of the unique practices discussed are being used by a limited number of DOTs. Some of the practices are derived from studies of contractor estimation procedures. In addition to management sub-strategies of Estimator Training and Estimation Procedure previously discussed in the global Management Strategy, a discussion of two additional operational strategies of Estimation Documentation and Estimate Reviews follows. Estimation Documentation Estimation documentation must be in a form that can be understood, checked, verified, and corrected (Carr 1989). The foundation of a good estimate is the formats, procedures, and processes used to arrive at the cost. Most DOTs do not currently have a published estimation procedure for early estimation. DOTs would benefit greatly by producing their own guidelines of standard processes, procedures, and formats to be used by both DOT estimators and design

69 consultants retained for estimation purposes. This guidance document should be specifically written for those responsible for preparing the State’s estimates. Estimate Reviews The FHWA document Guidelines on Preparing Engineer’s Estimates, Bid Reviews and Evaluation (2004) discusses the need to review project bids “A multi-disciplined review committee should be used to analyze the bids received so that the various perspectives within the contracting agency are represented and are provided with technical and managerial input.” However, this document fails to directly call attention to the fact that the quality of the DOT estimate can be validated by review processes. Only in Attachment A – “Review of Engineer’s Estimate Preparation” is there any recognition of the fact that DOT estimates should be reviewed and Attachment A is strictly directed at Engineer’s Estimates. A very effective management tool for establishing the reliability of cost estimates is to subject them to review and verification by independent experts. The depth of such reviews should be dictated by the complexity of the project and in most cases need only be directed to the major items of work. Establishment of an estimate review process, for all estimates from initial conceptual to the final engineer’s estimate, is an effective method for validating estimate basis and assumptions, and establishing estimate reliability. Integrity Strategy Insure checks and balances are in place to maintain estimate accuracy and minimize the impact of outside pressures that can cause optimistic biases in estimates. The potential for conceptual estimate error (on the low side) can result from pressure by project sponsors who seek the approval of their projects (Scope Definition Control 1986). Conceptual estimation is an art, not a science. Clever people do not want to do it because in many departments it is a dead-end job and there is recognition of the pressures that can be brought to bear if estimators produce high estimates. In developing a conceptual estimate judgment replaces straightforward material takeoffs and costing, therefore it is difficult to justify estimates quantitatively. Some DOT estimators expressed such frustrations during conversations with the research team. If DOTs truly want accurate project estimates, especially in the case of large complex projects, they must have management structures in place that shield estimators for external and internal pressures to produce a low project estimate. As part of such a structure it is necessary to elevate the status of senior estimators and to provide them with the tools to defend their cost numbers. To produce accurate conceptual estimates DOTs need to enhance their cost databases and document factors that effect project cost. Just keeping a database of historical bid tabs is not sufficient to proving the necessary data for estimation; the data must be analyzed to provide information. Summary Engineering skill and judgment invested in project planning is obscure to the general public, legislators, community opinion leaders, and the media. Cost busts are easy for the public to understand. But who wants to appreciate the fine points of route alignment, difficult geotechnical conditions, wetlands mitigation analysis or community desires for a signature structure?

70 Departments need strategic approaches to cost estimation practice and cost estimation management that: Avoid false precision − a big problem is created by early optimism. Relate contingency to the layman’s everyday experiences with uncertainty. Invest in continuous and transparent QA/QC of estimation processes. PRELIMINARY STRATEGIES, METHODS, AND TOOLS Strategies for cost estimation practice and cost estimation management must be applied across the continuum of project development phases. Specific methods and tools that support implementation of the global strategies are shown in Tables 4.3, 4.4, and 4.5. The methods and tools shown in these tables are based primarily on those presented in Chapter 3, only linked to specific strategies they support. There are several methods and tools that are not presented in Chapter 3 but are indicated in these tables. These methods and tools were identified in later interviews after Chapter 3 had been developed. Therefore, these methods and tools were eventually addressed fully in the Guidebook. The definitions identified in Chapter 1 guided the description of a particular method and tool. A method is described as “a means or manner of procedure, especially a regular and systematic way of accomplishing something.” Tools, on the other hand, are used to perform a method, as the definition of a tool suggests, “something used in the performance of an operation [method].” As shown in these tables some methods have more than one tool that can be used to perform the method. In addition, the same method and tool can be applied in more than one project phase. The use of the method and tool may change slightly to fit cost estimation practice or cost estimation management requirements for that particular phase. Finally, the tables indicate where a strategy may currently have only a small number of applicable methods and tools. The strategies, methods, and tools that were recommended and included in the Guidebook were fully developed in Phase II. Planning Phase Strategies, Methods, and Tools Current methods and tools being used by DOTs in support of planning phase estimation are shown in Table 4.3. Table 4.3 makes it very clear that in certain strategic areas DOTs may be not be prepared to deal with critical issues that influence the quality of their estimates. While some DOTs are beginning to deal with the impact of off-prism cost and schedule drivers by the use of context sensitive design, very few are engaging all of the other external influences. During the interview process there were no reports of DOTs having structured processes for looking at project delivery and procurement methods as they might impact cost estimation. There are individual reports of project delivery and procurement courses of action being carefully developed for selected projects (Federal lands Division of FHWA for the Hoover Dam Bypass project, and the Maryland State Highway Administration’s repackaging of the bid packages for the Woodrow Wilson Bridge) but from the reports it does not appear that this was considered during the planning phase. Fewer methods and tools identified address the strategic issue of estimate integrity. There are, however, several tools that had been put in place for other reasons but may also serve to monitor estimate integrity.

71 Programming and Preliminary Design Phase Strategies, Methods, and Tools Current methods and tools being used by DOTs in support of Programming and Preliminary Design phase estimation are show in Table 4.4. Table 4.4 makes it very clear that in certain strategic areas DOTs may not be prepared to deal with critical issues that influence the quality of their estimates. In the area of estimate integrity, a few more tools are being used by a limited number of DOTs. But there obviously needs to be more tools and methods developed to handle the off-prism issues that impact project cost, for developing project delivery and procurement strategies, and for achieving document quality. Final Design Phase Strategies, Methods, and Tools Current methods and tools being used by DOTs in support of Final Design phase estimation are show in Table 4.5. Table 4.5 makes it very clear that even at this late stage in project development DOTs may not focusing on certain critical issues that influence project cost and the quality of their estimates. In the area of estimate integrity no specific tools were identified during the interviews. Again there is a conspicuous lack of tools to address off-prism issues, for developing project delivery and procurement strategies, and for achieving document quality.

72 Table 4.3. Strategies, Methods, and Tools for the Planning Phase

73 Table 4.4a. Strategies, Methods, and Tools for the Programming & Advanced Planning/Preliminary Design Phase

74 Table 4.4b. Strategies, Methods, and Tools for the Programming & Advanced Planning/Preliminary Design Phase

75 Table 4.5a. Strategies, Methods, and Tools for the Final Design Phase

76 Table 4.5b. Strategies, Methods, and Tools for the Final Design Phase

77 CONCLUSIONS This chapter identified eight global strategies for address cost escalation. These proposed strategies were linked to seventeen different cost escalation factors. The eight strategies are described. The proposed strategies are then linked to a set of preliminary methods to implement the strategies. Each method is tied to one or more preliminary tools that can be used to execute the method(s). The next chapter discusses a preliminary outline for the Guidebook and the interim report that was developed and presented to the panel. The results of the interim report review, which delineated the directives of the panel for Phase II, are also discussed in the next chapter.