Airport Capital Improvements: A Business Planning and Decision-Making Approach (2014)

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3 Objective As part of its capital planning and master planning activities, airports are required to pre- pare cost estimates for proposed construction projects. These are presented and distributed to a number of stakeholders, including governing boards, state and regional transportation agen- cies, and the regional offices of the Federal Aviation Administration (FAA). The cost estimates can be developed by the airports’ own staff, with varying levels of expertise and experience, by external consultants, or by planners and engineers at other agencies. These estimates are typically developed prior to any significant feasibility, investigative or preliminary design work being per- formed. The resulting accuracy of the estimates is therefore mixed and as the projects move into the execution phase, the initial cost estimates are often far removed from the actual construction costs. In turn, inaccurate cost estimates can lead to outright project cancellations or inefficient distribution of limited airport capital funds. The importance of managing construction cost estimating and the risks associated with inac- curate estimates are reflected in the financial markets’ evaluations of airports. For example, one national credit rating specifically takes into account “risk and complexity of [an airport’s] capital programs,” including “level of construction risk in capital projects” (Krummenacker et al. 2011, p. 13). The main risk is identified as construction cost escalation caused by delay, with specific risk factors listed as follows: • Scope changes between design and completion • Outdated or inaccurate cost estimates • Project complexity • Material or labor cost escalations • Poor bidding procedures • Contractor management/oversight issues • Environmental concerns • Community concerns Another source of uncertainty is the presence of geographical (i.e., regional) variations in construction costs. These can be substantial and are caused by a number of factors, including labor supply, raw material costs, access to transportation, energy costs, and regulatory standards, with an emphasis on environmental regulations. A cost-estimating model must be able to take regional variations into account, both during the development and calibration of the model and during the cost-estimating phase. The existence of a standardized cost-estimating model should allow airports to mitigate some of these risks. At the same time, it must be recognized that a number of these risks cannot be addressed even by the most exhaustive cost-estimating model. For example, an otherwise C H A P T E R 1 Introduction

4 Airport Capital Improvements: A Business Planning and Decision-Making Approach accurate cost estimate could be rendered ineffective by unusually demanding environmental regulations, fluctuations in market conditions, or inadequate construction management. Only 139 of the 3,355 airports identified in the National Plan of Integrated Airport Systems (NPIAS) are classified as hub airports (FAA 2012). In other words, over 95% of airport sponsors represent non-hub commercial and general aviation airports, which tend to have no engineering staff on board. Consequently, most airports do not have any in-house cost-estimating experience or expertise. Even hub airports often rely on engineering consultants to provide cost-estimating and bidding services. Lack of access to cost-estimating expertise is another reason why there is a perceived need for a software-based cost model. Investment decisions for large acquisitions within the FAA Air Traffic Organization require a benefit-cost analysis (BCA), in which a standardized cost estimate is compared against mon- etized benefits. This is not the case for the majority of airport capital projects and, consequently, the approach for developing airport capital cost estimates can vary considerably. The lack of a standard methodology and the limited cost-estimating resources available to airports result in substantial challenges. One challenge arises from substantial variation between the cost esti- mates obtained in the capital planning phase and the actual costs reported in the bidding phase or after the close-out of the construction projects. Airports also suffer because the resulting variations tend to be biased toward underestimating the overall cost. The potential result is that anticipated projects must be scaled back, delayed, or cancelled. Cost estimates for airport capital improvement plans (ACIPs) are often first prepared during the development of the airport master plan, airport layout plan, or in support of the capital plan- ning process of the relevant state aviation agency or the FAA. Often, the design data available at the time the first cost estimate is developed is limited to a conceptual layout, the approximate size, the location on the airport, and little else. The time frame for construction of the facility being estimated can vary from a few months to 20 years or more. At this point in the process, a rough order of magnitude estimate is the best that can be expected, due to the limited data available. Airport projects are often complex: “Airport projects have a whole series of special systems which are seen nowhere else, on an enormous scale” (Merkel and Cho 2003). It is clear that two separate but related problems must be addressed: (1) improving the accuracy of the cost estimate as calculated from current and relevant cost data and (2) improving the specificity of the project scope and unique conditions which must be entered into the model by the user. The problems are linked: The accuracy of the result is completely dependent upon the specificity of the scope. The dual challenges of providing sufficient accuracy and specific scoping vary in their characteristics, depending on the type of project. Some project types have greater potential for significant deviations, and therefore more potential for improvement. Before discussing cost estimating in more detail, it is necessary to clarify what the terms “hori- zontal” and “vertical” mean in the construction industry and how they relate to airport projects. Horizontal construction refers to projects that involve work on a road, bridge, traffic signal, water or sewer main, or any other improvement to land that is not a building (Massachusetts Certified Public Purchasing Official Program 2001, p. 2). Applied to airports, roads and bridges are substituted with runways and taxiways, traffic signals are substituted with airfield light- ing, and so on. Examples of horizontal airport construction include runways, taxiways, aircraft aprons, security fences, and airfield lighting. Conversely, vertical construction is defined as work on a building. Examples of vertical construction on airports include terminal buildings, hangars, and facilities for storing airport equipment, such as snow removal equipment (SRE) and aircraft rescue and fire fighting (ARFF) vehicles. The objective of this research project was to develop an interactive construction cost-estimating model and associated database for airport capital projects, along with a guidebook documenting

Introduction 5 best practices for cost estimating and guidance on using the cost model and database. The model should cover common airport construction projects, both in the horizontal and vertical domains. It should make use of existing databases and take into account regional cost factors and inflation. Finally, it should be flexible in its use, for example, by allowing for database updates and the ability to generate reports in Excel, PDF, and other formats. How to Use this Guidebook This guidebook is designed to provide a practical approach for developing cost estimates for airport construction projects. The guidebook contains the following: • Information and background material on cost estimating intended to expand the reader’s knowledge base. The guidebook describes best practices for cost estimating, as well as specific material on the parametric cost-estimating approach. This material will also aid the reader who wants to understand the methodology used by the cost-estimating tool. • A primer and quick reference guide to ACCE—the Airport Capital Cost Estimation tool. ACCE represents the implementation of the cost model and database developed as part of this project. The ACCE cost model is implemented as a self-contained Microsoft Excel application that accompanies this guidebook. • Recommendations for future work, with a focus on overcoming limitations on data availabil- ity that constrain the effectiveness and robustness of the cost model as currently implemented. The material in this guidebook is organized to provide a logical path leading up to the use of ACCE to support cost estimating for airport construction projects. This guidebook is organized as follows: • Chapter 1 provides an overview of the guidebook, objectives, information for the reader, and background material. • Chapter 2 covers the fundamentals of cost estimating, as applied to the airport domain. This chapter identifies best practices, as well as specific challenges to cost estimating in the hori- zontal and vertical domains, respectively. • Chapter 3 provides detailed information on parametric cost estimating: the cost-estimating methodology that was adapted for this project. The chapter provides guidance on the selec- tion of CIVs, the development of CERs, and testing and validating the resulting cost model. • Chapter 4 describes the development of the historical cost database, including a description of the database structure, approaches to collecting data, as well as challenges and limitations. • Chapter 5 is a guide to ACCE, the Microsoft Excel-based application developed to implement the cost model and database for this project. It describes how to define a project, what data needs to be entered by the user, how the tool should be used, and the meaning of the data contained in the output—the cost-estimating report. Particular attention is spent on how to interpret the results and identifying the limitations of the cost model. • Chapter 6 summarizes lessons learned, drawing both on internal findings from the research project and results from the validation of the cost model. Recommendations for future work are also included in this chapter. Reference material has been placed in appendices to the main guidebook. Appendix A con- tains detailed information on the CERs for each of the project types supported in the cost model. Appendix B contains the ACCE Quick Reference, which is a concise user guide to the cost model. Note that a full understanding of the material in this guidebook is not necessary for the pur- pose of using ACCE. The information provided is intended to explain the selected cost-estimating methodology and how it is implemented in ACCE. It provides background material to help the user understand the inner workings of the model. This, in turn, should help the user better

6 Airport Capital Improvements: A Business Planning and Decision-Making Approach understand and explain the resulting cost estimates. For readers who are interested in quickly getting started with ACCE, the following sections are recommended: • Chapter 5: ACCE—Airport Capital Cost Estimation Tool • Appendix B: ACCE Quick Reference Guide Who Can Use this Guidebook? This guidebook can be used by all airports who are considering construction projects within their ACIP. While ACCE itself supports a specific subset of project types, the best practices pre- sented in the guidebook apply more broadly. When developing cost estimates, it will be useful to have participation and input from a broad range of functional areas at the airport. The areas of responsibilities that should be represented include the following: • Management: Executive leadership, policy, overall compliance with airport mission. • Operations: Operational and certification requirements, efficiency, safety. • Maintenance: Maintainability and sustainment of infrastructure. • Emergency Response/Law Enforcement: Operational and certification requirements, safety, security. • Planning: Capital improvement planning, funding, land use compatibility. • Finance: Finance, funding, airport use agreements. • Environmental: Impacts on noise, wetlands, air quality, water quality, wildlife, other envi- ronmental areas of concern. At larger airports, these functional areas may be represented by separate individuals or depart- ments. Conversely, at a general aviation airport, the airport manager may be solely responsible for all of the listed functions. The guidebook and accompanying cost model can also be used by decision makers and plan- ners at regional, state, and federal agencies with oversight over airport funding. For example, state aviation planners can use the tool to validate cost estimates submitted by airports in their requests for state and federal funding. The decision support tool requires certain hardware and software to be available. These include a computer running Microsoft Excel (version 2007 or later). Related ACRP Projects This study is one of several projects conducted within the Airport Cooperative Research Pro- gram (ACRP) intended to support airports in planning for and funding capital projects. While this particular study focuses on cost estimating, it is valuable for airports to be familiar with the broader literature on finance, BCA, and innovative methods related to capital planning. This emerging body of research includes the following ACRP projects: • ACRP Report 21: A Guidebook for Selecting Airport Capital Project Delivery Methods. This ACRP report provides guidance on three different types of project delivery methods for air- port projects: design-bid-build (DBB), design-build (DB), and construction manager at risk (CMR). The report provides a two-tiered decision support approach for selecting an appro- priate method. The report describes the advantages, disadvantages, and cost efficiencies of each of the three methods. The two-tiered project delivery selection framework can be used by airport owners and operators to evaluate the pros and cons of each delivery method and

Introduction 7 select the most appropriate method for their project. Tier 1 consists of an analytical delivery decision approach designed to help the user understand the attributes of each project delivery method. The goal is to decide whether the delivery method is appropriate for the airport’s specific circumstances. Tier 2 uses a weighted-matrix delivery decision approach that allows airports to prioritize their objectives and, based on the prioritized objectives, select the deliv- ery method that is best suited for their project. This report is useful for evaluating the effects that each delivery method has on the construction cost estimation process. • ACRP Report 49: Collaborative Airport Capital Planning Handbook. This handbook provides guidance to those in the airport community who have responsibility for, and a stake in, develop- ing, financing, managing, and overseeing the ACIP and the individual projects included in it. This guidance is useful to help to prioritize the projects in the ACIP, which influences the selection of project types to be modeled. It also creates a framework for using the ACCE tool in a collaborative fashion that results in constructive communication between internal and external stakeholders. The findings of ACRP Report 49 were used in this project to refine the list of candidate projects for inclusion in the cost model. Two key principles were applied: (1) to focus on projects with high potential for reducing the uncertainty in cost estimating and (2) to focus on projects with potential for a high return-on-investment for the airport sponsor. • ACRP Synthesis of Airport Practice 1: Innovative Finance and Alternative Sources of Revenue for Airports. This synthesis study discusses alternative financing options and revenue sources for funding capital projects. The report discusses existing and potential funding sources, newly developed revenue sources, and a review of privatization options. A solid understand- ing of funding availability is important, since there is a strong relationship between funding sources and the feasibility of including a project in the ACIP. The report may also help airports implement projects for which cost estimates have been developed using the ACCE tool. • ACRP Synthesis of Airport Practice 13: Effective Practices for Preparing Airport Improve- ment Program Benefit-Cost Analysis. This synthesis study describes successful assessment techniques that can be used by airports in performing BCAs to quantify benefits for projects needing more than $5 million in Airport Improvement Program (AIP) discretionary fund- ing. The synthesis includes a literature review, a review of BCAs submitted to the FAA for AIP funding, and an evaluation and summary of successful practices. While the focus is on the assessment of benefits, a framework for categorizing costs is presented. This study also pro- vides a conceptual framework for how to use cost estimates to formally prioritize investments under consideration.