Estimating Highway Preconstruction Services Costs - Volume 2: Research Report (2016)

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11 C H A P T E R 2 2.1 Introduction and Overview In the past, there has been a substantial amount of research into estimating construction costs for highway projects, and there are also a handful of articles about estimating design cost and preliminary engineering for highway projects, but some- how preconstruction services costs have been left out. Due to the changing nature of state DOT work with increased funding uncertainties and shrinking budgets, it is more important than ever to ensure proper allocation of funds for highway projects. Uneducated estimates for preconstruction services or using a fixed percentage across multiple projects can lead to a misallo- cation of available capital funding in the PCS phase, which may force the need to redistribute funding late in an agency’s fiscal year to cover overages and expend underruns before authori- zation expires (Hollar 2011). 2.2 Relevant Definitions The definition of preconstruction services covers a broad spectrum of project services and includes all work completed on the project, from project conception up until contract award. This process includes effort that may not be assigned to a particular project and also effort for projects that never eventuate. After considering this, the research team consulted the panel and chose to define PCS activities as those defined in Section 2.2.1. 2.2.1 Standard Definitions • Preconstruction services. All work completed on a project once it has been authorized for funding and costs related to the project can be charged accordingly, up until construc- tion contract is awarded. The project timeline and a list of included activities is shown in Figure 2.1. • Overhead costs. Costs applied to the DOT staff above the operational level of planners, designers, and so forth who directly worked on projects. • Corridor projects. Also referred to as “parent projects.” The term “corridor” is defined by the U.S. DOT as “a combina- tion of discrete, adjacent surface transportation networks (e.g., freeway, arterial, rail networks) that link the same major origins and destinations. It is defined operationally rather than geographically or organizationally” (Smith et al. 1999). Corridor projects are usually multiphased projects that require various preliminary engineering studies such as environmental assessment [acquiring wetland permits, National Environmental Policy Act (NEPA) documents, etc.] and ROW during the early planning stages. These types of projects are represented by project identification number (PIN) and usually fall under a Type I category. Thus, a corridor project is defined as a group of single projects divided either into multiple sections or work types aimed at repairing, preserving, or improving a transportation network associated with a given roadway. • Single projects. Also referred to as “child projects,” these are projects that are created from corridor projects and whose preconstruction expenses are at some level jointly estimated and recorded within a corridor project. For funding pur- poses, single projects are identified by project numbers. For single projects, it should be noted that preliminary engi- neering works might be performed for a particular type of project conducted at the planning stage of multiphase projects (PIN projects), and care must be taken to account for all works and costs associated with the project. • Independent projects. Independent projects are typical projects that are contracted by a DOT on an annual basis. In this type of project, the total preconstruction costs are individually estimated, assigned, and recorded. Thus, single projects that do not share any recorded preconstruction services expenses with corridor projects will be considered as independent projects. Independent projects are also iden- tified by project numbers. The projects investigated by the researches are termed “typical projects.” These projects were defined in the kick-off State of the Practice

12 phone conference as DBB projects within the $2 million to $25 million cost range. The main focus of the case studies was on these projects, but there were also some projects collected that were delivered using DB and CMGC. 2.3 Project Development Timeline Documents from various agencies on the project develop- ment timeline were collected to create a standardized project development process that could be adapted to fit all agencies’ processes. Table 2.1 is from NCHRP Report 574: Guidance for Cost Estimation and Management for Highway Projects during Planning, Programming, and Preconstruction (Anderson et al. 2007). This report focused on the construction cost estimates through these phases but provided the researchers with defi- nitions of each phase that were then manipulated to fit other literature found during the research. The first four activities— planning, programming and preliminary design, final design, and advertise and bid—are the areas of interest in this research. Project delivery processes from the Arizona Department of Transportation (2013), Western Federal Lands Highway Divi- sion (2007), Ohio Department of Transportation (2014), New York State Department of Transportation (2004), and Iowa DOT were reviewed and synthesized to develop Figure 2.1. Most of these documents can be found in Appendix A of this report. Figure 2.1 shows the preconstruction timeline starting at the preliminary engineering stage; this is designed to coincide with the Statewide Transportation Improvement Plan (STIP) for most agencies (see Section 2.3.1). All activities that occur prior to this, including initial start-up, scoping and budget, Figure 2.1. Preconstruction services activity timeline. Table 2.1. Project development phases and activities (Anderson et al. 2007). Development Phase Typical Activities Planning Determine purpose and need, determine whether it is an improvement or requirement study, consider environmental factors, facilitate public involvement/participation, and consider interagency conditions Programming and preliminary design Conduct environmental analysis, conduct schematic development, hold public hearings, determine right-of-way impact, determine project economic feasibility, obtain funding authorization, develop right-of-way, obtain environmental clearance, determine design criteria and parameters, survey utility locations and drainage, make preliminary plans such as alternative selections, assign geometry, and create bridge layouts Final design Acquire right-of-way; develop plans, specifications, and estimates; and finalize pavement and bridge design, traffic control plans, utility drawings, hydraulics studies/drainage design, and cost estimates Advertise and bid Prepare contract documents, advertise for bid, hold a pre-bid conference, and receive and analyze bids Construction Determine the lowest responsive bidder, initiate contract, mobilize, conduct inspection and materials testing, administer contract, control traffic, and construct bridge, pavement, and drainage

13 corridor planning, and conceptual design, are considered sunk costs and are included in the project’s overhead. 2.3.1 Statewide Transportation Improvement Plan Federal regulations require that state DOTs develop a STIP. The STIP contains capital and noncapital transportation projects proposed for funding under Title 23 (highways) and Title 49 (transit) of the U.S. Code as well as all regionally sig- nificant transportation projects that require an action by the FHWA or the FTA. In July 2012, the president signed the Moving Ahead for Progress in the 21st Century Act (MAP-21). The STIP is developed under current federal regulations (23 CFR). Cur- rently, the development of a new STIP is required at least every 4 years and must contain a minimum 4-year listing of federal-aid projects. The STIP must be approved by the FHWA and the FTA. Federal regulations require each STIP to be fiscally con- strained. All federally funded transportation projects must be included in the STIP. In some states it is transportation commission policy to include state-funded projects and local projects with the department’s oversight in the STIP. The STIP was identified as a good baseline for the start of precon- struction services once a project gains funding authorization. 2.4 Design Cost Estimating The 2012 update of ASCE Manual of Practice 45 states that there are five methods for charging for design services: 1. Multiplier: salary cost times multiplier, plus direct non- salary expense; 2. Hourly: hourly billing rate, plus reimbursable expenses and a “not to exceed” amount for specific services; 3. Per diem: fixed charge per day; 4. Cost plus fixed fee; and 5. Lump sum or fixed price (ASCE 2012). The first four methods are variable cost methods as the price the client will pay varies depending on the actual amount of work performed (ASCE 2012). The fifth method, lump sum or fixed fee, is a single factor and is useful if there is a well- defined project scope. When an agency outsources design, there is commonly a defined but general scope of work. How- ever, as the project is yet to be designed, that scope is concep- tual, and both the owner and the consultant must estimate the design effort to achieve the necessary functional require- ments. By adding a contingency, the need to request autho- rization for additional funds to complete the design process is avoided. Without a contingency, there exists a strong bias against requesting additional funding (Flyvbjerg 2002). If a contingency is not used during the design, those funds can then be released. 2.4.1 Contingencies When estimating project design cost, the scope is articu- lated in functional terms, but the design details are unknown. Nevertheless, current practice tends toward negotiating a lump sum design fee, which unintentionally implies a level of certainty and may not be dependable (Gransberg et al. 2007). Some agencies will only use variable cost methods to allow for the uncertainty; however, it is important to have a known range for funding authorization. A design estimate is the expected value of design, and a contingency can be included in the estimate to account for the higher end of the possible cost range for the project (Mak and Picken 2000). In public works, the project’s contingency is used to effectively account for the risks associated with both the design process and the construction project. However, in many cases, it is calculated as an arbitrary percentage. For example, the U.S. Army Corps of Engineers (U.S. ACE) requires a 5% contingency (U.S. Army Corps of Engineers 1997), and the Riverside County California DOT uses 10% to be added to project cost esti- mates before design commences (Riverside County 1999). Figure 2.2 shows the project development process, how the risk is allocated, and how the contingency can be retired as the project progresses and risks are realized. Most of the research conducted about contingencies pertains to construction cost contingencies; however, an argument can be made that Fig- ure 2.2 shows that the construction contingency is greater in the design stage where the unknowns are much greater, and as such, a design contingency is warranted for the very same reason. 2.4.2 Design Fee Estimating Approaches This section highlights a number of methods used for esti- mating design costs within the transportation sector. One method found by the researchers is to estimate the design fee on a cost-per-plan-sheet basis. This method has been explored as a good PCS cost modeling technique; however, cost-per-plan-sheet methodology is becoming obsolete. This is due to the development of technology that permits plans to be produced electronically, making the correlation between number of plan sheets and design fee difficult to measure. New York State DOT (NYSDOT) developed a model using a commercial spreadsheet/database program to estimate the design hours for each project (Williams et al. 2013). The model allows the DOT to either search similar projects or generate an estimate of total design hours to be expected for a project. The model was developed using a 12-key project characteristic

14 approach chosen by the NYSDOT engineers as defining fac- tors of a project. These were: 1. Complexity, 2. Project type, 3. Number of sub-consultants, 4. Construction cost, 5. Number of lanes, 6. Number of plan sheets, 7. State Environmental Quality Review classification, 8. NEPA classification, 9. Predominant bridge type, 10. Number of bridges, 11. Highway classification, and 12. Length of project (Williams et al. 2013). These characteristics became the input factors in the model. The number of plan sheets is used as the independent variable to calculate the total design hours. Hours are calculated from a simple regression model that is expected to become more accu- rate as more project data are made available (Williams et al. 2013). This methodology is similar to what the researchers used in Phase 2 of the project while developing the PCS model. Refer to Section 3.6.1 for more information. It has been suggested that using labor hours as an estimat- ing tool could cause a misrepresentation of the total work performed (Sturts and Griffis 2005). Due to the advance- ment in available technology and computer-aided design, the labor hours can be significantly reduced but the value of the design could be increased (Sturts and Griffis 2005). This was also suggested by Carr and Beyor (2008), who found that the design fees are not keeping up with the inflation of construc- tion prices. Another study (Gransberg et al. 2007) found that if the design fee of a project is too low, it can lead to major cost growth in the construction process due to incomplete construction documents. The issue of underestimating the reasonable cost of the necessary design effort must be con- sidered when using past project data to estimate direct hours, and adjustments should be made if necessary. The American Council of Engineering Companies of Texas (ACEC) released a formula to estimate a fee for consultant design of a transportation project. The formula uses a num- ber of technical factors related to the project to determine the percentage of design fee estimate. Table 2.2 shows all the fac- tors that are considered. The estimator must determine the appropriate value for each factor for each individual project. Equation 2.1 is the ACEC formula (American Council of Engineering Companies of Texas 2005): ( ) ( )= +12 1 0.1 Eq. 2.1F C P A where: F = engineering fee as a percent of construction cost, C = sum of fee factors (See Table 2.2), A = cost index factor = CCI current/CCI1993, CCI = Engineering News Record construction cost index, CCI1993 = 3,484.85 (Dallas, Texas–March 1993), and P = construction cost in millions of dollars. Figure 2.2. Conceptual components of a cost estimate (Molenaar 2005).

15 This estimate considers a variety of technical factors to either increase or decrease the estimated fee depending on project conditions. Table 2.2 incorporates all 12 of the factors influencing project design cost specified in ASCE Manual of Practice 45 (ASCE 2012). ASCE published design fee curves in the 2002 edition of Manual of Practice 45. These curves displayed a range of design fees versus construction costs. In the 2012 edition of the man- ual, it was noted that the fee curves were followed by owners Table 2.2. ACEC table of technical factors (American Council of Engineering Companies of Texas 2005). Technical Factors Factor Values 1. Level of information required on plans/drawings -0.20 to 0.10 2. Project requirement a. Scope of services b. Rehab vs. grass roots project c. Interface with other contracts/consultants d. Numerous disciplines required e. Alteration/modification of existing facility f. Complexity of project -0.20 to 0.33 3. Existing data (e.g., preliminary engineering report, as-constructed drawings/specifications) -0.35 to 0.20 Owner-Controlled Factors Factor Values 1. Risk/liability (base standard of risk limited to fee) -0.10 to 0.10 2. Time required for owner review/approvals (2 weeks standard) 0.0 to 0.20 3. Number of submittals/owner reviews Add 0.05 for each submittal in addition to preliminary and final 4.Schedule for completing work – fast-track vs. reasonable schedule 0.0 to 0.20 5. Payment schedule – 30 days after receipt of invoice 0.01 for each late 30-day period 6. Owner requested sub-consultants 0.05 to 0.15 of the value of the subcontract 7. Owner participation in project/partnering 0.0 to 0.20 8. Construction inspection limiting participation of engineer 0.05 to 0.20 External Factors Factor Values 1. Coordination with other entities 0.0 to 0.12 2. Environmental regulations 0.0 to 0.12 3. Not-in-my-backyard/citizen's involvement 0.0 to 0.20 4. Governmental constraints 0.0 to 0.20 as absolute fee estimates, which was not ASCE’s intention. As a result, the 2012 data did not contain the fee curves (ASCE 2012). Figure 2.3 shows the total fee percentage versus new construction cost. This graph used the cost data from the 2012 edition of the Manual of Practice 45, and the line rep- resenting the fee curve has been added by the researchers to mimic the curves in the 2002 edition. This curve can be used to determine the percentage of construction cost that would be the design fee.

16 The Institute of Professional Engineers New Zealand and the Association of Consulting Engineers New Zealand also developed a guideline for estimating consulting engineering services fees as a percentage of the estimated construction cost (Association of Consulting Engineers New Zealand and Insti- tute of Professional Engineers New Zealand 2004). This is a common method for estimating design cost as the construc- tion cost tends to be easier to quantify than the design cost (Sturts and Griffis 2005). The curves were developed using data from past projects and provide a best practice for esti- mating consultant fees; however, individual project interpre- tation is encouraged. It is noted in the guideline that the fee estimate includes project estimates, economic studies, alter- native evaluations, and schedule of quantities. If the required services for a particular project are different, an adaptation of the fee is required. The method divides projects up into nine different classes, with each type having subtypes to define the project. Fig- ure 2.4 shows the fee guideline for the class GG; this class corresponds to the following types of projects in the highway sector: • State highway, • State highway state correction, • State highway rehabilitation, • Bridges: urban, and • Bridges: state highway. The graph relates the project complexity and degree of urbanization to the design effort required. From Figure 2.4 it can be seen that there is a logarithmic relationship between the construction cost and design fee (Association of Con- sulting Engineers New Zealand and Institute of Professional Engineers New Zealand 2004). 2.5 Screening Survey A screening survey was issued at the AASHTO SCOD con- ference in Bozeman, Montana, June 2 through June 6, 2013. A copy of this survey can be found in Appendix B. From the 35 states represented at the conference, the researchers received 18 responses. The survey was designed to give the researchers a basic idea of the preconstruction services makeup of an agency and to identify what methods were being used to estimate pre- construction services costs, what data an agency had available on PCS, and whether it would be willing to share it with the researchers. A summary of the results from the screening survey is shown in Tables 2.3 and 2.4. It can be seen from Table 2.3 that all agencies except for Wyoming outsource PCS services, and most agencies out- source more than 31% of these services. The results of the survey also identified potential case study candidates who had available PCS cost data and were willing to share these data with the research team. It can be seen from Table 2.4 that there is a wide variety of methods in use to estimate PCS Figure 2.3. Total design fee percentage versus new construction cost (ASCE 2012).

17 Note: All costs are in New Zealand dollars. Figure 2.4. State highway road, shape correction, pavement rehabilitation, bridge, and urban bridge fee guideline (Association of Consulting Engineers New Zealand and Institute of Professional Engineers New Zealand 2004). Response from 17 of the 35 States Present Do you outsource PCS? Yes No AK, ME, AL, CA, GA, KS, MD, MS, WA, WI, NE, SD, MN, NC, WV, AZ WY What % PCS do you outsource? 0%–30% 31%–60% 61%–90% >91% CA, GA, KS, WI, NC AK, ME, AL, MD, MS, NE, MN, WV, AZ WA, SD Do you collect in-house cost per project? Yes No No response AK, AL, CA, GA, KS, MS, WA, WI, NE, SD, NC, WV, AZ ME, MD, MN WY Table 2.3. Summary results from screening survey. costs, and there are some overlaps, which could indicate that the agency uses two estimating methods and compares the results. The planning and construction phases were the least familiar to the survey respondents. This is likely due to the fact that most state design engineers completing the survey do not work in these areas of the project development process. After a discussion with the panel of the results of the screen- ing survey, the team chose to not include the planning phase in the PCS definition because it is difficult to pinpoint the beginning of this process for a particular project. However, the construction procurement section is included in the defi- nition for PCS. This information is likely to be more readily available within the agency but from different staff. As this survey was distributed at the AASHTO SCOD conference, design engineers were the respondents, and they do not usu- ally perform the procurement section of the preconstruction process. In the interviews with the agencies, the research team was able to meet with a wide range of the DOT personnel involved in the agencies’ PCS processes and get responses cov- ering construction contract preparation and procurement.

18 Phases Planning Preliminary Engineering Environmental Engineering Final Engineering Construction Activities Methods Project Start- Up (before MOP or STIP) Scope and Budget – Concept Stage 1 Design – Evaluating Alternatives Initial Cost Estimations Environmental Field Studies – Preferred Alternatives NEPA and Permit Approval Detailed Design Final Plan Package Procurement Trns.port software – – – – – – AL AL AL Standard % of estimated const. cost AK, AL, CA, GA, MD, WA, NE, MN AK, AL, CA, MD, MS, WA, NE, SD, MN ME, AL, KS, MD, NE, SD, MN ME, AL, MD, WA, NE, SD AL, KS, MD, WA, NE, SD AL, MD, WA, NE, SD KS, MD, NE, SD, MN, AZ KS, MD, NE, SD, AZ KS, SD, AZ Direct estimate of hours – GA, NC CA, MS, WI, NC, AZ, WY CA, MS, WA, WI, NC, AZ, WY AK, CA, MS, WI, MN, NC, AZ, WY AK, CA, MS, WI, NC, AZ, WY AK, CA, MS, WA WI, MN, NC, AZ, WY AK, CA, MS, WA WI, NC, AZ, WY CA, WA, AZ, WY Past project cost range AL, WA, MN AL, WA, MN ME, AL, MS, WI, MN, WV, AZ ME, AL, MS, WA, WI, WV, AZ AL, MS, WA, WI, MN, WV, AZ AL, MS, WA, WI, WV, AZ ME, MS, WI, MN, WV ME, WI, WV ME Don’t know ME, MS, NC, WV, AZ, WY ME, WV, AZ, WY AK AK ME ME – – AK, MD, MS, NE, NC, WV Note: MOP = maintenance operations plan. Table 2.4. Methods that states use to estimate the cost of the following activities.