Procedures Guide for Right-of-Way Cost Estimation and Cost Management (2009)

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Background Historically, many transportation projects have been underestimated (U.S. General Account- ing Office, 1997; Flyvbjerg et al., 2002). Approximately 50 percent of the recent large transporta- tion projects in the United States have overrun their initial budgets. This cost escalation problem is complex and difficult to address because the time between the initiation of a project and the completion of construction often spans many years. State Highway Agencies (SHAs) have recog- nized that project cost escalation is a pervasive problem and have sought solutions through research efforts supported by AASHTO and NCHRP. NCHRP Project 8-49 focused on project cost escalation and produced a Guidebook that describes a strategic approach to highway cost esti- mating and cost estimate management (NCHRP Report 574—Anderson et al., 2007a). NCHRP Report 574 provides SHAs with guidance for structuring their estimating and cost management processes to achieve estimate consistency and accuracy. NCHRP Report 574 also addresses esti- mating issues during the planning, programming, preliminary design, and final design phases of project development. The report does not address estimating for change orders or cost manage- ment during construction. NCHRP Report 574 provides appropriate strategies, methods, and tools to develop, track, and document realistic cost estimates during project development. NCHRP Project 8-49 and other estimating studies identified right-of-way (ROW) cost esti- mating and management of ROW cost as critical to achieving consistency and accuracy in proj- ect cost projections. Although NCHRP Project 8-49 addressed ROW cost estimating to a limited extent, the project’s scope did not allow for an in-depth treatment of this specialized area. This report provides a more in-depth analysis of the problems and practices of ROW cost estimating and cost management. Problem The NCHRP Project 8-49 findings, based on a critical review of estimating literature, recent esti- mating research, and current estimating practice, suggest that a component of project cost escala- tion is related to ROW cost. Specific findings related to ROW from the NCHRP Project 8-49 research are as follows: • Actual expenditures for project ROW are frequently greater than the cost estimate produced during the initial phase of project development due to factors such as poor estimating methods (difficulty with damages and condemnations), inconsistent application of contingency, and dif- ficulty in accounting for future appreciation and other market conditions. 1 S U M M A R Y Procedures Guide for Right-of-Way Cost Estimation and Cost Management

• Management of these influencing factors and the ROW estimating process can contribute significantly to cost estimate consistency and accuracy throughout project development. • There is an opportunity to develop ROW-specific cost estimating process steps based on suc- cessful SHA practices from around the country. • There is a need to provide specific guidance on how to minimize controllable influencing factors and implement strategies, methods, and tools such that ROW estimates are improved. These findings established the initial basis and need for this research project. As part of this project, some SHAs were interviewed about their ROW estimating practices. From those inter- views it was clear that 1. Cost escalation is a common occurrence related to ROW (confirming the first statement from the previous list). 2. The ROW cost estimation and cost estimate management processes generally lack structure and definition as compared with the other areas of cost estimation. 3. There is a lack of integration and communication between those responsible for ROW cost estimating and those responsible for the overall project cost estimate. These three issues are further compounded by uncertainties specific to ROW estimating, which include • Future highest and best use of the property; • Damages due to partial takings of properties; • Subsequent development of the property during the time between the cost estimate and actual acquisition; • The number of parcels that proceed to Eminent Domain and the associated costs of such takings; and • Inadequate project scope definition and information on parcels during the planning and programming phases of project development. Complicating the uncertainties listed above is the human factor related to acquiring property for highway projects. The “human factor” can be defined as the uncertainty and unpredictability related to dealing with property owners when a public agency is attempting to acquire a property. The reac- tion of individuals affected by the proposed project is difficult to predict. Moreover the effects of all these factors are intensified because of appreciating land values. Therefore, this research developed a structured process approach for ROW estimating that addresses these important issues. A critical component to achieving accurate cost projections for transportation projects is an agency’s approach to ROW cost estimating and the management of ROW estimates. The ability of an SHA to develop accurate ROW cost estimates and to effectively manage ROW cost depends on integrating a structured estimating and estimate management process into the project devel- opment process from concept through construction. Following a process approach to estimating and cost management ensures that the financial effects of both design and ROW decisions are always visible to the project development team. Yet, in many agencies, “stove pipe” divisional structures lead to failures to communicate important information affecting project scope, design, and cost. Such agency structures are not specifically the cause of project cost escalation problems; however, they fail to enable staff and management to address adequately the foundational prob- lems that drive project cost escalation. A Structured Approach Successful estimating is not so much about “computers and data” per se, as it is about an orga- nizational culture and an environment that supports those charged with producing the estimate. If ROW cost escalation is an agency problem, changes in agency policy that influence how ROW 2 Procedures Guide for Right-of-Way Cost Estimation and Cost Management

cost estimating and cost estimating management are performed may be necessary to improve the processes and to support the creation of consistent, accurate ROW estimates throughout project development. SHA staffs, charged with developing ROW estimates, realize the importance of accurate cost projections for projects and are trying to provide credible cost estimates. However, ROW deliv- ery under the traditional approach suffers from a long chain of command, lack of personal accountability, and inadequate coordination. SHAs will only achieve accurate estimates when se- nior management fully engages the use of structured ROW cost estimating and cost management processes and ensures that staff have the resources to complete each step in the ROW estimating process. Management is responsible for propagating organizational change that recognizes the importance of (1) a structured approach to ROW estimating, (2) using risk analyses in setting ROW contingency, (3) reviewing and approving all estimates, and (4) communicating the impor- tance and accuracy of each estimate to internal and external stakeholders. This Procedures Guide describes a structured ROW cost estimation and estimate management process linked to the project development process as shown Figure S-1. The Guide follows the strategic estimating approach described in NCHRP Report 574: Guidance for Cost Estimation and Management for Highway Projects During Planning, Programming, and Preconstruction. As shown in Figure S-1 the structured process has five steps: 1. Determine ROW estimate basis; 2. Prepare ROW base estimate; 3. Determine ROW risk and set contingency; 4. Review ROW cost estimate; and 5. Approve and communicate ROW cost estimate. Accurate ROW cost estimating requires that all five steps be accomplished. The approval and communication step also means that agency management has a definitive indication. These project development phases serve as benchmarks along a project timeline by which appropriate ROW process steps and tools can be identified. In general, the ROW cost estimation process is complex and differs from SHA to SHA and sometimes may vary between SHA districts/ regions. Additionally, the phases typically overlap one another. ROW cost estimation and cost estimate management occur during the first four project development phases: planning, pro- gramming, preliminary design, and final design (see Appendix A). Additional ROW needs may be identified during construction as a result of unforeseen project conditions or scope changes. These added requirements should also be estimated using a structured approached as recom- mended in the Guide. Often these changes represent only a minor portion of a project’s overall ROW cost. Consequently, this research concentrated on ROW cost estimates and cost manage- ment completed during each of the first four phases of project development. Four distinct but interrelated ROW cost estimating and cost estimating management processes are described in this Procedures Guidebook. They are • Conceptual ROW Cost Estimating, which occurs during the Planning phase of project devel- opment and supports SHA long-range plans; generally this phase is where the first estimate is prepared for a project. • Baseline ROW Cost Estimating, which occurs during the Programming phase of project devel- opment and supports intermediate plans (10 years or less). Several cost estimates may be pre- pared before the final estimate of this phase, based on the preferred project alternative, is used to set a Total Project Baseline Estimate. The Total Project Baseline Estimate is often used to move a project into the State Transportation Improvement Program (STIP). The ROW por- tion of the Total Project Cost Estimate then becomes the ROW budget amount for the project. Summary 3

Management will use this Baseline ROW Cost Estimate to monitor the cost impact of future ROW estimates prepared in response to development of the project design. • Updated ROW Cost Estimates are prepared during the Preliminary Design phase of project development and involve updating estimated ROW cost as designs are prepared leading to the final ROW plans. Updated estimates are reconciled with the Total Project Cost Estimate to help in managing ROW cost and its contribution to total project cost. 4 Procedures Guide for Right-of-Way Cost Estimation and Cost Management Determine ROW Estimate Basis Approve & Communicate ROW Cost Estimate Determine ROW Risk & Set Contingency Review ROW Cost Estimate ROW Cost Estimates ROW Requirements Input from Environmental, Utilities, Railroad Prepare ROW Base Estimate Real Estate Appreciation Rate Land Market Values Field Visit by Estimator (Improvements, Damages, Existing Conditions, etc.) Condemnation Rate Historical Data -Removal of Improvements -Relocation Assistance -Support Costs Future Development (Community Planning) Modifications Planning and Project Development Process Transportation Need To Final Design Figure S-1. Baseline right-of-way cost estimating.

• ROW Cost Management occurs when the appraisal and acquisition process begins and con- tinues throughout Final Design activities. Actual ROW expenditures are captured and used to forecast total ROW costs. Management is constantly comparing forecasted ROW cost as com- pared with the updated ROW budget. Reviewing, Approving, and Communicating Even early in project development, agency management is responsible for reviewing, approv- ing, and communicating the ROW estimate. Communication is particularly important for early ROW cost estimates, and management must make all users aware of the estimate precision and the limits of accuracy as related to the uncertainties associated with project scope definition and the real estate market. Management actions can significantly improve proper use of early ROW cost estimates. Keys to Success Ideally, SHAs will enhance their project development process to include earlier participation by all preconstruction functions, including right-of-way. The framework for accomplishing this can take various forms, but usually includes the use of project development teams. Such teams affirm that the project manager understands the effect of project design decisions on the profes- sional disciplines of environmental, utility, and right-of-way. Acting together, the team will accomplish the purpose and need of a transportation project. The component functions are only optimally effective if functions act collaboratively and in parallel, rather than independently and sequentially. A key concept presented in this guide is the setting of a Baseline ROW Cost during the Pro- gramming phase of project development. As the ROW scope is detailed during Preliminary Design, Updated ROW Cost Estimates should be prepared and the ROW cost identified in those future estimates should not be accepted as inevitable. Project management should use the estab- lished baseline cost for controlling project scope and for coordinating design decisions with ROW cost impacts. Right-of-way is one element in the unified Preconstruction phase of project development. As an agency philosophy, management should (1) encourage collaboration where actions affecting more than one discipline receive full consideration from all affected parties, and (2) insist that ROW activities are performed as much as possible in parallel with other functions, rather than waiting for a “hand-off” from an upstream function. No estimating technique or tool will ensure development of accurate estimates. Accuracy will only be achieved by consistently following the steps in the structured ROW estimating proce- dure described in this Guide (see Figure S.1). These steps provide estimate consistency over all phases of project development. Use of this guide by SHAs will enhance and improve their ROW cost estimation and cost management practices. If SHA executive officers support the practices described herein and enable the members of their ROW staffs to participate in training and AASHTO right-of-way professional development activities that enhance their base of knowledge, the completeness and accuracy of project costing is likely to improve. Limitations Several limitations are associated with this research. The limitation with the most effect on the content was the issue of the small overall number of SHAs interviewed. The budget and time available for the research project restricted the number of SHAs that could be contacted specif- ically about ROW estimating. This was addressed by using contacts identified during the initial NCHRP 8-49 Project and with help from the FHWA’s Office of Real Estate Services. Experience Summary 5

from the 18 formal SHA interviews conducted during the earlier phase of the NCHRP 8-49 proj- ect also provided the research team with valuable information (Anderson et al., 2007a). Thus, the intent was to focus on a representative sample of SHAs thought to be progressive in the area of ROW cost estimation. Other limitations are associated with the differences that exist among SHAs, including differ- ences in organizational structure (centralized versus decentralized), terminology, acronyms, and project development phase timing. These differences among SHAs affected data collection and were addressed during interviews by taking detailed and thorough notes that documented the specific attributes of a SHA relative to ROW cost estimation. In addition, the structure of the interview protocol helped reduce the effect of these limitations. The unique environments within which each of the SHAs operates affected the research. The operating environment of each SHA is affected by state laws, politics, and social factors. Subsequently, these issues were addressed by specific questions in the interview protocol. Recommendations for Future Research This research focused on developing a framework for the ROW cost estimation and cost esti- mate management processes that would support the creation of accurate ROW cost estimates. A more in-depth look at specific tools that support ROW cost estimation could be beneficial. This research presented tools discovered through interviews, but did not focus on development of tools, nor did it evaluate the effectiveness of any of the identified tools. 6 Procedures Guide for Right-of-Way Cost Estimation and Cost Management