Developing the "Guide for the Process of Managing Risk on Rapid Renewal Projects" (2014)

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3Problem Statement from Request for Proposal The overall goal of the SHRP 2 Renewal program is to develop a consistent, systematic approach to performing highway renewal that works rapidly, minimizes disruption, and pro- duces long-lived facilities. The scope of renewal applies to all classes of roads. As such, the focus of SHRP 2 rapid renewal research is to develop a systematic approach to renewing the aging highway infrastructure through rapid design and construction meth- ods that cause minimal disruption and produce long-lived facilities. Fulfilling the objectives of rapid renewal requires the use of innovative contracting processes and a departure from “business as usual.” Many of these innovative techniques involve shifts in the burden of risk from the state to the con- tractor. Renewal Project R09 addresses the general lack of understanding of risk and risk-transfer decisions associated with some contracting approaches. Different contracting approaches, such as design–build– operate–maintain–transfer (D–B–O–M–T), build–operate– transfer, warranties, design–bid–build, and design–build, generate different levels of risk for all parties involved. No stan- dardized systematic process exists to quantify the risks for the parties involved (e.g., the transfer of risk from DOT to the con- tractor). Objective guidance on the level and management of risk is needed to ensure industry acceptance of the concept and to assist states and industry in assessing the level of risk associated with various contracting approaches. This research project is based on the work recorded in the Federal Highway Administration (FHWA) document Guide to Risk Assessment and Allocation for Highway Construction Management (Risk Guide) (Molenaar et al. 2006). The Risk Guide notes that few U.S. state departments of transporta- tion (DOTs) use formalized risk assessment and management programs, although awareness is growing. For those DOTs that have adopted formal risk-based programs, the benefits have been substantial and multifaceted. However, risks can be magnified in rapid renewal projects, which involve acceler- ated environmental–permitting processes and construction methods in conjunction with innovative contracting meth- ods (possibly including project financing). DOTs are even less experienced with rapid-renewal types of risks and how they can be evaluated and effectively managed. However, the stakes can be quite large and can include significant project delays and budget overruns, as well as significant disruption during construction and poor longevity. Project R09 developed a guide for implementing processes for risk management on rapid renewal projects. The Guide for the Process of Managing Risk on Rapid Renewal Projects (the guide) is intended for use by transportation agencies to manage risk during the process of project development (Golder Associ- ates et al. 2014). The guide illustrates methods that can be used to identify, assess, analyze, mitigate, allocate, and monitor risk. It includes methods to determine the economic consequences of risk transfer to the various parties involved in a project. Background Cost and schedule overruns, especially relative to initial esti- mates, are relatively common on DOT projects and often lead to many other issues (e.g., those related to funding, politics). Poor estimates can lead to poor choices among project alter- natives. Overruns generally result from underestimates (e.g., in quantities or in unit costs), problems (e.g., change in scope, permit delays, errors), or both when they were not adequately taken into account in either project plans or estimates, either specifically or collectively through contingency. Such under- estimates and incomplete consideration of problems could be either intentional (e.g., project advocacy) or unintentional (e.g., optimism, errors, ignorance). For most problems, the cost and schedule effects are often a function of when they occur or when they are discovered. In many cases, if they are discovered early in a project, the cost C h a P t e R 1 Background

4of service (traffic). Understanding project performance uncertainty enables more effective project decisions, such as establishment of funding levels and decisions among project alternatives. • To optimize project performance through cost-effective management of potential problems and opportunities (risks)—for example, through design, choice of construc- tion methods, contract provisions, and the like. Optimizing project performance increases the likelihood of desirable outcomes, such as meeting an established budget and sched- ule and minimizing the likelihood of undesirable outcomes. At present, most DOTs do not have formal risk assessment and risk management programs, although FHWA has man- dated that risk be analyzed on all major projects (i.e., those costing more than $500 million) (FHWA 2007). However, several state risk programs may be cited here. The Washing- ton State Department of Transportation (WSDOT) has estab- lished a policy that risk be analyzed on all projects costing more than $100 million (WSDOT 2005). The Florida Depart- ment of Transportation (FDOT) has also recently established a risk assessment policy requiring qualitative risk assessment along with value engineering for all projects costing less than $100 million, quantitative risk assessment by internal resources for projects from $100 million to $500 million, and quanti- tative risk assessment by external resources for projects over $500 million. Other state DOTs (including California, Colo- rado, Iowa, Kentucky, Nevada, North Carolina, Pennsylvania, Texas, Utah, Virginia, and Wisconsin) have successfully applied risk assessment and management on various projects. Nonetheless, risk management to date has generally consid- ered only project cost and schedule; the FHWA Risk Guide and implementation materials are one example of this approach. Rapid renewal projects and their risks are generally even less understood than traditional DOT projects because they are typically innovative (meaning, in general, that DOTs have less experience with them) and complex. Rapid renewal projects can also have extremely large potential cost and schedule impacts in some cases, like innovative project delivery of megaprojects; and practitioners need to consider both dis- ruption and longevity in addition to cost and schedule. Thus, additional guidance (including tools and training) is needed to manage risk to improve performance of rapid renewal projects, as well as traditional projects. Research Objectives The primary objectives of this study were (a) to address the general lack of understanding of risk and risk-transfer deci- sions associated with the differing contracting approaches that can be used for rapid renewal, and (b) to develop practical guidance for the application of risk management methods to or schedule impact is smaller than if discovered late because they are generally easier to fix earlier in the project (e.g., through avoidance). Most problems are highly uncertain beforehand; if they were certain, they should have already been incor porated into the project plans and the associated cost and schedule estimates. For potential (rather than certain) problems, once they are recognized as a possibility, the question becomes what to do about them beforehand: (1) fix them immedi- ately, typically at some cost, often incompletely, and perhaps unnecessarily, because they might not occur if left alone; or (2) do not fix them and take a chance that they will not occur with associated cost and schedule impacts. Of course, for poten- tial problems that have not been recognized, DOTs are unaware that they may occur and cause cost and schedule impacts. If they do occur, one or more parties generally own the problem and are responsible for the cost and schedule impacts. The contractor is responsible for some problems and will have included the cost of those problems in the price; the owner is responsible for the remainder of the problems. In contracting, to preclude legal battles, decisions should be made beforehand about who owns various problems. Contingency has traditionally been used to account for all potential unfixed problems collectively (through recognition that some potential problems will occur and some will not), more so for problems related to cost and than for those related to schedule, primarily on the bases of experience and judg- ment. However, such empirically based contingency has gen- erally been inadequate, as evidenced by frequent overruns. Formal risk assessment and risk management can be used to deal more effectively with such potential problems by • Identifying and evaluating potential problems (risks) as early as possible in project development (i.e., the diagnosis); • Identifying, evaluating, selecting, and ultimately implement- ing ways to deal with those risks, eventually including their allocation, focusing on the more significant risks (i.e., the treatment); and • Evaluating the remaining risks (on the bases of the diag- nosis and the treatment) to determine the appropriate contingency for each party (i.e., the prognosis). The FHWA Risk Guide briefly summarizes risk assessment and risk management with respect to cost and schedule. Under a previous contract, the authors of this R09 report developed tools and a training course to apply those risk guidelines to relatively simple traditional projects; that work included successful testing on several actual projects (Golder Associates 2008). Fundamentally, risk management has two major objectives: • To understand uncertainty in project performance, includ- ing cost, schedule, safety, environmental impacts, and level

5 the project development process in a manner consistent with the business practices of transportation agencies. Research approach The chosen research approach was developed by leveraging team members’ theoretical knowledge and practical expertise in implementing formal project risk management on a large number of infrastructure projects. The approach provided a synergy of theoretical principles, practical tools for imple- mentation, and guidance for using the results in project risk decision making. The key features of the proposed approach for developing and conducting this research are described below. The research team reviewed the FHWA Risk Guide and other relevant documents (especially those related to the unique characteristics of rapid renewal projects) to deter- mine where gaps exist in those guidelines in applying them to rapid renewal projects. The researchers then planned how to fill those gaps. They conducted research—based on a litera- ture review, surveys of FHWA and DOT staff, and theoretical analysis—to identify the unique risks associated with rapid renewal projects and possible ways to mitigate them. The team then developed a significantly expanded and enhanced Guide for the Process of Managing Risk on Rapid Renewal Proj- ects and related practical materials that DOTs can apply. Development included testing the guide and implementation materials with two DOTs that had rapid renewal projects. The team synthesized a set of work tasks that supported the overall research approach. To accomplish the study objec- tives efficiently, the research team used ongoing research and development work on risk assessment and risk man- agement (including work by team members) and applied it to rapid renewal. The team defined and conducted the following research tasks, which are discussed in more detail in Chapter 2: • Task 1: Develop a work plan. First the team evaluated gaps in current risk assessment practice and guidelines with respect to rapid renewal projects. On the basis of those gaps, the team developed a plan to fill the gaps and develop a complete guide for rapid renewal projects. • Task 2: Develop a draft guide and related implementation materials. Using the gaps identified in Task 1, the team conducted research on several parallel paths, including an additional literature review, interviews with DOT person- nel experienced with rapid renewal projects, and internal team brainstorming on potential problems associated with various aspects of rapid renewal projects. The team then consolidated the results from these various research paths to develop a substantial checklist of rapid renewal risks and potential mitigation strategies. From this research, the team developed the draft guide and associated implemen- tation materials in preparation for the pilot workshops. • Task 3: Conduct pilot workshops. The draft guide and asso- ciated implementation materials were applied to actual rapid renewal projects. The team conducted training work- shops with multiple transportation agencies. • Task 4: Finalize the guide and related implementation materials. Using information gathered during the two pilot workshops and related feedback, the team finalized the guide and related implementation materials (including an MS Excel template to model rapid renewal risks and report mean-value results). The final guide and materials were submitted on February 15, 2011. • Task 5: Manage the study. This task included coordination among research team members and the project officer, as well as completing required status reports.