Right-of-Way Methods and Tools to Control Project Cost Escalation (2009)

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CHAPTER 2 STATE OF PRACTICE This chapter discusses the methodology and findings of Tasks 1 and 2 of the research effort. The purpose of Task 1 was to complete a comprehensive literature review relative to right-of-way cost estimating while Task 2 involved examining and documenting successful right-of-way cost estimation and cost management practices. The literature review completed by the research team for NCHRP Project 8-49 served as the foundation for additional searchers of published information concerning right-of-way estimation. It was necessary to update the original literature review because of the fact that there has been additional work around the country directed at the issue of estimation accuracy since the NCHRP 8-49 literature review was conducted. The present literature review specifically targets right-of-way issues. Therefore, the main objective of Task 1 was to identify documented practices in the area of cost estimation and cost estimate management specifically relevant to the right-of-way component of project development. This review primarily focused on current literature and established the basis for the later stages of the research. The main objective of Task 2 was to gain an overview of SHA right-of-way practice. Additionally, the practices of several other agencies engaged in estimating the cost of future right-of-way purchases were examined. Consequently, successful SHA and local public agency practices in estimating and managing right-of-way costs were examined in detail. The research team assembled data on state of practice cost estimating and cost estimate management techniques including process steps and tools in relation to the project development phases presented in Chapter 1. LITERATURE REVIEW The objective was to identify documented practices in the area of cost estimation and cost estimate management specifically relevant to the right-of-way component of project development. The literature review included locating and reviewing information found in technical papers, reports, and documents. The sources were: • General internet search engines; • Transportation Research Board’s TRIS Online (Transportation Research Information Systems); • Academic databases, such as LexisNexis and Engineering Village 2; • ASCE Civil Engineering database; • Selected SHA websites; and • Presentations and papers posted on AASHTO’s Subcommittee on Right-of-Way and Utilities website. 8

The literature review concentrated on documenting and comparing factors and variables that impact right-of-way cost estimating such as project type, property value prior to the project, anticipation of future land use change, timeline, information available at the time of the estimate, and type of acquisition. Information related to the right-of-way cost estimation and cost management processes and tools in the literature were surveyed. The accumulated information was reviewed, analyzed, and summarized. Although there is an abundance of literature on appraisal and acquisition of right-of-way, the research team discovered only a limited amount of information that specifically related to right-of-way cost estimation and cost estimate management. Right-of-Way Cost Estimation and Management The initial NCHRP 8-49 research identified right-of-way costs to be a critical highway project cost escalation driver. This was further confirmed by the literature review. Right-of-way cost estimation is a complex undertaking which is dependent on a magnitude of parameters that are difficult to quantify, even in the case of an identifiable date only a few years in the future. Right-of-way cost estimates must capture all costs that affect the expense of acquiring the needed property. This is exceedingly difficult due to the uncertainties involved in many aspects of right-of-way acquisition. It is typically necessary to capture deterministic values for each parcel in the following categories: • Land; • Property improvements; • Damages to property in partial takings; • Utility relocation; and • Relocation assistance. The literature particularly stresses the difficulty in estimating right-of-way cost due to uncertainty in real estate appreciation and the issue of damages resulting from a partial take. Land values constantly fluctuate and future values are difficult to assess, especially in the case of estimates completed during the earliest stages of project development. Damages are affected by the size and shape of the remainder area, location of the remaining access points, reductions in highest and best use, and length of remaining frontage (Buffington et al., 1995). In addition, takings by eminent domain or condemnation must be considered when developing an estimate as that process increases the cost of an acquisition because of legal fees and the court’s sympathy toward a land owner. Eminent domain proceedings add cost uncertainty because real estate value is determined by judges or juries instead of by definitive market information. Almost 80 percent of all acquisitions are completed without condemnation (CTC Associates and WisDOT, 2006) leaving about 20 percent of parcels, on average, that proceed to eminent domain. However, the percentage of properties proceeding to eminent domain increases when owner’s legal fees are paid by the SHA (FHWA, 2006). The US Supreme Court case of Kelo versus City of New London, which was decided in on June 23, 2005 (Kelo, 2005), impacted eminent domain expense throughout the nation 9

(Cambridge Systematics, 2006). The Kelo case involved the use of eminent domain by the city of New London, Connecticut for a community redevelopment project which benefited a private entity. The Court ruled 5-4 that the city’s action was permissible under the Takings Clause of the Fifth Amendment. Following wide criticism of the ruling, during the period immediately following the ruling and through July 31, 2006, 29 states enacted changes to their eminent domain laws in one or more of three ways: 1) restricting the use of eminent domain to certain situations; 2) requiring additional procedures when using eminent domain; and/or 3) defining or redefining certain terms associated with eminent domain (U.S. Government Accountability Office, 2006). Federal legislation was also passed in 2006 to address the issue of using Federal funds in eminent domain. Section 726 of The Transportation, Treasury, Housing and Urban Development, The Judiciary, and Independent Agencies Appropriations Act of 2006 established that federal funds can only be utilized for public use where “public use” excludes economic redevelopment (Towcimak, 2006). Public use is further clarified “not be construed to include economic development that primarily benefits private entities” (Transportation, 2006). While the language of the 2006 Appropriations Act was applicable only to projects funded by the act there is similar language in the 2008 Act (PL. 110-161). New compensation requirements which benefit property owners have also been passed by some states since the Kelo decision (Feldman, 2007). These state acts address: • Acquisition costs including appraisal fees, attorney fees, and expert witness fees; • Relocation costs including actual costs of rebuilding structures and compensating business for loss of business; and • “Supercompensation” payments, meaning paying a certain percentage over fair market value. The accuracy of an estimate is also affected by time constraints placed on completing the estimate, the quality of information available, and project and parcel complexity. Accuracy suffers under estimate preparation time constraints because the estimator has a limited amount of time to research the project and appraisal data. Similarly, the quality of available information can have a negative effect on the estimate since the estimate can only be as accurate as the information upon which it is based. In an attempt to improve right-of-way cost estimates, several tools and models for right-of-way cost estimation have been developed. Recently a cost estimation model was developed by Kockelman et al. (2004) in cooperation with TxDOT. Based on data from TxDOT and a commercial property database (CoStar) three models were developed. The accuracy of these Models in predicting parcel acquisition cost was acceptable in the case of agricultural and vacant parcels but the model lacked accuracy in the area of commercial and residential takings. Although the models were not accurate predictors in these areas, the authors argue that the tool may be used in budgeting for gross total right-of-way cost in a TxDOT District (Kockelman 2004). Early right-of-way estimates are often only gross approximations arrived at by using a percentage of the estimated construction cost (CTC Associates and WisDOT, 2006) or some other order of magnitude estimating technique. Project definition is frequently nebulous during the planning phase of project development; therefore right-of-way 10

boundaries at this point are not well defined. Furthermore, there may be multiple project alternatives being considered during the planning stage of project development. Alignment changes are likely and these may significantly affect the right-of-way cost estimate. It was reported that early public involvement in the form of public meetings is beneficial because it allows the State Highway Agency to gauge the level of support for a project. This can serve as an indicator of the rate of condemnations and even the amount of contingency to include in the estimate (CTC Associates and WisDOT, 2006). A larger right-of-way cost contingency might be necessary if public support is absent as this may be an indicator as to the number of condemnation parcels that can be expected. Selected SHA websites including those of the California, Florida, Georgia, Minnesota, Ohio, Wisconsin, and Virginia Departments were searched for procedures and manuals on cost estimation of right-of-way and other aspects of right-of-way procurement. Much of the material found on the SHA websites was related to appraisal and acquisition of property including procedures and forms used throughout the process. Caltrans devotes a chapter of its Right of Way Manual (Right, 2007) to right-of-way cost estimating. This information can be found online at www.dot.ca.gov/hq/row/rowman/manual/ch4.pdf (Estimating, 2007). The manual specifically discusses aspects of the estimate and general estimate information. The Ohio DOT has a specific procedure for estimating cost of right of way (2300 Cost Estimation… 2007). This procedure is tied to the Ohio DOT project development process. Right-of-Way Appraisal and Acquisition It should be emphasized that much of the literature focuses on the appraisal and acquisition of the parcels as opposed to directly discussing cost estimation and cost estimate management. Kockelman discusses how the dollar amount for appraised property values is established through three methods: 1) the Sales Comparison Approach; 2) the Income Approach; and 3) the Cost Approach (Kockelman et al. 2004). These approaches vary in methodology and application. The Sales Comparison Approach in which comparable sales in the area establish the base dollar value of the property is by far the most common approach. The Income Approach is typically used in commercial or investment properties. It attempts to estimate the income that will be realized from the property. The Cost Approach is used when comparable sales cannot be found in the area and calculates the cost of replacement minus any depreciation of the existing structure. The Uniform Act of 1970 (Uniform, 1997) governs the treatment of property owners for all Federally-funded projects by providing a set of procedures and standards for right-of- way acquisition. The major implementation of this act is that all property owners be justly compensated for their property and they receive relocation assistance. Condemnations are a concern when acquiring property since they have the potential to increase costs and delay the project. Condemnation rates (or the percentage of properties which move to condemnation proceedings) vary from state to state. The FHWA notes that the percentage of parcels proceeding to condemnation can potentially be reduced by: 1) the use of mediation methods between the property owners and public agency; 2) the use of well trained right-of-way agents handling acquisitions who have the authority to 11

negotiate settlements; and 3) the use of quick settlements in lieu of allowing the property owner a long period of time to consider the offer (FHWA Office of Real Estate Services, 2006) Hakimi and Kockelman (2006) discuss best acquisition processes while considering the uniqueness of each state depending on political, social, environmental, and other factors. They recommend that the public should be contacted early in the process and that states should update laws and statutes to outline compensable items with the goal to streamline the acquisition process. Additionally, special acquisition techniques such as land exchange, land consolidation, and advanced acquisition should be utilized. Such techniques may not be available in all states however such techniques should be considered to the extent allowed under state law. A few such techniques are outlined in the “European Right of Way and Utilities Best Practices” report (European, 2002) In summary, the method of right-of-way appraisal and acquisition can affect the accuracy and consistency of cost estimation and cost estimate management. Appraisal and acquisition methods must be understood by those who prepare right-of-way cost estimates. The appraisal and acquisition methods should be integrated into the overall project development process. As noted in the literature review of cost escalation factors completed in the NCHRP 8-49 research, inaccuracies and/or delays in right-of-way acquisitions can have a profound impact on project cost escalation. Literature Review Summary The literature review provided a basis for further research. Right-of-way appraisals and acquisitions make up a large portion of the right-of-way literature. The right-of-way cost estimation literature that was discovered was limited to several statistical estimating models, discussion of the impact of the Kelo case, and provided several piecewise descriptions of the line items of an estimate. It provided selected information on the impacts of condemnations, land appreciation, and damages. The research methodology used to examine the right-of-way cost estimation and estimate management process following the literature is discussed in the next chapter. RESEARCH METHODOLOGY In addition to the literature review, a series of on-site and telephone interviews were conducted with agencies across the United States. The goal of these interviews was to collect data on current successful right-of-way cost estimation and cost estimate management practices. Seven SHAs and two local public agencies were interviewed. Interview Protocol An interview protocol was developed to guide data collection during interviews. The objective of the interview protocol was to capture successful practices including right-of- way cost estimation process steps and tools. It was modeled after the interview protocol used for NCHRP Project 8-49. Questions were developed based upon findings of the 12

literature review. In particular, the literature review findings identified problem areas that needed to be addressed through the interviews. The interview protocol covered six areas and consisted of 15 questions. Additionally, the areas of interest to this research were similar to those in the original NCHRP Project 8- 49, but were more specific to right-of-way issues. The interview questions examined six areas within right-of-way cost estimation and cost estimating management: 1. Determining Right-of-Way Requirements; 2. Right-of-Way Cost Estimate Preparation; 3. Right-of-Way Cost Estimate Reviews; 4. Right-of-Way Cost Estimate Communication; 5. Right-of-Way Cost Estimate Management; and 6. State Laws and Other Factors that affect the Right-of-Way process. The six areas of interest governed the organization of the interview protocol. Section 1 of the protocol explored the process steps and tools employed by the SHAs to determine right-of-way requirements. Based on these steps and tools, Section 2 examined how right-of-way estimators produced estimates for the defined right-of-way requirements. More specifically, it addressed policies and procedures guiding estimate preparation, the elements of each estimate, how environmental issues were handled in the estimate, whether risk and uncertainty was considered, and if contingency was applied to the estimate. Estimate review processes and practices were the focus of Section 3 of the protocol. Section 4 addressed the issue of estimate communication and included training of estimators and communication of estimating procedures. Additionally, Section 4 covered the issue of contacting property owners. Section 5 of the protocol focused on how differences were reconciled between estimates, the procedures for handling changes in right-of-way requirements, and triggers for an update to right-of-way cost estimates. The effect of state laws and other factors like environmental, political, and social issues on the right-of-way process and estimates were addressed in Section 6. The effects of acquisition techniques such as advanced acquisition, incentive offers, and other non- standard techniques on estimating right-of-way costs were also explored in Section 6. The protocol was prefaced by several introductory pages which confirmed the interview time and date, described the background of the research, and provided instructions and interview expectations. The background material covered previous NCHRP 8-49 findings relative to right-of-way including a discussion of the typical project development phases relevant to right-of-way and the basis for the right-of-way research. The instruction and interview expectation sections outlined such aspects of the interview as the phased approach to be employed relative to each of the questions during the interview and other details. Included in the interview package were the project development phase flowcharts for planning, programming, preliminary design, and final design that had been developed during the earlier NCHRP 8-49 work. These flowcharts were included to bridge the terminology differences that exist between agencies and address some of the factors limiting this research, which were discussed in Chapter 1. A copy of the interview protocol including all introductory material is provided in Appendix B. 13

Interview Participants The seven SHAs interviewed included: California, Florida, Georgia, Minnesota, Washington State, Wisconsin, and Virginia. These SHAs were selected based upon input provided in Phase I of NCHRP Project 8-49. Each appeared to have systematic and relatively successful right-of-way cost estimation practices from which the research could benefit. As noted in the methodology, interviews were completed with participants from both the central office and with right-of-way administrators in districts/regions around the state. In addition to interviewing SHAs, the City of Phoenix Street Transportation Department and the O’Hare Modernization Program Office of the City of Chicago were interviewed to provide further perspectives on right-of-way cost estimation and cost estimate management. A list of interview participants by position from each agency is provided in Table 2. Interview Process Due to the complexity of the right-of-way cost estimation process and the information being collected from SHAs, onsite interviews were the main activity utilized for data collection. The option of a survey was ruled out because surveys would not provide adequate information describing the right-of-way cost estimation process. The majority of issues could not be answered with yes/no or multiple choice answers. It was necessary to acquire in-depth information about the cost estimation process that included some elaboration and explanation on the part of the interview participants. Onsite interviews provided the opportunity to clearly communicate specifics about the process and provide the detail necessary for developing the right-of-way cost estimation and cost estimate management flowcharts. Interviews were conducted with SHAs and other organizations having experience with right-of-way acquisition. The interview process focused on the four phases of project development to provide a frame of reference for linking the application of successful right-of-way practices to the project development timeline. This enabled effective data collection and helped to identify differences as project development progresses. Contacts were acquired through Phase I of the NCHRP 8-49 Project and the FHWA Office of Real Estate Services also provided suggestions. Eighteen formal SHA interviews (Anderson et al., 2007b) were conducted during the earlier phase of the NCHRP 8-49 project. Experience from the previous research and recommendations provided the research team with valuable contacts possessing considerable experience and knowledge of successful practices. Some SHAs, especially large states, are highly decentralized and rely on the districts/regions within the state to manage projects and perform estimates. Therefore, when interviewing SHAs the research team attempted to capture perspectives from both central office right-of-way administrators and other administrators in districts/regions around the state. This provided diverse perspectives on right-of-way cost estimation and related issues. 14

Table 2. Agency interview participants Highway Agency Interview Participants California Senior ROW Agent – Headquarters Office Senior ROW Agent – Headquarters Office Senior ROW Agent – North Region Senior ROW Agent – North Region Senior ROW Agent – District 3 ROW Manager – South Region Senior ROW Agent – South Region Associate ROW Agent – South Region ROW Agent – South Region ROW Estimator – South Region ROW Estimator – South Region Georgia Appraisal & Review Manager Manager, ROW Cost Estimates Florida Manager, Appraisal & Appraisal Review Director, Office of Right of way Deputy State Manager, Appraisal & Cost Estimating State Cost Estimating Administrator District One Cost Estimates Administrator (Bartow/Lakeland) District Seven Cost Estimates Administrator (Tampa) Minnesota Right-of-Way Program Manager – Central Office Assistant Director, R/E & Policy Development – Central Office ROW Engineer – District 1 ROW Engineer – District 2 ROW Engineer – District 3 ROW Engineer – District 4 ROW Engineer – District 5 ROW Engineer – District 6 ROW Engineer – District 7 ROW Engineer – District 8 ROW Engineer – Metro Washington State Assistant Director for Appraisal and Appraisal Review Program Appraisal Specialist, Olympia Region Appraiser, Olympia Region Wisconsin Real Estate Supervisor – SE Region Real Estate Supervisor – SE Region Real Estate Supervisor – NW Region Real Estate Supervisor – District 3 Real Estate Supervisor – District 5 Division Realty Office – FHWA Virginia Assistant Director ROW Manager City of Chicago Projects Administrator Relocation Manager Director of Public Affairs City of Phoenix Traffic engineering Supervisor Acting Assistant Real Estate Administrator The first step in the interview process was to contact the agencies. Upon initial contact with the potential interview participants, the interview protocol was transmitted by email to the participants several days prior to the scheduled interview. This provided the 15

participants a chance to review the protocol and prepare for the interview. Interviews were set up in two to three hour blocks to allow ample time to cover the entire process from the first planning estimate to the activities required during final design. In most cases, the interview was conducted by two individuals from the research team. One member would typically act as facilitator while the other took detailed notes. Both team members took an active part in the interview. The first 15 minutes of the interview typically consisted of introductions, a summary of the research background and framework, the objective of the research, and statement of the research team’s expectations of the interview. Additionally, the status of the project and findings of previous interviews were summarized to provide the participants with the current status and direction of the research project. Following the introductory portion of the interview, the participants were probed for information regarding the SHA’s project development process and any special terminology. This served to provide the research team a base for further questions and to relate participant answers to project development phases (planning, programming, preliminary design, and final design). Then, the facilitator would guide the interview towards the first right-of-way estimate completed during planning. From this point on, a discussion proceeded in which interview participants would tell the “story” behind the SHA’s right-of-way cost estimation process. As the interview was coming to a close, issues not yet covered were addressed using the interview protocol as a checklist. The members of the research team would typically use the time following the interview to make additional notes on general impressions of the interview. All details were recorded in the interview protocol under the related questions. In lieu of proceeding straight through the interview questions one by one, the majority of the interviews began with general discussions, which led into specific topics within the context of right-of-way cost estimation and cost estimate management. This practice was adopted during the first interview with the Minnesota Department of Transportation. That interview served as a “test” dialogue for the newly developed protocol. Consequently the protocol questions served more as a checklist to ensure that all issues were covered. Shortly following the interview, an interview report was prepared which consisted of filling out the protocol based on the interview notes. An example of a completed interview report for a State DOT can be found in Appendix C. This allowed the team to capture and understand the process for right-of-way cost estimation and cost estimate management utilized by the SHAs throughout all phases of project development. In addition to the on-site interviews, conference calls via telephone were utilized to follow up on any issues unclear after the initial interview. Documents Collected State highway agency right-of-way estimating tools were documented during interviews and any documents describing the tools or examples of the tools that the agency used were requested at the time of the interviews or in follow-up emails and telephone calls. The documents gathered ranged from cost estimate maps used to determine right-of-way requirements to cost estimate spreadsheets used in completing estimates. Screenshots of right-of-way tracking and estimate systems were also requested and provided by the SHAs. The SHAs were always asked for copies or web addresses of manuals, policies, 16

and procedures that supported their right-of-way cost estimation and cost estimate management processes. STATE OF PRACTICE CHARACTERISTICS Critical issues relating to right-of-way estimating were identified during the interviews as those most difficult to estimate or issues that may have a significant impact (good or bad) on creating an accurate estimate. Based on the responses of the interview participants, the most notable critical issues include (not presented in an order of importance or priority rank): • Condemnations • Damages • Inflation and other market conditions • Risk analysis and assigned contingency • Scope definition • Estimating tools • Estimator experience and knowledge Condemnations Estimating the costs of condemnations is very difficult because of two major factors. First, there is the issue of determining the number of condemnations, or what percentage of parcels will move to condemnation proceedings. FHWA Office of Real Estate Services’ report on state condemnation practices (2006) indicated that approximately 80 percent of acquisitions are completed without condemnation while FHWA online data reported 12.5 percent condemnation rate for 2004 and 12 percent for 2005 (FHWA, 2007). This variable is study specific and may vary drastically between projects, between regions/districts, or even within regions/districts. As discussed previously in the literature review, the condemnation rate is heavily dependent on state laws governing the process and whether the public agency is responsible for paying acquisition costs of the property owner such as appraisals, expert witnesses, and other legal fees (FHWA Office of Real Estate Services, 2006). The second issue is the actual cost of the condemnation proceedings. Condemnation expenses include engineering, appraiser, and economists’ fees plus attorney and court costs, and the final condemnation award amount. The fee portion together with legal cost may add significantly to the cost of a condemnation proceeding. Additionally, states have specific laws concerning condemnations. In one state it is the financial responsibility of the acquiring agency to reimburse the property owner for an independent appraisal if such is requested by an owner. This stipulation is a result of the Supreme Court Kelo decision. Condemnations may cost a project more than just money; the proceedings may cost the project valuable time. Proceedings can delay a project schedule. Time delays then impact estimated construction cost. The cost and rate of 17

condemnations is heavily dependent on state laws and social factors that exist in a particular local. Damages Damages due to partial takings of a property were indicated by agencies to be one of the most difficult aspects of right-of-way estimating. The definition of the term under 23 CFR Ch. I (4–1–02 Edition) § 710.105 Definitions is: Damages means the loss in value attributable to remainder property due to severance or consequential damages, as limited by State law, that arise when only part of an owner’s property is acquired. Damages are primarily an issue in acquiring a portion of a business. Assigning a cost to damages can be very subjective and many times, the accuracy of the estimated cost is dependent on the experience of the estimator. Real Estate Inflation and Other Market Conditions Assessing the potential impact of inflation/appreciation and other related real estate market conditions is a challenge. This is an issue in preparing cost estimates during every project development phase. Property values increase at rates different than the inflation rates for construction materials and labor. Properties in highly urban areas or areas where there is substantial growth potential may be subject to substantial increases in the market value of land. The results of the interviews in this project were consistent with the interviews and data collection in Phase I of NCHRP Project 8-49 concerning inflation and other market conditions. Risk Analysis and Assigned Contingency The majority of agencies interviewed made no attempt to conduct a formal detailed risk analysis of items that could impact right-of-way cost although most agencies did assign contingency amounts in some manner. A detailed risk analysis can be defined as a systematic method of identifying and evaluating risks using a formalized agency procedure. The majority of agencies reported that they did not specifically address risk analysis in a formalized and documented procedure. Only two SHAs reported performing detailed risk analyses where specific project risks are identified and then addressed by some application of contingency. These two instances are presented later in the report. Risks effecting right-of-way derive from the schedule, property appreciation, condemnations, damages, and other issues that exhibit uncertainty or may be unknown. Moreover, the use of contingencies was an issue throughout the SHAs interviewed. Four SHAs reported the regular practice of applying a contingency to their right-of-way estimates: the two aforementioned states using detailed risk analysis and two others who explicitly assign a contingency. Other SHAs may apply contingency values subjectively based on the estimator’s opinion or judgment about the cost estimate. 18

Scope Definition and Estimating Tools Determining a project’s right-of-way requirements early in the development process is problematic, particularly during the Planning phase (e.g., 10 to 20 years out from the estimated construction letting year). Phase I of NCHRP Project 8-49 found that actual cost of project right of way is frequently greater than the estimated cost that was projected during the early stages of project development. Two primary factors can explain this: 1) inadequate scope definition; and 2) the absence of effective tools and methods to complete right-of-way cost estimates. Right-of-way estimates made during the planning phase of project development are often solely based on a percentage of estimated construction costs. Agencies using this method maintain that the cost benefit is not substantial enough to invest manpower in more detailed right-of-way estimates at this early stage because limited project scope information is available, there are multiple alignments to consider, and there will be inevitable changes to the project as scope is refined as the project moves through the development process. This is not the case, however, with the Cities of Chicago and Phoenix which finance their projects with bond money and therefore must have accurate cost estimates before going to the bond market. Both cities work hard to define project scope in detail early in project development and to develop accurate early right-of-way cost estimates. Estimator Experience and Knowledge Estimator experience was consistently noted as having a large impact on the quality and accuracy of right-of-way cost estimates. In achieving estimate accuracy the estimator’s knowledge of the project area and market plays a role in many subtle ways. SHAs are facing issues related to personnel turnover, especially related to employees with 15 to 20 or even 30 years of experience in right-of-way cost estimating. These people are quickly reaching retirement and when they depart, invaluable experience and knowledge will be lost. OVERVIEW OF CURRENT PRACTICE A right-of-way cost estimate is produced during each of the first three phases of project development: planning, programming, and preliminary design. Before preparation of the estimates, right-of-way requirements must be provided by planners or the project design team to establish the basis of the estimate. Following preliminary design, appraisals and acquisition typically commence. Typically, no further cost estimates are generated at final design, but right-of-way cost management should continue as purchases are executed. Right-of-way cost management occurs during final design and is completed by comparing actual costs reflected in the appraisals and acquisitions to the estimated costs. If actual costs exceed the estimated amount, the project manager is notified and action is taken to either request additional funds or to make design changes that might reduce right-of-way cost. Additional right-of-way needs are sometimes identified during construction. When this occurs the staff members responsible for right-of-way cost management must work closely with the agencies construction and design sections to minimize the impact of these new right-of-way requirements. 19

The following subsections discuss the current and general state of practice relative to each of the project development phases. Current practices are discussed in a general manner that outlines the overall state of practice in the SHAs interviewed. Later in this chapter, specific successful practices will be covered and critical review of these practices is presented. Determining Right-of-Way Requirements The basis of a right-of-way cost estimate is the right-of-way requirements and this is dependent on the level of project scope definition. Even in the case of a planning-level right-of-way cost estimate where the estimate is based on a percentage of estimating construction cost, the right-of-way estimate is dependent on the planner’s ability to develop a reasonable scope definition to confirm the percentage applied. Typically, scope definition is clarified as the project development process proceeds from the initial planning phase to final design and construction. The need for a project is typically defined in the initial project development phase of planning where scope definition is often nothing more than a statement of purpose and need. The scope at this point in time is expressed in very general or broad terms and usually consists of only an approximate number of lanes or a width, several potential alignments, with little definitive supporting information available. A right-of-way estimator is typically not involved at this stage, and it was found that right-of-way estimates are often completed within the agency’s Planning Division and not the responsibility of the right-of-way Division. As previously stated, a percent of the estimated construction cost is often used at this point in the process. At the programming phase of project development the scope of the project has been further defined and usually an alignment relating to right-of-way needs has been determined. In the case of most SHAs, the right-of-way division or group will receive a request from the project manager for a right-of-way cost estimate. This request is often accompanied by an aerial map or other visual representation of the project site with approximate right-of-way boundaries indicated. This aerial map defines the right-of-way requirements for the project. The total area to be acquired may also be indicated. In some cases SHAs reported that rough parcels would be indicated along with parcel areas, but this is not common practice at programming. Right-of-way requirements during preliminary design are reflected in an updated aerial map or a preliminary drawing provided by the design engineers. The map typically shows the refined right-of-way boundaries, defines each parcel and shows parcel boundaries, and provides the areas required for each parcel. Final right-of-way plans exist at the final design phase in which all right-of-way requirements are explicitly defined as parcels. No further estimates are completed at this point as right-of-way appraisals begin followed by acquisition of parcels. It is likely that some changes may occur during final design which will impact the right-of-way requirements; while such changes are typically minor in extent they can have significant impacts to right-of-way cost. In that case, new right-of-way plans may be released and reconciliation of the cost changes occurs, if necessary. 20

General Right-of-Way Cost Estimating Practices during Planning During planning, right-of-way estimates in many SHAs are usually based on percentages of construction costs. Historical right-of-way costs from general databases or right-of- way cost from comparable projects may also be used to produce this early estimate. Construction costs for planning estimates, as outlined in the NCHRP Report 574, are frequently based upon lane-mile cost factors and prepared by planners. If right of way is required the estimate for this project cost component often does not involve the right-of- way division. Planners also prepare the right of way estimate. In general, planning estimates are used for long-term budgeting. The right-of-way amount defined in the planning estimate appears to have minimal bearing on later estimates. General Right-of-Way Cost Estimating Practices during Programming When preparing the programming estimates, a field visit to the project location is usually completed by the estimator. The right-of-way estimator assigned to complete this early estimate will generally either walk or drive the project and make notes of pertinent details like improvements to be removed, potential damages due to partial takings, and the general topography of the project area. Improvements to be removed include any structure, pavement, outdoor sign, or any other enhancement to the property that is necessary to remove before construction begins. A determination must be made by the estimator related to the current use of the property since the land values may be drastically different for each of use. The estimator must determine whether the use of the property is residential, commercial, industrial, or agricultural land. The right-of-way estimator will prepare the estimate based on the right-of-way requirements per the aerial map and any data obtained during the project site visit. SHAs typically have a cost estimate sheet or checklist to ensure that all elements affecting right-of-way costs are considered. This is the case for the estimates completed during programming, which usually sets the baseline budget (the estimate by which all other estimates are compared for cost management purposes). A cost estimate sheet will have line items for all elements to be included in the estimate. Typically, the major estimate elements are: 1) land; 2) improvements; 3) relocation costs; 4) damages; and 5) condemnations. Land values are established by comparable sales in the general project area using resources such as the tax assessor’s records, area realtors, or commercial realtor databases. At this point in project development, the estimate is normally completed on a gross area basis. Therefore, the estimator is looking to establish a value to apply to the total right-of-way area on a price per acre or price per square-foot basis depending on property usage. Improvements to the raw land and the condition of the existing site improvements must be included in the cost estimate. In addition to justly compensating a land owner for their property, improvements, such as buildings, outdoor signs, and parking lots, must be included in the compensation. Relocation costs for all displaced individuals and their belongings are included in the estimate. Most SHAs appear to have reasonable data for estimating relocation costs and 21

apply a set dollar amount based on recent historical costs and depending on the type of displacement (business, residential owners, or residential tenants). Damages are hard to estimate in almost every case. Estimating such cost requires judgment on the part of the estimator. A value must be assigned based upon the size, shape, and use of the parcel remainder. The estimator’s experience and knowledge of the area are very important in establishing this amount. Condemnations are based on historical data and/or previous experience of the estimator in the project area. The condemnation rate (or the percentage of parcels that will proceed to condemnation) must be estimated in addition to the actual costs of those parcels that may proceed to condemnation. The condemnation rate differs drastically from state to state due to state laws adjudicating property rights and state laws governing condemnation proceedings. Condemnation rates are estimated based upon recent project experience in the area, but estimating the condemnation rates are still quite subjective since there is always a human factor involved. The “human factor” can be defined as the uncertainty and unpredictability related to dealing with property owners when an agency is attempting to acquire their property. The reaction of individuals to an agency acquiring property is difficult to predict. If the condemnation rate is estimated accurately, the cost of condemnations will usually be accurate since they are primarily based upon state laws. General Right-of-Way Cost Estimating Practices during Preliminary Design At the preliminary design phase of project development the right-of-way cost estimate is further refined. In most cases, this is a completely new estimate developed by the right- of-way division personnel, but it may be an update of a previously developed estimate. This varies by SHAs practice. The estimator usually makes a project site visit to explore any issues not apparent from aerial photos or preliminary plans defining the right-of-way requirements. The project manager or project engineer will often accompany the right- of-way cost estimator to provide input on probable design scenarios that will impact the right-of-way requirements and cost, and the potential trade-offs between right-of-way and design may be discussed. Again, a cost estimate sheet is used in producing the estimate to insure that all aspects of right-of-way cost are included in the estimate. The same line items included in the programming estimate sheet are examined for this estimate but now in more detail (e.g. parcel information should be available by this point in project development). The preliminary design estimate is completed using parcel by parcel data where a cost is estimated for each individual parcel. This is the last cost estimate completed before the project is programmed in the State Transportation Improvement Program (STIP). Other than the estimates described here, update estimates may occur when major changes occur in project design. These changes, though, must be communicated to the Right-of- Way Division by the project manager or project engineer. Communication becomes important in this case. Many SHAs attempt to update estimates annually, but some SHAs noted that the size of their right-of-way offices or groups of individuals is too small for a comprehensive annual update. 22

General Right-of-Way Practices during Final Design Final right-of-way plans are released during the final design phase and appraisals begin followed by acquisition. No further cost estimates are prepared. Right-of-way acquisition can begin in earlier phases through protective buying, hardship acquisition and other early acquisition actions but most SHA responded that these were seldom used because of bureaucratic issues such as state laws restricting the length of time right of way can be held after purchasing and prior to construction on the property. In general, the right-of-way agents in charge of appraisals and acquisition will be aware of cost overruns, but requesting more funds seems to be the current practice instead of attempting to manage costs to a previously set budget. This is a major issue, which is addressed later in the analysis section of Chapter 3. Estimate Review and Approval Practices Review of a completed estimate during any of the project development phases is typically limited to a visual scan by the estimator’s supervisor. In specific cases where the cost of right-of-way is extremely high in value, a division head may be required to sign off on the estimate. The SHAs contacted had no formal and documented review process covering right-of-way cost estimates. The right-of-way supervisor typically has many years of experience with right-of-way estimates and performs a high-level review of the cost estimate by using “rules of thumb” and heuristics that they have developed through their years of estimating experience. This is completed by examining the major elements of the estimate which have a large impact on right-of-way cost. The supervisor then determines whether these elements of the estimate appear consistent with past cost experience and subsequently approves or disapproves. State Laws and Other Factors State laws and environmental, political, and social factors affect the right-of-way cost estimation process and impact right-of-way cost. The effects of these laws and factors vary by state. The Kelo versus City of New London case which went to the U.S. Supreme Court seems only to have affected SHAs to a limited extent as most highway agency practices were in conformance with the requirements prior to the case result. However, changes have been made to the eminent domain laws in several states. Interviews confirmed that some state legislatures have passed laws requiring the SHAs to reimburse property owners for private appraisals, attorney fees, and/or other acquisition costs up to a certain value. Furthermore, some states have tightened right-of-way condemnation requirements in the areas of notification and time to response to SHA actions. All states have a defined process for condemnation proceedings and, depending on the state, condemnation actions have the potential to delay project construction starts. CHAPTER SUMMARY This chapter described the state of practice relative to highway right-of-way cost estimation and cost estimate management. A literature review was completed and 23

interviews conducted with SHAs. The interviews with seven SHAs together with agencies in the Cities of Chicago and Phoenix resulted in the identification of critical issues related to cost escalation and the overall state of right-of-way estimating practice. Chapter 3 focuses on the critical review of SHA practice and identifies successful practice process steps and tools. 24