Key Issues in Transportation Programming (2008)

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56 BREAKOUT SESSION Cost Estimation and Management Stuart Anderson, Texas A&M University Ananth Prasad, Florida Department of Transportation A NEW STRATEGY FOR COST ESTIMATING AND COST ESTIMATING MANAGEMENT Stuart Anderson Stuart Anderson discussed NCHRP Project 8-49, Proce- dures for Cost Estimation and Management for High- way Projects During Planning, Programming, and Preconstruction. He summarized the issues associated with cost estimation for transportation projects, the activities conducted in the study, the project product, and future activities. Stuart covered the following topics in his presentation. • State transportation agencies face a major challenge in controlling project budgets between the initiation and completion of a project. A number of factors contribute to this challenge. There may be difficulty in (a) describing solutions for all scope issues early in the project develop- ment phase, (b) evaluating the quality and completeness of early project cost estimates, (c) identifying major areas of variability and uncertainty in the scope and cost of a project, and (d) tracking the cost impact of scope devel- opment that occurs between major cost estimates. • The objective of the project was to develop a guide- book on highway cost estimating management and proj- ect cost estimating procedures aimed at achieving greater consistency and accuracy between long-range trans- portation planning, priority programming, and precon- struction estimates. It is important to have both consistency and accuracy in the cost estimation andman- agement process. • The project was divided into two phases. A state- of-the-practice review was conducted in the first phase. Activities in this phase included a comprehensive litera- ture review, detailed interviews with agency personnel, and the identification of potential strategies, methods, and tools. The second phase included development of the guidebook, testing and validation of the guidebook, and implementation planning. • The guidebook includes 18 primary cost escalation factors and eight strategies to combat cost escalation. It out- lines 30 implementation methods and 90 tool applications. Three generic process maps for project development phases are provided, along with one agency-level process map. • Strategies address management, scope and sched- ule, off-prism approaches, and risk. Other strategies focus on project delivery and procurement, document quality, estimate quality, and integrity. One of the strate- gies presented for improving the quality of cost estimates is to use qualified personnel and uniform approaches. Good examples of programming methods are also pre- sented, highlighting consistency, documentation of esti- mate assumptions, and the creation of a project baseline. • Examples of programming tools for standardized estimating and cost management procedures, project estimate files, and methods for establishing project base- lines are also provided in the guidebook. These baselines provide a cost–performance benchmark. Defining major project elements is a key element in developing these benchmarks. Tools for developing project baselines include cost containment tables and scope change forms. • Project baselines in programming establish a basis for controlling costs. Cost management cannot be per- 60627_TRB_S1_A:01-CP43 11/17/08 10:15 AM Page 56

formed effectively without a baseline budget. Project baseline programming provides management with a tool for making decisions when changes occur. Developing a baseline should occur when a project is programmed. • The WSDOT scoping process provides one exam- ple of the use of project baselining in programming. One tip is to ensure an appropriate level of detail necessary to track changes. The book Principle-Based Project Man- agement provides additional resources. • The guidebook outlines elements of cost estimating and cost-estimate management during programming and preliminary design and presents methods for implement- ing different tools. It includes a discussion of the imple- mentation of strategies through organizational change, implementation of methods through programmatic change, implementation of tools through project change, and integration of the system through the use of a strategic plan. • Many of the techniques and tools contained in the guidebook are being implemented by state departments of transportation. Minnesota, Georgia, Montana, and Washington are all implementing comprehensive approaches or partial techniques. Other related initia- tives include NCHRP Project 8-49, Right-of-Way Cost Estimating and Cost Estimating Management; NCHRP Project 8-60, Guidebook on Risk; and NCHRP Project 8-36(72), Implementation and a Capacity Building Workshop. • The guidebook includes 10 key principles to cost estimating management and practice. These key princi- ples include making estimating a priority by allocating time and staff resources, setting a project baseline cost estimate during programming or early in the preliminary design and managing it throughout project development, and creating cost containment mechanisms for timely decision making that indicate when projects deviate from the baseline. Other principles are creating estimate trans- parency with disciplined communication of the uncer- tainty and importance of an estimate and protecting estimators from internal and external pressures to provide low-cost estimation. Other key principles include completing every step in the cost-estimate process during all phases of project development, docu- menting the estimate basis, identifying project risks and uncertainties, anticipating external cost influences, and performing estimate reviews to confirm that the estimate is accurate and fully reflects the project scope. COST ESTIMATION AND MANAGEMENT Ananth Prasad Ananth Prasad discussed cost estimation and cost man- agement at the Florida Department of Transportation (FDOT). He described the factors influencing cost increases in the construction of transportation projects in the state and strategies FDOT is using to address these increases. Ananth covered the following points in his presentation. • FDOT is experiencing cost increases related to roadway construction. Costs have increased for earth- work, asphalt, structural concrete, structural steel, and reinforced steel. Factors influencing the increase in earth- work costs include borrow pit availability, hauling costs, and real estate pressure. Asphalt cost increases have been driven by increases in crude oil prices and in bitumen and aggregate prices, availability of supply, uncertainty in supply, and increases in transportation costs, as well as maintenance of traffic (MOT) considerations. Struc- tural concrete cost increases are the result of the demand for concrete, MOT considerations, and the increased prices, uncertainty in supply, and transportation costs related to aggregate. Cost increases in structural and reinforcing steel are influenced by the global demand for steel, pressure on the fabrication process, and transportation costs. • Earthwork increased from $4.96/yd3 in 2003 to $8.64/yd3 in 2006. Asphalt increased from $53.93 per ton in 2003 to $99.54 per ton in 2006. Structural con- crete increased from $549.82/yd3 in 2003 to $868.90/yd3 in 2006. • Florida has a robust economy. There has been sig- nificant population growth in the state. In 2004, the value of construction put in place per capita in Florida was double the national average and higher than in Cal- ifornia. Approximately 70% of construction activity has been in the residential market, whereas highway and bridge construction accounts for only 10% of the mar- ket. The residential market appears to be cooling off, however. How long this trend will last is unclear. The extent to which it might benefit the transportation indus- try and whether FDOT will see any benefit is also unclear. There are also labor shortages in many parts of the state. Florida has a low unemployment rate and was less affected by the recent recession than were many other states. The rate of growth in construction employ- ment, which accounts for 7% of total employment, is double that of overall employment levels in the state. • Cost increases have also been influenced by reduc- tions in bid competition caused by consolidations. The average number of bids received on FDOT construction contracts declined from 2002 to 2006, while the number of contracts with no bids and with only one bid increased. Further, the hurricane rebuilding efforts in Florida and the southeastern portion of the country have put a strain on supply chains. • FDOT is pursuing a number of short- and long- term strategies to address these issues. Short-term strate- 57COST ESTIMATION AND MANAGEMENT 60627_TRB_S1_A:01-CP43 11/17/08 10:15 AM Page 57

gies include refining the awards criteria, revisiting infla- tion rates and contingency levels, and refining the depart- ment’s estimating process. The department may reject more contracts if bids are too high or if there is only one bidder. FDOT is providing more periodic updates to the estimation process. Performance measures have also been established. Additional cost libraries that use his- torical unit prices and time durations from similar contracts were developed. • Other short-term strategies include encouraging the use of bid options and bid alternates, implementing a bid maximum specification, and developing a compre- hensive price index for construction contracts to manage risk. Optimizing night work is also being pursued. Finally, contract scope and length are being reviewed, as larger contracts are not necessarily better. • The department is also examining long-term strate- gies, such as conducting a work force study focused pri- marily on unskilled workers and addressing conflicts in mobility and in freight. A statewide freight study will address key supply chain issues, with an emphasis on ports and rail infrastructure needs. The results of this study will be used to make investments in rail and port capacity that provide the greatest return on investment. • Another long-term strategy is managing the risk associated with material availability. A statewide aggre- gate resource study is under way, and the department’s procurement of aggregate to build redundancy in supply is being considered. The use of right-of-way for joint-use stormwater ponds and securing borrow pits is also being considered. Using flexible design and engineering and not requiring federal-aid standards on all projects repre- sent other long-term strategies. • Another long-term strategy is developing indica- tors to aid in establishing letting levels. Maintaining a moderately aggressive base level of lettings at all times is part of this strategy. The statewide construction data- base shows a total of $9.1 billion for highway and bridge work. FDOT’s share of this total is only about $3 billion. Increasing competition continues to be an ongoing strat- egy. Even with volatility, contracts with three or more bids came in closer to the FDOT estimate than contracts with one or two bids. Waiving bonds on smaller con- tracts to help develop the next generation of prime con- tractors represents another approach, as do simplifying contract administration on smaller contracts and remov- ing restrictions that do not add value. • Procuring and permitting sites for temporary asphalt plants for contractors to use represents still another strat- egy. A final long-term strategy focuses on procuring per- mits for asphalt and concrete sources and plants. FDOT will participate in the dialogue on the permitting process and will provide information so that informed decisions can be made. It is important to remember that there is a fine line, however, between providing information and advocating for the permit or location of a temporary asphalt or concrete plant for a project. • A number of strategies related to cost estimates are also being examined. Standardizing the estimating processes and more frequently updating cost estimates are two approaches. More attention is also being given to managing scope creep. Prior to bid solicitation, the estimates and funds programmed will be reviewed. Efforts will also be undertaken to “true up” the esti- mates, including reviewing bid prices on similar types of contracts of similar duration and reviewing bid prices for other agencies in the region. Prospective pricing, which involves contacting material supplies on trends and escalators, will also be considered. • Unknown factors related to a project can be used to estimate the contingency amount appropriate for dif- ferent phases of a project. The unknown factor percent- ages can also vary depending on the type of project. After a project is incorporated into the work program, con- struction cost estimates should be updated at specific milestones. • Construction cost estimate performance measures have been developed. The first performance measure is the adopted versus the low bid, with a 15% absolute dif- ference. The second performance measure is the official estimate versus the low bid, with a 10% absolute differ- ence. The third performance measure is the initial cost estimate versus the Phase II cost estimate, with a 15% difference. The fourth performance measure is the initial cost estimate versus the adopted cost estimate, with a 25% difference. • The right-of-way estimates focus on developing a system to identify projects for which the cost estimate has changed 15% and $1 million since the last pro- grammed estimate. The frequency of updating cost esti- mates will also be increased. These updates will help capture and track the primary causes of changes in cost estimates on a project basis. Other enhancements focus on including phase-level real estate inflation factors in programming and providing a percentage for project unknowns in the project cost estimate. Joseph G. Jones, Missouri Department of Transportation, moderated this session. 58 KEY ISSUES IN TRANSPORTATION PROGRAMMING 60627_TRB_S1_A:01-CP43 11/17/08 10:15 AM Page 58