Contingency Factors to Account for Risk in Early Construction Cost Estimates for Transportation Infrastructure Projects (2022)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

23   Guidelines on the Risk-Driven Approach for Estimating Construction Contingencies 5.1 General Workflow of Estimating Contingency for High-Priority Risks Figure 7 illustrates a general workflow proposed to address individual risks, especially the top priority risks. As opposed to the risk checklists used by many DOTs, this workflow is expected to help cost estimators consider risks more thoroughly and comprehensively and guide them through how to develop a contingency estimate specific to their project rather than simply applying predefined percentages without examining project conditions and issues. The proposed workflow is most appropriate to typical, common projects where a risk workshop is not normally conducted. FHWA’s recent guidelines on PRBE need to be followed for large and complex projects that include a risk workshop. The proposed workflow includes five main steps to be applied to a specific risk: • Step 1. Determine project characteristics, conditions, and environments. – Similar to a general cost estimation process, an initial basis for estimating construction cost contingencies is necessary. Key inputs in the scoping phase include the following: (a) scoping report; (b) project description with project characteristics such as type of project, project complexity, and site-specific information; (c) documented conversations about project scope and description; (d) design summary report (if any); and (e) documents from analogous past projects (TxDOT n.d.; Anderson et al. 2007; MnDOT 2008). – Risks typically have triggers (also known as risk symptoms or warning signs); risks seldom occur suddenly (MDT 2016). Common triggers for each of the top risks are provided in Appendix D. The triggers can be examined for a particular project to evaluate whether a risk is likely to appear. If a trigger exists, subsequent steps are performed. • Step 2. Contact subject matter experts (SMEs). – SMEs (in areas such as traffic, bridges, environment, construction, and maintenance) typi- cally help to review and validate project cost and schedule estimates. SMEs can also provide valuable input during an estimating process, particularly in the early phases when detailed project information is limited. Common categories of SMEs to be consulted for each of the top risks are included in Appendix D; this can serve as a reference for early cost estimators. – Early cost estimators can contact relevant SMEs for a specific project to get more information on a specific risk. • Step 3. Conduct qualitative assessment. – Each of the top priority risks identified has a significant effect on construction costs in general, but not every risk affects every project. Qualitative analysis can help evaluate a risk’s significance to a particular project, with input from the relevant SMEs. – A common approach to qualitative assessment is to use a 5-point Likert scale (1 for “very low impact or likelihood” and 5 for “very high impact or likelihood”) to measure the probability C H A P T E R 5

24 Contingency Factors to Account for Risk in Early Construction Cost Estimates for Transportation Infrastructure Projects of occurrence and the impact of a risk if it does occur. During the risk analysis, a risk score can be calculated by multiplying the likelihood and the impact and using the product as a ranking tool among the identified risks. A risk matrix is also used to help early cost estima- tors determine whether or not a risk is significant. More information on the risk matrix is available in section 5.2. The focus of this step is to remove insignificant risks from further analysis. If early cost estimators are not certain whether a specific risk is insignificant, that risk can be kept for further analysis. If a risk is significant, they can continue to Step 4. • Step 4. Gather information and data from SMEs. – Typical information and data to be collected from SMEs for estimating contingency are provided in Appendix D as a reference for early cost estimators. • Step 5. Determine the probability and cost impact of the risk. – With input from SMEs, early cost estimators can determine three estimates of the con- struction cost impact of the significant risk [i.e., optimistic (O), most likely (M), and pessimistic (P)]. The average impact (I) is calculated as follows: = + × +4 6 I O M P – The probability of occurrence of the risk (Pr, with Pr < 1) is also determined and then multiplied with the average impact to obtain the contingency amount for the risk. Contingency amount = Pr × I • Step 6. (Optional) Select a response strategy and determine residual contingency. – For a high-risk item, a risk response action may be implemented to mitigate its impact. The additional cost associated with the response action is added to the base cost estimate. Figure 7. General workflow of estimating contingency for an individual risk.

Guidelines on the Risk-Driven Approach for Estimating Construction Contingencies 25 – After the risk response, the risk’s I and Pr values decrease, resulting in a smaller product or contingency amount than the output of the whole process. Please see section 5.2 for more detail. 5.2 Contingency Cost Estimation Tool Description The spreadsheet-based tool, Early Risk-Driven Estimating and Monitoring of Construction Cost Contingencies (EReC3), was developed to help DOTs’ early cost estimators effectively esti- mate construction cost contingencies for top priority risks. The EReC3 supports all of the steps described in the preceding section; it can be found on the National Academies Press website (nap.nationalacademies.org) by searching for NCHRP Research Report 1025: Contingency Factors to Account for Risk in Early Construction Cost Estimates for Transportation Infrastructure Projects. EReC3 lists the top 12 risks affecting construction costs for contingency consideration and for the general process of evaluating individual risks (see Figure 8). Users can also manually modify the Description column of Table 1 in the Home Page sheet if necessary. Those risks selected for further consideration are automatically generated in the Risk Identi- fication worksheet (see Figure 9). Their common triggers are also provided to evaluate whether Top construction cost contingency risks ID. Description Considered? R01 Utility issues (e.g., utility conflicts, and utility relocation of identified utilities) Yes R02 Poor or incomplete project scope definition during the scoping phase Yes R03 Unexpected geotechnical issues (e.g., inadequate geotechnical investigation results, poor soil conditions, unsound subgrade conditions, large boulders contained in existing soils, or adverse groundwater conditions) Yes R04 Design changes (e.g., changes in the bridge foundation type or redesign of the drainage facility, changes in design standards, exceptions to design standards, and inaccurate design assumptions) No R05 Constructability issues (e.g., problems with construction sequencing/staging/phasing) Yes R06 Contractor availability and competition (e.g., lack of competition due to project size) No R07 Railroad involvement (e.g., additional requirements due to proximity to the railroad) Yes R08 Market conditions (e.g., a shortage of local contractors, labor, and material) No R09 Late changes requested by stakeholders No R10 Project duration-related issues (e.g., scheduling errors, inaccurate contract time estimates, restricted working windows for some activities, or issues with aggressive schedules) Yes R11 Errors in cost estimating No R12 Funding availability Yes Note: Please select the risks you would like to consider in your estimation using the last column of below table. If you are not sure, please consider them all at this stage. Below figure provides the general step-by-step process of evaluating each selected risk. Please click blue box to move to the next step or back to the previous step. EReC3_Risk Investigation (Scoping phase) Grey cells: Automated Figure 8. Spreadsheet tool—Risk investigation worksheet.

26 Contingency Factors to Account for Risk in Early Construction Cost Estimates for Transportation Infrastructure Projects each of them occurs in a specific project. If a trigger exists, the corresponding risk will be moved to the next stage. Not all risks that occur in a project will have a significant effect on construction costs. Therefore, a qualitative analysis is conducted using the worksheet shown in Figure 10 to determine which of the identified risks are significant for quantitative assessment. Common SMEs for each risk are listed so that early cost estimators can contact them to help with the qualitative assessment if necessary. It is advantageous to the estimators if their agency maintains a specific list of SMEs in various disciplines along with detailed contact information to allow for faster communications. With input from the relevant SMEs, each risk is assigned scores for Likelihood and Impact. A checkmark corresponding to the assigned scores will automatically appear in the Risk Matrix column. A risk item that appears in the yellow or red area is typically considered significant. The Risk Score column (= Likelihood × Impact) is also automatically generated. Given the informa- tion provided in the Risk Matrix and Risk Score columns, early cost estimators then decide whether or not the risk is significant by choosing Yes or No in the last column. To estimate contingency for each significant risk, early cost estimators may need to gather additional data and information relevant to the risk from the SMEs identified earlier. If risks are tracked and monitored as proposed in Chapter 7, historical data should also be available for estimation. If not, SMEs’ judgments and experiences in past projects are a crucial and most probable source of information for early cost estimators. Common information and data to be collected are available for reference (see Figure 11). The SMEs and the additional data can help estimators to calculate the expected contingency value for each risk. EReC3 also has an extra function to determine residual contingency if an action is performed to mitigate the expected impact of a specific risk (see Figure 12). ID. Risk factor Common triggers for checking Are there any triggers in this project? Action What are the triggers in this project? RISK IDENTIFICATION (SCOPING PHASE) R02 Poor or incomplete project scope definition during the scoping phase R01 Utility issues (e.g., utility conflicts, and utility relocation of identified utilities) Proximity to urban centers Proximity to urban centers Rocky or variable subsurface conditions No recent major roadwork within the alignment Yes Continue Many stakeholders involved in the project Yes R03 Unexpected geotechnical issues (e.g., inadequate geotechnical investigation results, poor soil conditions, unsound subgrade conditions, large boulders contained in existing soils, or adverse groundwater conditions) Unknown groundwater flow direction Variability of subsurface conditions Known geotechnical issues in the area Inadequate geotechnical investigations Yes Continue Continue Figure 9. Spreadsheet tool—Risk identification worksheet.

Guidelines on the Risk-Driven Approach for Estimating Construction Contingencies 27 ID. Typical Subject Matter Experts (SMEs) to contact Specific contact for this project Likelihood (1-5) Impact (1-5) Risk score Significant ? 5 4 X 3 2 1 1 2 3 4 5 5 4 3 X 2 1 1 2 3 4 5 QUALITATIVE RISK ASSESSMENT (SCOPING PHASE) 3 4 4 5 Lik el ih oo d Yes Local area ROW personnel Maintenance personnel that have worked in the area for an extended amount of time Utility managers Jane Done, Geotechnical engineer Yes Impact Lik el ih oo d 12 Professional engineers or architects representing the stakeholders’ interests DOT’s functional groups Sandie Angulo Chen, Project engineer Impact 20 R02 Risk matrix R01 Figure 10. Spreadsheet tool—Qualitative risk assessment worksheet.

Note: Minimum Most likely Maximum Probable impact Impact on construction cost Probability of occurrence Expective value R01 Utility issues (e.g., utility conflicts, discovery of previously unknown utilities, and utility relocation) Utility cost information for recent projects with similar scope in the same general area 370,000.00$ 420,000.00$ 490,000.00$ 423,333.33$ 423,333$ 85% 359,833.33$ R02 Poor or incomplete project scope definition during the scoping phase Clarifications from functional groups for unclear requirements Alternative analyses such as pavement analysis and life cycle analysis Local/federal policies with possible ripple effects on project requirements Scoping reports from past similar projects in the area 80,000.00$ 140,000.00$ 180,000.00$ 136,666.67$ 136,666.67$ 90% 123,000.00$ ID. QUANTITATIVE RISK ASSESSMENT (SCOPING PHASE) Grey cells: Automated Quantitative Risk Assessment Cost estimator's calculation Risk factor Risk Impact ($) from the data and information obtained Information & data typically obtained from SMEs Specific details for this project Figure 11. Spreadsheet tool—Quantitative risk assessment worksheet.

Guidelines on the Risk-Driven Approach for Estimating Construction Contingencies 29 Risk control method Responsibility Action to control risk Construction cost impact of the action Probability of occurrence after risk response Expective value R01 Transfer Utility Engineer Subsurface Utility Engineering (SUE) Survey 14,000.00$ 75% 317,500.00$ R02 Accept Project Engineer Subsurface Utility Engineering (SUE) Survey 4,500.00$ 82% 112,066.67$ RISK RESPONSE (SCOPING PHASE) Risk response Residual Risk Assessment Contingency after risk response ID. Figure 12. Spreadsheet tool—Risk response and residual contingency worksheet.