For Transportation Projects Niyi Olumide Stuart Anderson Texas A & M University A Delphi Study

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  Contingency Matrices  Results  Applications of Sliding Scales  Conclusions

What is Contingency? An estimate of costs associated with identified risks, the sum of which is added to the base estimate. What is a Base Estimate? The most likely project cost estimate in any phase at any time, which normally includes all estimated known project costs, but does not include project contingency

Cost Estimate at Any Phase Total Project Estimate = Base + Contingency Reflects Estimated Dollars Associated with Uncertainty

 Introduction  Background and Motivation  NCHRP 8-60: Risk Analysis Tools and Management Practices to Control Transportation Project Costs

NCHRP 8-60 Published Definition of Contingency 48 of 52 SHAs responding

 Contingency: ◦ Provides costs for uncertainties associated with projects cost estimates ◦ Reduces over planning and project development time cycle, therefore, so does the amount of contingency ◦ Enhances accuracy of cost estimates ◦ Improves communication to stakeholders

 Introduction  Background  Contingency Estimating  Contingency and the Project Development Process (PDP)  Risk in the Cost Estimation Process  Contingency in the Highway PDP

 The Project Development Process (PDP) ◦ Project 8-49 (Report 574)

Estimate Basis Assess Risks Revise Cost Estimates + Contingency + Contingency Compare Uncertainty Phases of Project Development Re-evaluate Re-evaluate

Project Cost Project Development Process PlanningPreliminary Design Final Design Cost Range Programming Contingency Base Estimate Contingency Base Estimate Contingency Base Estimate Baseline Estimate & Total Project Cost Estimate Cost Estimates and Contingency (w/Total Project Cost Estimate = Baseline Estimate)

Project Cost Preliminary Design Final Design Programming Base Estimate Contingency Base Estimate Contingency Base Estimate Baseline Estimate Total Project Cost Estimate Project Cost Preliminary Design Final Design Programming Base Estimate Contingency Base Estimate Contingency Base Estimate Baseline Estimate = Total Project Cost Estimate Total Project Cost Estimate < Baseline Estimate Total Project Cost Estimate = Baseline Estimate Cost Estimates and Contingency

 SHA methods of setting contingency 1.Standard Predetermined Contingency across projects 2.Unique Project Contingency (Estimators/Engineers) 3.Formal Risk Analysis and associated contingency NCHRP 8-60  16 of 48 SHAs stated use of standard predetermined contingencies  Majority indicated that they use unique project contingencies  Formal risk analysis not as widely used

Sliding Scale Contingency Ohio DOT Approach

 Major Problems in Contingency Estimation ◦ Inconsistencies in application of contingencies  Poor definitions of what constitutes contingency  Inappropriate application of contingency amounts to cover other issues instead of the intended purpose  Contingency estimation methods: One method may not necessarily serve all project types  Rationale for selecting method may not sufficiently address major issues like project complexity

 Introduction  Background  Contingency Estimating  Research Questions

1. How does the application of contingency change across the PDP? 2. How do the ranges of contingency change across the PDP in the Highway Industry? 3. How do factors such as the following impact contingency estimates?  Project Size/Complexity  Estimation method  Level of scope definition

4. When using contingency scales, do the contingency bands narrow linearly or decrease exponentially or in some other form across the PDP? 5. What is the relationship between uncertainty, risk and contingency?

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives

 Main Objective To develop sliding scale contingencies that can be used in the estimation and management of the cost of highway projects taking into account the effects of project complexity, level of project definition, estimation methodology, and phase of project development

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  The Delphi Technique  Panel of Experts

 What is the Delphi Technique? ◦ An iterative method used to gather opinions from a group of qualified individuals to solve a complex problem ◦ The method relies mainly on the judgment of experts to solve problems ◦ It lends its application to solve problems where there is little or no empirical evidence ◦ It is conducted through the application of a series of questionnaires called rounds’ typically a minimum of 2 rounds ◦ The main aim of the Delphi technique is to achieve consensus among the experts

 Key Features ◦ Anonymity minimizes the effects of bias, conflict, individual status and intimidation ◦ Effectively structures group communication ◦ Eliminates the draw backs of face-to-face participation ◦ Controlled feedback to participants at the end of each round enables participants make fully informed decisions

 Caution!!! ◦ Repeated rounds may lead to fatigue or loss of interest of the panel members ◦ May take a substantial amount of time and participant effort to complete if questionnaires are not carefully structured ◦ Panel members should represent several relevant disciplines to guarantee a wide knowledge base

 Round 1 Group Response Analysis  Controlled Feedback in round 2  Round 2 Group Response Analysis  Controlled Feedback in subsequent rounds

 Profile ◦ Invitations sent to approximately 80 potential participants ◦ 23 professionals agreed to participate and made up the panel ◦ Majority had experience:  Estimating (5 to 20 years experience)  Risk Assessment (2 to 5 years experience) ◦ Majority of participants were from SHAs

 Expertise ◦ Project Managers ◦ Project Engineers ◦ Risk Coordinators ◦ Cost Estimators ◦ Construction Managers ◦ Program Managers ◦ Design Engineers ◦ Contract Managers ◦ Project Planners

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  Contingency Matrices ◦ Complexity Classifications ◦ Representative Risks ◦ Matrices

 Participants were provided 3 contingency matrices for 3 complexity scenarios across the phases of project development  Complexity definitions from NCHRP 8-49 (Report 574) ◦ Non-Complex (Minor) Projects ◦ Moderately Complex Projects ◦ Most Complex (Major) Projects  Typical risks were associated with the complexity levels

 Levels of Complexity are distinguished using: ◦ Roadway attributes ◦ Traffic control approaches ◦ Structures ◦ Right of way ◦ Utilities ◦ Environmental requirements ◦ Stakeholder involvement

Project Types based on Complexity Most Complex (Major)Moderately ComplexNon-Complex (Minor)  New highway; major relocations  New interchanges  Capacity adding/major widening  Major reconstruction (4R; 3R with multi-phase traffic control)  Congestion Management Studies are required  3R and 4R projects which do not add capacity  Minor roadway relocations  Certain complex (non- trail enhancements) projects  Slides, subsidence  Maintenance betterment projects  Overlay projects, simple widening without right-of-way (or very minimum right- of-way take) little or no utility coordination  Non-complex enhancement projects without new bridges (e.g. bike trails)  Examples of complexity classifications (full definitions in Report 574)

Project TypeMost ComplexModerately Complex Non-Complex REPRESENTATIVE RISKS Unresolved constructability issues Geotechnical IssuesContractor delays Design ComplexityChanges in materials/ foundation Changes in Program priorities Political FactorsDelays in permitting process Errors in cost estimating Complex environmental requirements Bridge redesign/ analysis Inaccurate Technical assumptions  Examples of the Representative Risks for the 3 project complexity scenarios

 For each complexity scenario, participants were asked to input appropriate ranges of contingency (Low, Most Likely Estimate, High) in the matrices based on: ◦ Phase of Project Development ◦ Level of Project definition ◦ Type of Estimate ◦ Historic Data ◦ Representative Risks for the different project types

Non-Complex (Minor) 5 Planning 10 to 20 yrs from letting 1 - 3% Parametric with Historical Percentages Cost per Lane mile, Past Projects Programming/ Preliminary Design 5 to 10 yrs from letting 5 -15% Bid based (80/20 rule) with other Recent Bids, Past Projects Design 1 4 yrs or less from letting % Bid based with 75% line items identified Recent Bids Design 2 less than 4 yrs from letting % Bid based with 90% Line items identified Recent Bids Design 3 less than 4 yrs from letting % Bid based, Cost based. All items (Pay) Recent Bids and/or Labor, Material, Equipment Costs Moderately Complex Planning 10 to 20 yrs from letting 4 - 7% Parametric with Historical Percentages Cost per Lane mile, Past Projects Design 2 less than 4 yrs from letting % Bid based with 90% Line items identified Recent Bids Design 3 less than 4 yrs from letting % Bid based, Cost based. All items (Pay) Recent Bids and/or Labor, Material, Equipment Costs Most Complex (Major) 4 Planning 10 to 20 yrs from letting % Parametric with Historical Percentages Cost per Lane mile, Past Projects Programming/ Preliminary Design 5 to 10 yrs from letting % Bid based (80/20 rule) with other Recent Bids, Past Projects Design 2 less than 4 yrs from letting % Bid based with 80% Line items identified Recent Bids Design 3 less than 4 yrs from letting % Bid based, Cost based. All items (Pay) Recent Bids and/or Labor, Material, Equipment Costs

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  Contingency Matrices  Results ◦ Overview of Rounds ◦ Contingency Inclusions and Exclusions ◦ Results

 Round 1 formed the basis for subsequent rounds; contingency ranges were very wide  Contingency ranges provided were between 0% and 500% contingency across the categories  In Round 2 ranges tightened; between 0% and 400% contingency across the categories  In round 3, majority of participants did not make any significant changes made to earlier assessments

 Mean was used as the main feedback to participants at the end of each round  Participants were provided all summary statistics from previous rounds as part of the feedback at the end of each round  Response rate was 100% for all three rounds: all 23 participants responded  Stability was achieved in the results after 3 rounds

 Some participants indicated a few of the major items included in the contingency ◦ Cost Overruns ◦ Change orders during construction ◦ 5-10% for minor items ◦ 5% for supplemental work not identifiable at time of estimate preparation

 Some participants indicated a few of the major items NOT included in the contingency ◦ An allowance for cost escalation ◦ Allowances for items known to be required as part of the base project but not yet quantified in cost estimate ◦ Funds available for cost adjustments driven by predetermined market factors and incentives

 Median ranges were slightly lower than the mean ranges for most of the categories  The median was used as the final results to eliminate bias in the results

PhasePlanningProgrammingDesign 1Design 2Design 3 Non-Complex Projects Ranges (%) MLE (%) Moderately Complex Projects Ranges (%) MLE (%) Most Complex Projects Ranges (%) MLE (%)  MLE: Most Likely Estimate of Contingency

PhasePlanningProgrammingDesign 1Design 2Design 3 Ranges (%) MLE (%)  Median Contingencies  Ranges: Range Estimating  MLE: Deterministic Estimating  Estimator can pick values within ranges based on project risks

PhasePlanningProgrammingDesign 1Design 2Design 3 Ranges (%) MLE (%)  Median Contingencies  Ranges: Range Estimating  MLE: Deterministic Estimating  Estimator may pick values within ranges based on project risks

Planning Programming Design 1Design 2 Design 3

PhasePlanningProgrammingDesign 2Design 3 Ranges (%) MLE (%)  Median Contingencies  Ranges: Range Estimating  MLE: Deterministic Estimating  Estimator may pick values within ranges based on project risks  Higher level of definition in the programming phase due to complexity of project

Planning Programming Design 2 Design 3

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  Contingency Matrices  Results  Application of Sliding Scales ◦ 5 major steps, Benefits, Limitations,

 To successfully apply these scales estimators must perform 5 major steps 1.Remove all contingencies and conservative biases from the base estimate 2.Classify the project by complexity as most complex, moderately complex or non-complex 3.Determine current phase of project development at time of estimate preparation 4.Identify risks as drivers of contingency 5.Add appropriate contingency to the base estimate consistent with risks 6.Repeat the process at each major phase of project development

 Creates consistency in defining and applying contingency to projects  Relatively easy to use  Implied retirement of contingency across the phases of project development

 Contingencies are not directly tied to risks and uncertainties ◦ Risks should be identified and monitored ◦ A risk list could provide justification to stakeholders for contingency included in estimate  For larger moderately complex and all complex projects ◦ Analysis of unique project risks is recommended in developing contingencies  Focus on contingency related to construction costs only

 Introduction  Background  Contingency Estimating  Research Questions  Study Objectives  Methodology  Contingency Matrices  Results  Applications of Sliding Scales  Conclusions

 The Sliding Scales provide a defensible top- down method for estimating contingency  Takes into account the effect of major factors that affect contingency Note!!!  For successful application, estimators must remove all contingencies and conservative biases from base estimate before applying sliding scale contingencies

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