Appendix A Cost Estimation Methodology

(White Paper Prepared by FTA) Introduction

Cost estimation is a process that provides progressively more accurate information as a project moves from conceptual through final design and construction award. It establishes initial budget limits and is the crucial element of a project management/control system. FTA relies heavily on a grantees ability to develop and monitor an accurate project budget. Over time budgets are refined as more detailed engineering information is available.

Current Practice of Budget Development

Creating a project budget requires the allocation of all costs associated with completing a project. Project budgets are built from the bottom up by use of work breakdown structures (WBS). The WBS provides a means for defining program/project scope, both what is to be built hard costs; and all management/administrative costs, including fees, testing, etc. soft costs. This latter category is typically twenty (20) percent of a projects budget. Development of an order of magnitude estimate marks the beginning of the budget and project management process. Design consultants are retained to prepare order of magnitude estimates using models or templates developed by a professional engineering association having detailed knowledge of a particular field or industry. In rail transit, for example, a frequent starting place would be manuals published by the American Railway Engineering and Maintenance Association (AREMA) with adjustments reflecting unique features of a light rail project. Another source is the R. S. Means Construction Cost Estimating Manual. At this level of detail reserves or contingencies of 35 percent and higher are normal. Hard costs are the probable costs of construction and are first prepared as order of magnitude estimates. From this point the engineering/design consultant is instructed to design to cost, an exercise that relies on budget limits to control scope expansion. No construction contingencies are included at this level of detail. Grantees do not release design contingencies at this stage of design, usually reserving these funds for added design work needed at a later time. In some circumstances an architect/engineer instructed to design to cost may be required to redesign a project, at no cost to the grantee, if construction bids
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Appendix A Cost Estimation Methodology exceed final design estimates. At the preliminary design, design development and final design stage construction cost estimates should be verified to ensure that a project has remained within budget. Value Engineering (VE) is advocated by FTA throughout the design process particularly in the early phase where there is the greatest opportunity to affect the cost of construction with minimal impact to project goals. VE assesses products and systems and provides recommendations for a more economical solution. The process also considers long-term operations and maintenance practices and costs. FTA requires its grantees to escalate construction costs to reflect anticipated inflation and to report this amount as a separate budget line item. This requirement acknowledges that over time, materials and labor costs may rise due to general inflation. Escalation may be calculated by applying an assumed fixed annual percentage to probable construction costs through the mid-point of construction. A more sophisticated approach would be to apply escalation by either individual construction contract or by trade item, e.g. bridge, track, signal, etc., and adjust to the anticipated year of expenditure. Large, complex projects that encompass many construction contracts should add a program contingency over and above design and construction contingencies. A program contingency addresses interfaces between and among construction contracts as well as uncertainty associated with system start-up, testing, and commissioning. FTA participates in reasonable startup costs that directly support activation and pre-revenue operations. These costs should be accounted for in the project estimate.

Recommendations
1

Resolution of Variations in Cost Estimates During project development FTA and the grantee should agree on a method to resolve variances between estimates. Regions 1 and 9 have utilized a Capital Reserve Account (CAPRA) for this purpose. The CAPRA requires the grantee to set aside funds equal to estimating differences. These funds are available for overruns. Cost Management System Grantees should implement a cost management system to operate within the framework of the grant requirements and provide the grantee with reliable cost information. Greater visibility to cost information will permit the timely implementation of alternative solutions. The cost management system will encompass a data warehouse of all project costs organized within the WBS.

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Appendix A Cost Estimation Methodology Reporting categories within the cost management system should include: Baseline Budget Authorization Contract Commitments Actual Cost Pending Contract Changes Forecast-to-Complete Estimate-at-Completion Budget Variance Earned Value

Grantees can manage the program/project contingency by evaluating commitments to budget estimates and tracking potential changes as soon as they are identified. Further, the grantee should establish a change order control system that identifies and records the cause of the changes. Increases/changes in scope or scope creep are a common occurrence on large-scale projects. Individual changes should be logged and recorded with the appropriate funding source. Cost Recovery In association with the change order control system, grantees should be encouraged to develop and utilize a cost recovery procedure. Several larger projects have successfully implemented procedures that allow for the potential recovery of costs due to errors and omissions that cause rework of a portion of the project. It is a requirement of all design contracts for the Architect/Engineer to maintain professional and general liability insurance to cover these items. Regardless of how much is recovered through this process, it is an effective negotiation tool.

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Appendix A Cost Estimation Methodology

Table A-1. Recommended Contingency by Estimating Stage

Estimate Stage Order of Magnitude (conceptual) Probable Accuracy1 50% - 30% Design Stage Preliminary Purpose Evaluation of projects or alternatives Information Available 100-scale alignment, facility descriptions, sketches, study reports Estimate Methods Parametric Cost of a similar facility is adjusted to represent the new facility. Includes costing by SF, LF, or CF. Model A typical design is used to develop quantities and costs for elements. Quantity development of major commodities, pricing by database, manuals, quotes, bid results, or experience which may be adjusted for the conditions of the specific package. Rough estimates or allowances developed for immeasurable items. Takeoff of quantities from plans, representative pricing by database, manuals, quotes, bid results, or experience adjusted for the conditions of the specific package. Crewed approach to labor and equipment, percent approach to general conditions, overhead and profit, contingency, and escalation. Some allowances carried for immeasurable items. Detailed takeoff of all measurable items, detailed review of specifications, detailed pricing including price quotes, crewed approach to labor and equipment, detailed estimate of general conditions, overhead & profit, and escalation. Consideration of construction schedule, work restrictions, shift requirements, and risk. Contingency Guideline 20% or higher

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1

Preliminary (budget)

15% - 30%

Preliminary Design Report (25%)

Establish Control Budget

Definitive

15% - 5%

75% to 100% complete

Detailed Control Budget, Cost Control, and Reporting

40-scale alignment, facility descriptions, sketches, study reports, cross sections, profiles, elevations, geotechnical data, staging plans, schedule, definition of temporary work Progress Plans and Specifications, working construction schedule

10% - 20%

5% - 15%

Detailed (engineers estimate)

5%

PS&E

Check Estimate for Bids, Commit Funds

Complete Plans and Specifications for Bidding, Detailed Construction Schedule, Contract Terms and Conditions

0% - 10%

Probable Accuracy as stated by the Association for the Advancement of Cost Engineering International (AACE)