For Transportation Projects

Niyi OlumideNiyi OlumideStuart AndersonStuart AndersonTexas A & M UniversityTexas 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

Total Project Estimate = Base + Contingency

Reflects Estimated Dollars Associated with Uncertainty

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

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

+ + ContingencyContingency

Com

pare

Com

pare

Uncertaint

Uncertaint

yy

Phases of Project

Development

Re-evaluateRe-evaluate

Pro

ject

Cos

t

Project Development Process

Planning Preliminary Design

FinalDesign

Cost Range

Programming

Contingency

Base Estimate

Contingency

Base Estimate

Contingency

Base Estimate

Base Estimate

Baseline Estimate & Total Project Cost Estimate

Cost Estimates and Contingency(w/Total Project Cost Estimate = Baseline Estimate)

Pro

ject

Cos

t

Preliminary Design

FinalDesign

Programming

Base Estimate

Contingency

Base Estimate

Contingency

Base Estimate

Baseline Estimate

Total Project Cost Estimate

Pro

ject

Cos

t

Preliminary Design

FinalDesign

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 contingency1. Standard Predetermined Contingency across projects2. 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 ContingencyOhio 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

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?

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

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 AnalysisControlled Feedback in round 2

Round 2 Group Response AnalysisControlled 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

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 Complex Non-Complex (Minor)

New highway; major relocations

New interchangesCapacity

adding/major wideningMajor 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)

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

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

Phase Planning

Programming

Design 1 Design 2 Design 3

Non-Complex ProjectsNon-Complex Projects

Ranges (%)

24-68 21-56 16-38 11-25 5-14

MLE (%) 41 34 25 17 9

Moderately Complex ProjectsModerately Complex Projects

Ranges (%)

33-92 27-68 21-50 15-32 8-20

MLE (%) 59 43 31 22 13

Most Complex ProjectsMost Complex Projects

Ranges (%)

47-125 36-89 20-48 12-32

MLE (%) 75 59 31 21

MLE: Most Likely Estimate of Contingency

Phase Planning Programming

Design 1

Design 2

Design 3

Ranges (%)

22-50 20-40 14-30 9-20 5-15

MLE (%)

35 30 20 15 8

Median Contingencies Ranges: Range Estimating MLE: Deterministic Estimating Estimator can pick values within ranges

based on project risks

Phase Planning

Programming

Design 1

Design 2

Design 3

Ranges (%)

30-75 25-60 20-40 13-30 7-19

MLE (%)

50 40 30 20 10

Median Contingencies Ranges: Range Estimating MLE: Deterministic Estimating Estimator may pick values within ranges

based on project risks

Planning Programming Design 1 Design 2 Design 3

Phase Planning Programming

Design 2 Design 3

Ranges (%)

40-100 34-75 20-40 11-30

MLE (%) 60 50 28 20 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

To successfully apply these scales estimators must perform 5 major steps1. 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

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

Thank You!