THIS STAFF REPORT COVERS CALENDAR ITEM NO.: 7 FOR THE MEETING OF: November 16, 2007 TRANSBAY JOINT POWERS AUTHORITY BRIEF DESCRIPTION: Recommendation of a Baseline Budget for Phase 1 of the Transbay Transit Center Program (Program) in the amount of $1,189,000,000 in year of expenditure (YOE) dollars. SUMMARY: A preliminary Phase 1 cost estimate totaling $983 million was developed in January 2006 and presented to the Board in March 2006. This preliminary estimate was prepared using conceptual designs and FTA-mandated minimum levels of contingencies, as well as initial estimates of escalation and program-wide costs such as design and construction management. Since the Phase 1 preliminary cost estimate was presented to the Board in March 2006, considerable work has been completed to identify the most probable final cost of Phase 1 as the basis for the recommended Baseline Budget. The estimate was recalculated to account for the escalation that occurred during 2006, and an industry review was conducted to assess the most probable ongoing annual levels of escalation to the end of construction. In addition, adjustments were made to the Phase 1 preliminary cost estimate to account for further scope development, development of intended contracting strategies, and reallocation of some costs from Phase 2. Accordingly, this report provides an update to the components included in the prior estimate and recommends the adoption of a Baseline Budget for Phase 1 of $1,189,000,000 (YOE). Once adopted, this Baseline Budget will be the benchmark against which cost performance will be measured. Staff and consultants have developed a draft funding plan for the Baseline Budget. With updated real estate-based revenues, this funding plan indicates that Phase 1 is fully funded. REPORT: Recommended Budget The budget presented here is a Phase 1 budget only. Phase 1 comprises the following facilities forming part of the of the Transit Center Project (TCP) Refined Locally Preferred Alternative (RLPA): (a) acquisition of private parcels for TCP right-of-way and three for DTX; (b) construction of a temporary terminal on Main Street between Folsom and Howard streets; (c) demolition of the existing Transbay Terminal and bus ramps; (d) construction of the above-grade bus facilities portion of the new Transit Center with refinements from the LPA, including a reduction in height and size of the Transit Center, reduction in height of the bus ramps connecting with I-80, expansion of adjacent sidewalks and public access, greater penetration of sunlight into the Transit Center, and increase in customer service and waiting areas in the western end of the Center; (e) construction of bus ramps and bus storage; (f) construction of foundations and other improvements to prepare for future construction of the below-grade train station facilities portion of the Program; and (g) design and engineering of the above facilities including the full below-ground rail level component of the Transit Center building (h) preliminary engineering Part 1 and 2 of the DTX. Phase 2 comprises the following facilities forming part of the TCP and the Caltrain Downtown Extension (DTX) Project RLPA: (a) engineering and design of the DTX; (b) early acquisition of private parcels necessary to protect the right-of-way for the DTX and acquisition of below-grade easements and the remaining parcels for construction of the DTX; (c) construction of the DTX to extend the rail lines from the existing Fourth and King Street Station to the new Transit Center building; (d) construction of the below- grade train station portion of the new Transit Center and the below-grade train station at Fourth and Townsend streets; and (e) upgrade to the existing Fourth and King Street Station and provision of train storage at the existing Caltrain Yard. We are working to identify funding for the construction of the train box as part of Phase 1 of the Program. The design of the full below-ground rail level is already included in the budget for Phase 1. There are four main factors influencing the staff recommendation of a Baseline Budget that is higher than the $983 million (YOE) preliminary cost estimate prepared in January 2006. They are: 1. Most significantly, the occurrence of historically high rates of construction cost escalation in the San Francisco Bay Area and national markets ($102 million (YOE)). 2. Contingency in excess of that which was included in the January 2006 preliminary cost estimate ($25 million (YOE)). 3. Re-estimation of certain specific line items based on recently developed information ($41 million (YOE)). 4. Reallocation of certain costs between Phase 1 and Phase 2 of the Program ($38 million (YOE)) for clarification purposes. Each of these cost items is discussed separately in the following sections. Construction Cost Escalation. The construction market in the San Francisco Bay Area has been very active over the last several years resulting in significant upward pressure on prices for construction material and labor. It has also had the overall effect of making bid prices less competitive. In addition to the Bay Area, national and international markets have experienced well-publicized high rates of escalation for certain commodities such as structural steel. To evaluate the magnitude of cost escalation impacts, the PMPC Consultant adjusted the direct construction cost estimates to reflect January 2007 prices. This resulted in an additional $48 million (YOE) in estimated construction cost. At the same time, real estate appraisals conducted as part of the ongoing right-of-way acquisition process indicate an escalation in property values. Additionally certain right-of-way costs have been reallocated from Phase 1 to Phase 2 to align the parcel costs with the appropriate phase of the Program. These reallocations include half of the cost of 80 Natoma, which is required for both the Transbay Transit Center and the DTX, and the cost of near-term acquisitions for DTX right-of-way preservation. These changes added a net cost of $6 million (YOE) to the estimate of acquiring properties for the Program. In addition to these direct escalation costs, we assessed the probability of future escalation at the 50% probability level. This resulted in the addition of $48 million (YOE) in escalation cost due to the possibility of schedule prolongation and bidding market pressures. The net result of these three components of additional escalation (actual construction cost escalation experienced in 2006, real estate escalation, and the possibility of future escalation) is the recommendation of an additional $102 million (YOE) to the January 2006 estimate. Additional Contingency. With any large capital design and construction program, it is prudent to conduct a detailed probability analysis to recommend the appropriate level of contingency funds to include in the Baseline Budget. Moreover, the FTA requires that such an analysis be conducted for all New Starts projects. A number of well-publicized large capital projects have experienced significant cost overruns from their original budgets at least in part because such an analysis was not conducted or because results of such analyses may not have been fully understood or accepted. PMPC subconsultant Golder Associates (Golder) conducted a formal analysis for the Program from March 2005 to September 2007. Golder is a nationally recognized expert in analyzing large design and construction programs and helping owners with setting appropriate levels of contingency to budget. Golder conducted several day-long workshops, with all key project participants as well as outside experts, to identify all possible issues with the potential to impact Phase 1 of the Program, assess their probability of occurrence, and evaluate their impact. Management strategies were also developed to determine which of the issues could be managed and which needed to be incorporated into the Program’s Baseline Budget. The result of this effort was an issue register, the content of which served as the input to a computer simulation. The computer simulation produced a curve that predicted the final Program Phase 1 cost at varying levels of probability of occurrence. The Program has chosen to use the 50% probability level for establishing a Baseline Budget. A 50% probability level means that the model predicts a 50% probability that costs will be less than the recommended budget. The use of a 50% probability level is coupled with the implementation of ongoing analyses and other cost control measures to be employed. Following the probability analysis, $25 million (YOE) was added as additional contingency, in excess of that which was mandated by the FTA, to the Baseline Budget to account for the identified issues at the 50% probability level. Scope Refinement. Three items in the previous estimate were refined due to recently developed information. The first of these is the estimated cost of relocating buried utilities to allow the construction of the new Transit Center. In conjunction with the bidding and negotiating process for the recently approved engineering consulting contract on utility relocations, a new estimate was prepared using recently compiled data showing the existing utilities to be relocated. The relocation of utilities is expensive work and complex to estimate precisely. Nevertheless, the study determined that $23 million (YOE) should be added to the January 2006 estimate for Phase 1 utility relocation. The second item is the cost of an insurance program for the Program. Based on the current cost of insurance as analyzed by the PMPC insurance consultant, the impact to the estimated cost included in the recommended Baseline Budget is $10 million (YOE). The third item is a recalculation of the estimated cost of a Construction Manager at-Risk contracting strategy, including funds for staffing a construction management function during the later stages of design and prior to the actual start of construction. Staffing this function early should minimize concerns in the construction phase.