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NDOT Risk Management and Risk-Based Cost Estimation

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NDOT Risk Management and Risk-Based Cost Estimation RISK MANAGEMENT AND RISK-BASED COST ESTIMATION GUIDELINES August 2021 This page is left intentionally blank NEVADA DEPARTMENT OF TRANSPORTATION RISK MANAGEMENT AND RISK-BASED COST ESTIMATION GUIDELINES The goal of this manual is to provide guidance to NDOT personnel and consultants in best practice methods of risk management and risk-based cost estimation. It is recognized that guidelines cannot provide entirely complete and practical guidance applicable to all situations and cannot replace experience and sound judgment. As such, deviations from these guidelines may, in some cases, be unavoidable or otherwise justifiable. Procedure for Guideline Revisions The guideline will be periodically revised or updated. For edits or updates, contact the Project Management Division at (775) 888-7321. All updates will be available on the Project Management Division SharePoint Portal which should be visited regularly for updated information. Responsibility: The Project Management Division is responsible for edits and updates to this document. Temporary Revisions: Temporary revisions will be issued by the Project Management Division to reflect updated/revised procedures. These will be reflected on dated errata sheet(s) posted on the Project Management Division SharePoint Portal. Scheduled Revisions: As deemed necessary by the Project Management Chief, the Project Management Chief will assemble a Review Team for reviewing the guidelines and errata sheets to determine if a revised edition of the guidelines is required. The Project Management Division Chief will evaluate and approve the recommendations of the team for revisions to the guidelines. Risk Management and Page i Risk-Based Cost Estimation Guidelines August 2021 Foreword These guidelines address the first step in NDOT project management’s vision of achieving statewide uniformity and consistency of project cost estimates and department-wide priority on estimating, managing, and controlling costs. Risk-based cost estimation and risk management involves the use of resources, including personnel that have the necessary knowledge, skills, and abilities to accurately and consistently predict costs. The future is uncertain, but what is certain is there are two questions that will be asked about our transportation projects: “How much will it cost?” and “How long will it take?” Risk-based estimates of project cost and schedule provide an alternative to traditional deterministic estimates which typically contain lump sum contingencies based on overall costs. Risk-based estimates establish project-specific contingency amounts that are based on specific risk drivers. In addition, risk-based estimates allow the project team to communicate the degree of uncertainty associated with the estimates to decision makers and stakeholders. The risk-based estimates are developed by establishing base estimates founded on clear assumptions without contingencies for unknowns, quantifying and estimating uncertainties, and quantifying specific risks (threats and opportunities). The resulting probability distributions and sensitivity analyses can be used as tools to understand, communicate, and manage risk to improve project development and delivery. Risk Management and Page ii Risk-Based Cost Estimation Guidelines August 2021 Contents Foreword .................................................................................................................................. ii Definitions of Selected Terms ................................................................................................vii Manual Organization ...............................................................................................................xii The Purpose of these Guidelines .......................................................................................... xiv 1. Risk Management ............................................................................................................. 1 1.1 Accounting for Risk in Project Cost and Schedule ....................................................... 1 1.2 Project Risk Management and Risk-Based Cost Estimation ........................................ 4 2. Cost Estimating Process .................................................................................................. 7 2.1 Introduction .................................................................................................................. 7 2.2 Determine Estimate Basis ............................................................................................ 8 2.3 Prepare Base Cost Estimate ........................................................................................ 8 2.4 Review Base Cost Estimate ......................................................................................... 9 2.5 Determine Risks .......................................................................................................... 9 2.6 Determine Estimate Communication Approach ............................................................ 9 2.7 Conduct Independent Review and Obtain Management Endorsement .......................10 3. Base Cost Estimate Methodology ..................................................................................11 3.1 Introduction .................................................................................................................11 3.2 Base Cost Estimating Techniques ..............................................................................12 3.3 Uncertainty .................................................................................................................14 4. Base Cost Estimation and Project Development Level .................................................17 4.1 Overview .....................................................................................................................17 4.2 Planning Phase ...........................................................................................................18 4.3 Environmental Phase ..................................................................................................19 4.4 Final Design Phase .....................................................................................................21 5. Important Factors Impacting Base Cost Estimation .....................................................23 5.1 Geographic Considerations .........................................................................................23 5.2 Quantity Considerations ..............................................................................................23 5.3 Scheduling/Lead Time ................................................................................................24 5.4 Difficult Construction/Site Constraints .........................................................................24 5.5 Methods of Payment ...................................................................................................24 5.6 Timing of Advertisement .............................................................................................26 5.7 Specialty Work ............................................................................................................26 5.8 Standard Items vs. Non-Standard Items .....................................................................26 5.9 First Time Used ..........................................................................................................27 5.10 Geotechnical Conditions .............................................................................................27 5.11 Permit Conditions........................................................................................................27 5.12 Market Conditions .......................................................................................................28 5.13 Other Funding Sources/Agreement Work for Others ...................................................29 Risk Management and Page iii Risk-Based Cost Estimation Guidelines August 2021 5.14 Project Delivery Methods ............................................................................................29 6. Base Cost Estimation Markups .......................................................................................31 6.1 Mobilization .................................................................................................................31 6.2 Miscellaneous Item Allowance ....................................................................................31 6.3 Preliminary Engineering ..............................................................................................32 6.4 Construction Engineering ............................................................................................32 6.5 Construction Contingency ...........................................................................................33 6.6 Escalation ...................................................................................................................33 6.7 Application of Markups ................................................................................................35 7. Documentation/Basis of Estimate ..................................................................................37 7.1 Techniques .................................................................................................................37 7.2 Basis of Estimate (BOE) .............................................................................................37 8. Project Schedule ..............................................................................................................45
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