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Civil Works Cost Engineering,” Included As Petitioner’S

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Civil Works Cost Engineering,” Included As Petitioner’S STATE OF INDIANA INDIANA UTILITY REGULATORY COMMISSION IN THE MATTER OF THE PETITION OF ) THE TOWN OF CHANDLER, INDIANA, ) FOR APPROVAL OF A NEW SCHEDULE ) OF RATES AND CHARGES FOR WATER ) UTILITY SERVICE AND FOR ) AUTHORITY TO ISSUE REVENUE ) CAUSE NO. 45062 BONDS TO PROVIDE FUNDS FOR THE ) COSTS OF THE ACQUISITION AND ) INSTALLATION OF IMPROVEMENTS ) AND EXTENSIONS TO THE ) WATERWORKS OF THE TOWN ) PETITIONER’S EXHIBIT NO. 2-R Prepared Rebuttal Testimony and Attachments of J. Christopher Kaufman Jr. Water Resources Department Manager for Beam, Longest and Neff, LLC Sponsoring Petitioner’s Attachment Nos. JCK-1R through JCK-3R 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Christopher Kaufman Jr.) Cause No. 45062: Chandler Municipal Water Works Page 1 of 9 VERIFIED REBUTTAL TESTIMONY OF CHRIS KAUFMAN 1 Q. Please state your name, employer, and business address. 2 A. My name is J. Christopher Kaufman Jr. and I am the water resources department 3 manager at Beam, Longest and Neff, LLC (“BLN”), an engineering consulting firm. My 4 business address is 8320 Craig Street, Indianapolis, Indiana 46250. 5 6 Q. Are you the same Christopher Kaufman who provided direct testimony in this Cause 7 on behalf of the Waterworks Utility of the Town of Chandler, Indiana (“Petitioner” or 8 “Chandler”)? 9 A. Yes, I am. 10 11 Q. What is the purpose of your rebuttal testimony? 12 A. The purpose of my rebuttal testimony is to respond to positions taken by the Office of 13 Utility Consumer Counselor (“OUCC”) through the testimony of witness James Parks 14 regarding Chandler’s allowances for contingencies and engineering costs in the 15 acquisition, construction, installation, and equipping of a road relocation project, line 16 replacement, an additional transmission line, and related waterworks improvements 17 (collectively, the “Project”). 18 19 Capital Improvement Projects 20 Q. Did the OUCC question the need for Chandler’s Project? Page 1 of 11 4841-1203-1856.v1 4841-1203-1856.v2 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Chris Kaufman) Town of Chandler, Indiana Page 2 of 9 1 A. No. The OUCC did not question the need for the Project, and, in fact, OUCC James 2 Parks agreed that “the three water main projects are necessary . .” Pub. Ex. 2 (Parks 3 Direct Testimony), at p. 11, lines 23-24. He also highlights Chandler’s leaking aged water 4 mains that Chandler seeks to replace in this case. Pub. Ex. 2 (Parks Direct Testimony), at 5 p. 4, lines 10-14. 6 7 Q. Excluding contingencies and engineering costs, did the OUCC question Chandler’s 8 cost components of the Project? 9 A. No. OUCC Witness Parks concluded “[t]he average unit costs per foot of water main 10 shown in Petitioner’s Detailed Project Cost Estimates are reasonable. Furthermore, 11 Petitioner’s cost estimates are detailed and appear to have identified all major cost 12 components.” Pub. Ex. No. 2 (Parks Direct Testimony), at p. 12, lines 21-22 through p. 13, 13 lines 1-2. 14 15 Q. What criticisms did Mr. Parks raise about Chandler’s Project in his testimony? 16 A. The OUCC considered Chandler’s allowances for 20% contingencies and 30% 17 engineering costs as both overestimated. Mr. Parks reduced the project contingencies to 18 10% (from 20%) and the engineering costs to 15% (from 30%). Mr. Parks also suggested 19 inspection services at no more than 5% of the estimated construction costs. 20 21 Q. Do you agree with the OUCC’s adjustment to project contingencies? If not, why? 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Chris Kaufman) Town of Chandler, Indiana Page 3 of 9 1 A. No, I do not agree with the OUCC’s adjustment to project contingencies because it fails 2 to consider (1) this Project’s early stage, (2) this Project’s size and scope, and (3) industry 3 standards. 4 5 Q. What about the Project’s early stage and size and scope contributed to contingency 6 costs? 7 A. Contingency factors are allowances included in a cost estimate to account for risks. 8 Contingency costs usually begin at 30% and are then reduced throughout design 9 development to 10% when construction bids are ready. The contingency accounts for 10 things like underground utility conflicts, rocky or problematic soil conditions, changes 11 due to updated permitting and funding requirements, easement acquisition, escalating 12 material prices, etc. For example, some contingencies relate to escalating prices of oil or a 13 company acquisition. These involve escalating prices that are more drastic than simple 14 inflation. The price for a barrel of oil directly affects the price for PVC pipe, an oil 15 byproduct. The new price per gallon of gas for the fleet has increased 28% for next year 16 over this year, and I expect the price of PVC pipe to follow suit once new prices are 17 established by the suppliers. Further, a recent acquisition of the crushed stone material 18 supplier to Chandler has resulted in a 25% increase in the cost of crushed limestone rock 19 for a current project, and we expect this to have a similar impact on utility projects in the 20 near future. Crushed stone is used in backfill in asphalt restoration and in concrete curb 21 and sidewalk – essentially every portion of our restoration in a water line replacement 22 project. 23 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Chris Kaufman) Town of Chandler, Indiana Page 4 of 9 1 Traditionally, cost contingency estimation relies heavily on expert judgment based on 2 various cost-engineering standards. For an estimate used at this early stage of project 3 development, where the design is not complete, we recommend a contingency ranging 4 from 15% to 30%. Moreover, the Project involves the addition of a large transmission line 5 over substantial territory. Taking all these factors into account, as well as the industry 6 standards addressed below, we applied a 20% contingency for Chandler’s estimated 7 construction costs. 8 9 Q. Please explain why Chandler’s contingency costs are consistent with industry 10 standards. 11 A. The contingency factor Chandler applied to the estimate is consistent with industry 12 guidelines. Both the American Association of Cost Estimators (“AACE”) and the Electric 13 Power Research Institute (“EPRI”) provide recommended ranges of contingency costs 14 when establishing a control budget, as Chandler has done here. AACE recommends 20% 15 contingency and EPRI recommends a range of 15% to 30%.1 16 17 In the Construction Management Standards of Practices, included as Petitioner’s 18 Attachment JCK-1R, the Construction Management Association of America (“CMAA”) 19 suggests a contingency of 15 to 25 percent at the budget estimate stage. 20 1 See Geoffrey Rothwell, Stanford Institute for Economic Policy Research, Cost Contingency as the Standard Deviation of the Cost Estimate for Cost Engineering, SIEPR Discussion Paper No. 04-05 (Feb. 9, 2004), available at: https://siepr.stanford.edu/sites/default/files/publications/04-05_0.pdf 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Chris Kaufman) Town of Chandler, Indiana Page 5 of 9 1 The U.S. Army Corps of Engineers provides its approach to contingency cost estimates 2 in Regulation No. 1110-2-1302, “Civil Works Cost Engineering,” included as Petitioner’s 3 Attachment JCK-2R. The Army Corps of Engineers bases its contingency costs on 4 various class stages. The basis of an estimate can range from no technical information 5 (very high cost risk and contingencies for uncertainties, considered Class 5) to complete 6 plans and specifications (very low-cost risk and lower contingencies for uncertainties, 7 Class 1). Chandler’s Project falls within the Class 4 and Class 3 stages. There remains 8 substantial lack of technical information and scope clarity for the Project resulting in 9 major estimate assumptions in technical information and quantities, heavy reliance on 10 cost engineering judgment, cost book, parametric, historical, and little specific crew- 11 based costs. For these class stages the U.S. Army Corps of Engineers recommends a 12 contingency range of 20 percent on the low end to 100% on the high end. 13 14 Chandler used these various industry guidelines from AACE, EPRI, CMAA, and the 15 U.S. Army Corps of Engineers to help determine the appropriate level of contingency 16 costs. Chandler’s estimated allowance for 20% contingency costs falls well within the 17 recommended guidelines. 18 19 Q. Do you agree with the OUCC’s adjustment to engineering costs? If not, why? 20 A. No, I do not agree with the OUCC’s adjustment to engineering costs. Chandler needs to 21 include engineering costs for construction oversight and administration to ensure the 22 Project is installed in accordance with Chandler’s intent and in general conformance to 23 the plans and specifications prepared by Chandler or its outside consultant. Chandler 4841-1203-1856.v3 Petitioner’s Exhibit No. 2-R (J. Chris Kaufman) Town of Chandler, Indiana Page 6 of 9 1 based its engineering cost estimates on historical data collected by BLN. In the case of 2 the Bell Road relocation portion of the Project, these costs are based in many situations 3 on the actual cost of service under Chandler’s current engagement with BLN. While Mr. 4 Parks may view this cost as high, it does not change the fact that this is the market price 5 Chandler is paying for the services. Mr. Parks also errors by using an average of $125 6 per hour billable charge, which is far below market pricing.
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