Risk Management of Infrastructure Projects in the Development of Capital Cost Estimates

In reports from 1997 to 2005, the US Government Accountability Office (GAO) highlighted several problems with FHWA’s oversight of the federal-aid highway program, including a lack of useful project cost estimates, which it deemed as non-reliable predictors of project costs or financing needs. GAO also found that existing FHWA cost estimating guidance was voluntarily provided to states and covered only major projects.[1] Since then, the adoption of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) in 2005 and the Moving Ahead for Progress in the 21st Century Act (MAP-21) in 2012 have played a major role in improving federal oversight and setting minimum standards that state departments of Transportation (DOTs) must follow when estimating project costs and analyzing/managing project risks.

In 2006, FHWA published a ‘Guide to Risk Assessment and Allocation for Highway Construction Management’[2] to provide a concise guide to the risk assessment and allocation process in highway construction. It also drew on other infrastructure and major project areas for examples of risk management best practices.

FHWASupplementing its initial guidance, the FHWA Major Project Program Cost Estimating Guidance [3] was issued in 2007 for the preparation of a total program cost estimate for a major project. This also laid a framework for the inclusion of cost estimate reviews (CER) in the National Environmental Protection Act (NEPA) process. The CER, along with the financial plan and the project management plan, are key requirements for FHWA major projects. Alternatives to the FHWA CER process may be considered only with prior FHWA consultation and approval.

The CER process was updated in 2011[4] to improve the consistency of results by establishing a format for modelling uncertainty. The objective of the FHWA CER process is to conduct an unbiased risk-based review to verify the accuracy and reasonableness of the major project’s current cost estimate and schedule to complete. This results in the development of a probability range for the cost estimate that is representative of the project’s current level of design. The identified project cost and schedule from the CER are used in the major project financial plan and NEPA decision document. The review is often performed through a series of workshops in which FHWA, the project sponsor, and subject matter experts (working with FHWA) collaborate to reach agreement on the project’s risks. An important goal of the review is to achieve consensus on the team’s findings and recommendations and ultimately on the final estimate.

It is typical for two CERs to be conducted for major projects. The timing of the CER is critical to the NEPA process – the first CER workshop should be completed at least 90 days, but no more than one year, prior to completing the NEPA document. A preferred alternative must be identified prior to the first CER. The second CER should be completed at least 90 days, but no more than one year, prior to the initial financial plan submittal.[5]

The total estimated cost presented in the financial plan should be consistent with the results of the CER and reflect the 70th percentile costs[6]. FHWA may consider variations to the 70th percentile cost on a case-by-case basis. A detailed explanation should be provided if the 70th percentile cost is not used in the financial plan. MAP-21 requires the financial plan to include an analysis of the risk allocation associated with delivering the project through a P3 procurement. To support the preparation of this assessment, all CERs that are conducted prior to the issuance of the NEPA decision document must include a component to analyze the allocation of risk with respect to delivering the project through a P3.[7]

Federal Transit Administration (FTA)

FTA is known to have historically applied project risk management to help ensure proper utilization of its funding by stakeholders. In 1990, FTA first published the Project and Construction Management Guidelines. These guidelines aimed to promote effective project management by introducing a transit capital project development process and general project management principles. It also applied these principles to the various phases of a project’s lifecycle. In particular, the guidelines require that a risk management program be established for all major transit projects and a multi-disciplinary risk management group be organized to lead the risk identification, assessment, and mitigation throughout the life cycle of the project. The guidelines require that a risk and contingency management plan (RCMP) be included as part of the project management plan (PMP) for major capital projects. This establishes the necessary procedures to ensure the effective implementation of risk management activities. The Project and Construction Management Guidelines were subsequently updated in 1996, 2003 and 2011. The latest (2011) update incorporates renewed emphasis on cost containment through continuous risk management practices[8].

FTAIn the early 1990s, FTA commissioned a research project to help project owners or sponsors develop the framework for a risk management program. The project resulted in the issuance of the Risk Assessment in Fixed Guideway Transit System Construction report in 1994. This report serves as guidance in helping the owner identify risks that may affect project budget and schedule objectives. It classifies typical design/construction and financial risks, in addition to characterizing risks arising from the interface between design/construction and financial risks. The report also provides a very informative section on the risk assessment process carried out by the surety bond industry. It is FTA’s belief that a better understanding of the surety’s functions and procedures would benefit the agency in managing major transit projects[9].

Currently, FTA procures project management oversight contractors (PMOC) for use as extended staff for routine and specialized oversight of the design and construction of major capital transit projects throughout the states. In 2002, FTA instituted its risk assessment oversight program and subsequently published Operating Guidance 22 - Risk Assessment and Mitigation Procedures. After several updates, this became the basis for Oversight Procedure 40 - Risk and Contingency Review (issued in 2010), a component of the series of oversight procedures to instruct FTA staff as well as its PMOCs to conduct project reviews[10].

The risk assessment methodology applied by FTA and the PMOC has also transitioned from a stand-alone bottom-up risk analysis to an integrated top-down risk analysis that accesses not only technical risks but the project owner’s ability to mitigate those risks given the current project budget and schedule constraints[11].

Between 2003 and 2011, FTA completed over 40 risk assessments for the New Starts program and other major capital projects[12]. FTA addressed its evolved risk assessment practices and requirements in its Project and Construction Management Guidelines 2011 update. This document included a guide for major capital project grantees on the New Starts process, including project reviews at entry into preliminary engineering (PE), entry into final design (FD) and request for full funding grant agreement (FFGA), as well as additional updates during the construction and equipment/material procurement phases. Mirroring Oversight Procedure 40 structurally, this guide walks the grantees through the risk review process, explains the methodologies for assessing cost and schedule risks (in particular the top-down approach) and provides risk mitigation and management guidance[13].

In late 2011, recognizing the need for faster and more integrated project development and delivery, the FTA rolled out a new and streamlined risk assessment process for New Starts projects[14]. This new process allows and encourages the project sponsors to conduct more risk assessments independently. FTA will also tailor its own risk assessments to the specifics of the projects through a three-tiered system and perform more integrated oversight, as opposed to risk reviews at discrete milestones. It is expected that the revised risk assessment process will cut the New Starts project delivery timeline by as much as six months[15].

Conclusion

Federal agencies are making steady progress in identifying and managing risks for federal-aid projects. For agencies such as FHWA and FTA, the most serious delays can be attributed to the lack of understanding of the risk assessment/management process on the part of the project sponsor and incomplete or poor quality submittals.[16] The aforementioned regulations, processes, and guidance documents are intended to provide project sponsors with a more thorough understanding of the risk assessment/management process and to better equip them to participate in it. Ultimately, the goal of this guidance is to ensure that project sponsors have the tools to deliver every project on time and under budget.

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[1] FHWA Has Improved Its Risk Management Approach, but Needs to Improve Its Oversight of Project Costs (GAO-09-751) (July 2009), GAO

[2] Risk Assessment and Allocation for Highway Construction Management (October 2006), FHWA

[3] Major Project Program Cost Estimating Guidance (January 2007), FHWA;

[4] Guidance for FHWA Major Project Cost Estimate Reviews (October 2011), FHWA; Annual Summary of Major Projects – Fiscal Year 2012, FHWA

[5] FHWA Major Project Delivery Process, FHWA

[6] In a probabilistic or risk-adjusted approach to cost estimating, there is no single, deterministic cost estimate. Rather, there is a distribution of possible costs, each with an associated probability that it will not be exceeded.  Higher percentiles translate to increased confidence that the project has not been underestimated. A ‘70th percentile cost’ is predicted to not be exceeded 70% of time or, equivalently, there is a 30% chance that it underestimates final cost of the project.

[7] Interim Major Project Financial Plan Guidance (September 2012), FHWA; FHWA Financial Plan Guidance (December 2014), FHWA

[8] Project and Construction Management Guidelines (July 2011), FTA

[9] Risk Assessment in Fixed Guideway Transit System Construction (DOT-T-95-01) (January 1994), FTA University Research and Training Program

[10] Oversight Procedure 40 – Risk and Contingency Review (Rev 2) (May 2010), FTA TPM-20 Office of Engineering Project Management Oversight

[11] Notice of Proposed Rulemaking: Request for Comments, FTA 49 CFR Part 633 RIN 2132-AA92, Federal Register Vol. 76, No. 177, September 2011

[12] FTA’s Perspective on the Need for and Benefits of Risk Assessment on Major Capital Projects, ITE Conference Risk Assessment Session (August 2007), Aaron James

[13] Project and Construction Management Guidelines (Appendix G) (July 2011), FTA

[14] FTA Administrator’s Policy Letter - Risk Assessment Streamlining, FTA, September 2011

[15] Risk Assessment – An FTA Update, Presentation on 2011 Rail Conference (June 2011), Aaron James

[16] Notice of Proposed Rulemaking: Request for Comments, FTA 49 CFR Part 633 RIN 2132-AA92, Federal Register Vol. 76, No. 177, September 2011.