Monday, December 3, 2018

Why does project cost estimating seem so hard?

By Ann Briggs

If you've ever taken on a major home remodeling project, you know that one of the first steps is to get estimates for what your project will cost. "Remodeling" a highway is similar in some ways, but for our projects, we develop our own cost estimate before we ask contractors to give us their bid for the work.

Estimating isn't an exact science
What is an estimate, really? It's an educated guess using the best information we have available to us at the time. Like a home remodel, what we think the project will cost doesn't always align with what contractors bid for doing the work. We develop our estimates by looking at historical bids for similar work, as well as trends in material and labor costs and market conditions. It gives us a good basis to start from, but by looking back at the past, we aren't always able to keep up in volatile markets with rapidly rising costs or with unanticipated events, such as tariffs or work stoppages.

With these kinds of variables, we consider contractor bids that are within 10 percent above or below our engineer's estimate acceptable and we typically award the project to the lowest bidder within that range. So for example, the Interstate 5 Northbound - S. 260th Street to Duwamish River Bridge project, which replaced concrete and expansion joints on I-5 in King County, was estimated to cost $29.5 million and the contractor's bid was $30.8 million. That's just 4 percent over estimate - yet it equates to $1.28 million. We recognize that this is still a lot of money.

Things that can influence the cost of a project
Any number of elements can influence the amount a contractor bids for a project; some are within our control, others are not. These are a few of the major ones:
  • Contract Restrictions: Think about the differences in approach you'd take remodeling an empty building versus one that is occupied. We do the same for transportation projects. For us "occupied" might mean working around traffic on a busy roadway, or fish in a stream, or birds nesting on bridges and nearby trees - any of these might result in placing restrictions on when a contractor can do their work. The more restrictions there are, the less flexibility a contractor has to do the work, and often that is reflected in bid prices.
  • Time of year: Projects advertised for contractor bids early in the season (December/January) typically result in lower bid prices. During this time, contractors are just starting to schedule work for the upcoming construction season, and supplies and available work force are more plentiful. Later in the season, there is more demand for labor and materials (such as asphalt) and those prices go up. For many of our engineers, the winter season is when they are developing projects - after the summer construction season is over - so it's a matter of balancing workloads, making it difficult to meet that early season time frame.
  • Competition among owners: There's a construction boom happening in our state and when many project owners - for example, King County, City of Seattle, Sound Transit - all have projects within the same region, competition for construction contractors can drive prices up due to demand for available labor. A similar boom is occurring in the private sector as well. With so much work going on, we're getting fewer bidders on our projects because contractors are already busy. Contractors with more work than workers, might need to bring in extra crews from other regions, which drives up their costs (travel, lodging, etc.) and those costs get passed on to us.
  • Project complexity: We have several unique and complex projects that require specialized engineering skills or construction expertise - including the largest bored tunnel in North American, ferry terminal projects that require both building and marine construction expertise, and floating concrete bridges - that create estimating challenges for engineers with limited exposure and experience in these types of projects.
  • Project duration: Very large projects that span multiple years to build, might be subject to changing market conditions throughout the construction period. As a result, contractors may adjust their bids to reflect the risk and anticipated inflation.
  • Materials costs: We track materials price changes for items that are commonly used in our projects, such as hot mix asphalt (influenced by oil prices) and steel (rebar and structural steel). We also monitor the effects of tariffs on commodity prices. In volatile markets, it's not unusual for us to underestimate these commodities because the historical bid information we use lags the market.
How we measure up
Our engineers are trained professionals and they expertly design some effective and creative project solutions under challenging conditions. The chart below shows the percentage of projects that were below, within 10 percent, or above the engineer's estimate for the past three fiscal years (July 1 - June 30).



Nationally, the Federal Highway Administration sets the target for project engineer estimates within the plus or minus 10 percent range at 50 percent. We met that target in FY 2016, struggled with our accuracy in FY 2017 (for some of the reasons outlined above) and then bounced back in FY 2018.

As with any project, we understand the importance of starting out with a realistic budget. That's why we're working to continuously improve our processes by:
  • Inviting review of our processes by peers and external experts
  • Consulting with the heavy construction and engineering industry to better understand how contract restrictions affect bid prices
  • Exploring ways to attract a larger number of project bidders
  • Implementing specialized training on project-cost estimating to enhance our engineers' skills
Like a home remodel project, in transportation construction you never really know what lies hidden until you start digging below the surface. It's similar to tearing the shingles off your roof and finding the plywood is rotten below. Although some things are beyond our control, we'll continue delivering the best results we can, using all the tools that are available to us.