HD31 - Review of Construction Costs and Time Schedules for Virginia Highway Projects


Executive Summary:
The Virginia Department of Transportation annually develops a six year plan for transportation, referred to as the Virginia Transportation Development Plan, or six year plan. The current plan allocates approximately $9 billion to road construction projects over the next six years. One of the key assumptions on which the plan is based is the estimated cost of the projects for which funds are allocated. The plan is also based on the projected schedules for completion of design and advertisement of projects.

In July 2000, the Joint Legislative Audit and Review Commission (JLARC) directed staff to conduct a study of Virginia's highway construction program. Based on concerns regarding reports that road construction projects may be facing large cost overruns or have encountered delays in their completion dates, the Commission directed staff to undertake a study of VDOT's transportation development plan. The Commission specifically directed JLARC to assess the impact of these cost overruns on projects authorized pursuant to the Virginia Transportation Act (VTA). This report addresses the issues raised by the Commission directive.

Estimates of project costs prepared by VDOT staff during the design phase appear to underestimate substantially the final cost of road construction projects. In addition, final construction costs exceed, on average, the amount budgeted for contingencies by a substantial amount. Multiple factors have contributed to low cost estimates and higher than anticipated final construction costs, including: project scope expansion, lack of adjustments for inflation, and design errors and omissions. The Springfield Interchange Improvement project is a good case example of a project in which the final cost will far exceed initial project cost estimates.

Given the consistent underestimation of project costs, and construction expenditures that exceed budgeted allocations for projects, the current six year development plan may underestimate the cost of projects in the plan by $3.5 billion. As a result, funds currently allocated in the plan likely will be inadequate to pay for all of the projects. The plan may also overstate the amount of funds that will be available for road construction based on several questionable assumptions, and limited cash flow may further constrain implementation of the current plan.

Road Construction Costs Exceed Estimated Costs and Contract Amounts

Based on analysis of project cost estimate data for recently designed projects, VDOT project cost estimates prepared during the design phase were substantially below final project costs. As Table A shows, cost estimates prepared at the design stage for preliminary engineering, right of way, and construction were all substantially below the final design (100 percent design) cost estimates. Though initial cost estimates were low, they did grow closer to the final design estimate as projects progressed through the design process. The same general pattern emerged when analyzed by road system type, although primary and urban project construction cost estimates increased by significantly more than interstate and secondary project estimates.

While construction contract award amounts were relatively close to the estimated construction cost once the design had been completed, the final construction costs for projects exceeded the amount budgeted for construction by a substantial amount. As Table B shows, final construction costs added eleven percent, on average, to the contract award amount (including budgeted contingencies). Interstate and primary system projects exceeded the contract award amount by the greatest percentages (19 and 16 percent, respectively).

Final construction costs exceeded contract award amounts for two primary reasons. Part of the reason for the increase is that actual project construction costs exceeded the ten percent contingency budgeted for unforeseen contract costs. The other reason for higher than anticipated construction costs is that construction engineering (administration and inspections) costs were higher than was budgeted for this purpose.

Several Factors Explain Low Cost Estimates and Final Construction Cost Increases

Several factors appear to explain why project cost estimates are well below final design estimates. One of the factors is that cost estimates prepared during the design phase do not usually anticipate project scope expansion that often occurs as the result of local requests. In addition, prior to this year, cost estimates were based on dollar values at the time of the estimate with no adjustment for inflation. Moreover, estimates historically have not consistently included: (1) contingencies to cover unforeseen circumstances that arise in most projects, (2) amounts for incidental items, (3) and construction and construction engineering contingencies. Finally, there are inherent incentives in the system to underestimate project costs during the design phase.

Inadequate preliminary engineering appears to be one of the reasons that final construction costs exceed the budgeted amount. Many of the projects that were reviewed as part of this study had major design errors that substantially increased project costs. This report includes several case examples in Chapter II in which documented design errors by VDOT and its consultants added substantial amounts to project costs. In several other cases reviewed, construction costs increased substantially as a result of field conditions that were not discovered until construction had begun.

VDOT has recently taken measures to improve project management, including the quality of the project cost estimates prepared during the initial stages of project design. However, it will take several years for VDOT to determine whether these changes will improve the accuracy of the project estimating process. It is unlikely that recent changes have had much impact on the current six year plan, and it will be several years before VDOT can assess the impact of these changes on subsequent six year plans.

VDOT needs to review further its cost estimation process to determine if additional measures can be taken to improve the accuracy of the process. The department should develop clear standards regarding the incorporation of incidental items and contingencies in cost estimates. The department should also review the preliminary engineering process to assess whether there are adequate procedures in place to minimize design errors and whether there is an adequate investigation of existing field conditions during the design phase. VDOT needs to also examine what measures can be taken to reduce the amount by which construction costs exceed budgeted contingencies and whether additional amounts need to be budgeted for contingencies.

Current Development Plan May Underestimate Project Costs by $3.5 Billion

Although VDOT took the positive step this year of adjusting cost estimates in the six year plan for inflation, they still appear to underestimate the cost of projects by a substantial amount. Based on a conservative application of cost growth factors developed by JLARC staff to projects in the current six year development plan with more than 70 percent of their funding allocated by 2006, the plan may underestimate the cost of these projects by $3.5 billion. As Table C shows, VDOT predicts that the projects to which growth factors were applied will cost $7.9 billion to construct. In contrast, JLARC staff estimates that this same set of projects may cost $11.4 billion, or 45 percent more than currently estimated by VDOT.

JLARC staff also applied the cost growth factors to road construction projects listed in the Virginia Transportation Act (VTA) only, with more than 70 percent of their funding allocated by 2006. The plan may understate the cost of these projects by $2 billion. VDOT projects that the 257 VTA projects used in the analysis will cost $4.2 billion to construct. Applying the cost growth factors, JLARC staff estimate that these projects may cost $6.2 billion, or 47 percent more than currently estimated by VDOT (Table D.)

This finding has serious implications for highway construction in Virginia over the next few years. With projects in the six year plan possibly costing $3.5 billion more than currently estimated by VDOT, the current plan does not appear to accurately reflect the level of construction that can be realistically achieved over the next six years. As project costs rise beyond the estimates and the amounts budgeted, difficult choices will inevitably have to be made between which projects should proceed and which projects will have to be delayed until adequate funds can be allocated.

Six Year Plan Includes Questionable Assumptions and May Be Limited by Cash Flow Constraints

In addition to being based on low project cost estimates, the current plan appears to be based on questionable assumptions regarding maintenance expenditures. The amount allocated for maintenance over the six year period appears to be overly conservative and therefore may understate the amount that will be needed for highway maintenance by $201 million. Other questionable assumptions regarding dedication of funds to mass transit and amounts needed to repay bonds may further reduce the amount actually available for road construction.

Another concern regarding the six year plan is whether there will be sufficient cash flow to support the projects in the plan. The most recent VDOT cash flow analysis shows a shortfall by the end of the 2001 fiscal year in the construction portion of the Transportation Trust Fund, which may not be entirely eliminated, even with the recent appropriation of additional funds by the General Assembly. A cash flow shortfall will likely require VDOT to delay the advertisement of some projects.

Road Construction Projects Take More than Four Years to Design and Construct, But Appear to Be Completed Within a Reasonable Time Period

Analysis of projects that recently completed the design phase indicates that projects took approximately three years to design, on average, and 13 months to construct. The majority of projects (52 percent) completed the design phase in one to three years, while more than one-third (37 percent) took more than three years to finish design. Most construction contracts are extended beyond the initial project deadline as a result of shutdowns or extra work due to work orders or quantity overruns. While some projects do experience substantial time delays as demonstrated by some of the case examples in this report, it appears that projects are typically completed within a reasonable time period.

Cost of Springfield Interchange Improvement Project Has Increased by 44 Percent Since July 1999, and May Cost $667 Million

The Springfield Interchange Improvement project has not experienced significant design errors or major delays and appears to be on schedule to be completed by 2007. However, cost estimates for the project have steadily increased over the last several years. Since July 1999, the project has increased in cost by $174 million from $393 million to $567 million. Factors that have contributed to the recent cost increase include the inclusion of construction and construction engineering contingencies, increased right of way costs, and refined design estimates. Based on the cost growth factors developed by JLARC staff, the cost of the project may increase by an additional $100 million. As Table E on the next page demonstrates, most of the estimated increase will result from higher construction costs for phases IV through VII.