More Americans than ever are moving to the southeastern U.S., putting increasing strains on the region’s transportation infrastructure. Maintenance and capacity projects are moving full speed ahead, but there are warning lights flashing on the traditional construction cost estimation processes.
Caution and awareness are essential. Like a good driver, departments of transportation (DOTs) need to know where they are and what it will take to reach their destination safely. Estimations of project costs form the basis of DOT budgets and are essential for development and prioritization of work programs.
Innovative cost estimating methodologies are becoming important to improve accuracy and reduce bid variances. Agencies taking a fresh approach to the estimation road map will have better odds of selecting an optimal route.
Where We Are (and Where We’ve Been)
Keeping within budget is a basic element of project success. Up until now, the standard approach for DOTs in developing cost estimates has been to use historical pay item averages. DOTs generally have detailed records of their costs on past construction projects and have leveraged that data to forecast their costs on future projects.
This approach has worked for many years, but the convergence of several factors has led to an inescapable truth: The old way does not work reliably anymore.
Recent years have seen increased volatility in the price of the resources that go into transportation construction projects. The Federal Highway Administration’s National Highway Construction Cost Index has increased by over 50% in the last four years. Bid prices are up more than 30% over the same time frame. Supply chain challenges and inflation have made materials both harder and pricier to obtain.
All of this means that historical pay item averages are much less likely to reflect realistic costs for present and future projects. These headwinds are gusting at the same time DOTs are having to ramp up the magnitude of their transportation maintenance, expansion and improvement projects. A new approach to developing estimates is needed to account for cost uncertainty in current market conditions.
Where We’re Going
The solution is to bring a contractor’s perspective by using a bottom-up estimating method. Bottom-up estimating is time- and resource-intensive. One way to mitigate the cost and time spent producing a bottom-up estimate is to apply the Pareto principle, which generally suggests that 80% of a project cost is contained in 20% of a project’s bid items.
For a typical DOT project, bid items that drive the majority of the cost are commonly associated with bridge work, earthwork, drainage and pavement. For these major bid items, a bottom-up contractor-style estimate takes into account current market conditions and tends to yield more accurate cost estimates. The remaining bid items that have less impact on project cost are typically items that are subcontracted out on DOT projects. Even though these bid items tend to have more reliable historical data, care needs to be taken to analyze the data and remove outliers that could artificially raise or lower the cost for the project.
Given the magnitude of transportation projects required to meet the demands of the traveling public, current market conditions favor contractors, who can be more selective in pursuing opportunities. Proactive agencies, such as the Florida Department of Transportation, are now at the forefront of evolving their philosophy of cost estimates to better understand the real cost and risks involved in projects.
Shifts in the modern market have severely reduced the reliability of historical bid-based pricing to predict future outcomes on transportation projects. Taking a more proactive approach that leans into contractors’ knowledge for more accurate forecasts will smooth the road to better and more cost-effective projects that meet rising strains placed on our transportation infrastructure.
State agencies aren’t the only ones striving for more accuracy. The phased design-build delivery method enables municipalities to keep complex projects on track and on budget.