Cost Estimation Validation Process (CEVP)

Cost Estimate Validation Process (CEVP) has been developed to identify, quantitatively analyse and evaluate the risk that could impact cost and/or time during infrastructure project execution (WSDOT, 2018). CEVP is the most advanced estimating tool pursuing the risk strategy with its more comprehensive strategies proposed by the transportation community to counteract the risk factors causing cost underestimation and time delays in infrastructure construction projects (WSDOT, 2018). It is a tool especially suited to risk identification and risk analysis, the first and second phases of the risk strategy. In this section, the goals and the two central processes of the CEVP, the validation process and the risk identification process, are discussed.

According to WSDOT (2018) the main goal of CEVP is estimating ranges of project cost and time by modelling risk in the negative and positive forms of opportunities and threats, thus favouring interval probabilistic ranges over single deterministic estimates The other goal of CEVP are to establish consistency in the practice of risk-based estimations and to provide a flexible and scalable estimating tool that can be adapted depending on the size, location and complexity of the project. In CEVP, cost or time estimates are given by the base estimation (deterministic) and the risk estimation (interval probabilistic range). The base estimation is the most probable estimation that can be expected in the case of the project developing as planned. It is estimated during the validation process by eliminating contingencies from the initial estimate. The risk estimation is given by risk events, defined by their probability of occurrence, severity and their impact. It is determined and quantified during the risk identification process (WSDOT, 2012).

When CEVP was introduced in 2002, an initial negative reaction of the public turned into acceptance and gratitude for more realistic estimates: within a short period of time; both the larger estimates and the concept that ranges are a more sensible representation of estimates than single numbers were accepted by the public (Reilly et al., 2004).

The efficacious use of CEVP depends on one main condition: the project owner is interested in knowing the potential factual estimation of the project (WSDOT, 2012). This observation is tightly connected to the body of literature that identified the causes of cost escalation in inadequate estimation tools, optimism bias and economic-political interests. CEVP is an advanced tool to estimate risk in cost and time; it can address biases in the risk identification process with the help of the risk analyst, but it cannot address politically motivated cost and time underestimations that aim at obtaining approval for a project by accentuating benefits and reducing costs and times. In order to guarantee the professionalism in cost and time estimates, CEVP binds the participants to a code of ethics in ten points that cover issues such as the highest standards of practice in the industry, honest and effective communication, accountability, broad participation in the process without exercising pressure when developing estimates, consideration for public funds, and strengthening the understanding of risk and of cost/time estimation (WSDOT, 2012).

The project team and estimator specialists conduct the cost validation process, starting from an initial phase of the project to determine the base estimation. The project team briefs the estimator

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specialist on the project scope and the risks included in the project estimate. Then, successively the project scope, cost and time are reviewed. Unit costs and production rates are also reviewed; the contingencies in the unit costs and production rates are removed. Finally, an agreed upon base estimation for cost and time of the project are calculated, which is the base to which the risk estimations are added (Idrus et al., 2011).

In the process of risk identification, project team members and experts identify risks, led by an experienced risk analyst who is acquainted with uncertainty theory, debiasing techniques, and the cost and risk models (Reilly et al., 2004). The three main goals of the risk identification process of CEVP are: identify the risks; quantify the risks; and model the risk of infrastructure project cost and time.

Prior to the formal risk identification process, the participants are calibrated, trained (although briefly) on relevant risk concepts and biases. The calibration requires three points of input: a graphical display of the project plan and strategy, a preliminary list of risks and opportunities, and the base estimation from the validation processes (WSDOT, 2012).

CEVP utilises the Monte Carlo procedure to develop a probabilistic model and provide the probability distributions of project cost and time from validated base estimation and risk estimation. Such distributions are used to communicate ranges of probable cost and time to the public. The quantitative analysis, as well as the risk identification, are iterative, since some risks are mitigated or eliminated, and others arise (Idrus et al., 2011).

According to WSDOT (2012), a main advancement of CEVP compared to the other estimating tools is that it provides a range of project cost and time, which is a more sensible representation of uncertain outcomes, since no one can predict the future accurately. However, Reilly et al. (2004) considered a practical downside of CEVP cost and time ranges for planning purposes, that is, a single number estimate is needed to gain legislature endorsement, because results presented as ranges cause communication difficulties and the project appears too expensive and unrealistic if the decision-makers focus on the extreme values of the ranges.

To avoid these difficulties the WSDOT (2012) indicated the 90th _{percentile of the probability} distribution of estimated cost and time ranges for approval and legislating purposes. However, when the budget for the Dubai metro was allocated, it included a range for the construction costs of ±20% of estimated cost from CEVP (Johnson and Babu, 2018)

Other risk identification and analysis tools similar to CEVP are Highways Agency Risk Management (HARM) and the Public-Sector Comparator (PSC). In both tools, risks are first identified and prioritised, and then they are analysed with quantitative risk analysis. In particular, HARM aims at creating full-fledged risk management including, besides risk identification and analysis, also risk mitigation and risk allocation. Differently, the special feature of PSC is the capability of comparing total project cost, including the entire project life cycle (FHWA, 2005).

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The focus on the two phases of risk strategy and CEVP as the most advanced risk-based estimation tool is needed since the uncertainty model proposed in this thesis allows one to identify and analyse uncertainty in an infrastructure construction project.

2.10 SUMMARY OF THE CHAPTER

The literature presented in this chapter examined holistically the costs underestimation and time delays in infrastructure construction projects and identified various causes and proposed various solutions for these underestimations and delays.

The concept, of five risk strategy phases (risk identification, risk analysis, risk mitigation and planning, risk allocation and risk monitoring and controlling) was discussed. Three main sources of uncertainty in the construction of infrastructure projects, the variability in the construction cost and time of the infrastructure process, the correlations between construction activities costs and times; and disruptive events were identified.

Furthermore, different types of correlations in the construction of linear infrastructure projects were identified. Also, seven main factors, namely: economic, environmental, financial, legal, political, social and technical were established from literature. Lastly, the evolution and accuracy of estimation in construction were discussed and available estimation methods for assessing the impact of risk and uncertainty on cost and time of infrastructure projects were reviewed.

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CHAPTER THREE: THEORETICAL AND CONCEPTUAL FRAMEWORK

3.1 INTRODUCTION

This chapter provides an overview of the theoretical perspectives on cost and time estimation on infrastructure projects and modern portfolio theory, to highlight a knowledge gap on assessing uncertainty and to form the basis, along with reviewed literature, for developing the research conceptual framework. Furthermore, this chapter outlines the research hypotheses which were tested to answer the research objectives in Chapter Six.