SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3171 words

COMMITTEE: HOUSE TRANSPORTATION AND INFRASTRUCTURE

SUBCOMMITTEE: HIGHWAYS AND TRANSIT

HEADLINE: HIGHWAYS AND TRANSIT

TESTIMONY-BY: TOM STEPHENS, P.E., DIRECTOR

AFFILIATION: NEVADA DOT

BODY:
Testimony on "Major Project Management: Solutions for Major Success"

Presented by Nevada DOT Director Tom Stephens, P.E. on behalf of the American Association of State Highway & Transportation Officials

for the United States House of Representatives Committee on House Transportation and Infrastructure Subcommittee on Highways and Transit

on May 1, 2002

Mr. Chairman and Members of the Committee, my name is Tom Stephens. For the past seven years I have been the Director of the Nevada Department of Transportation, and I am here today to testify on behalf of the American Association of State Highway and Transportation Officials (AASHTO) on project oversight issues. I also serve as the President of the 18-state Western Association of State Highway and Transportation Officials (WASHTO). Additionally, I chair the AASHTO Task Force on Project Oversight.

I want to thank you, and this Committee, for your leadership in scheduling this hearing on a subject that is of great importance to the States-- and I know of significance to the Committee and the American public. The manner in which we assure adequate project oversight is one that is of critical importance to the proper functioning of the Federal-aid Highway Program. As a State DOT Director, I believe that I can offer benefit of the experience I have gained in administering projects. Let me begin by giving you some background on my state, Nevada. We are by far the nation's fastest-growing state, having grown from less than half a million people in 1970 to two million in 2000. Nearly all of this growth has been in the urban areas, and we have successfully completed many highway projects to meet the transportation demands. The public bus systems in the two urban areas have been greatly expanded, and a monorail system is now under construction in Las Vegas. Clark County, where Las Vegas is located, has a land area larger than New Jersey. Clark County grew by 85 percent in the last decade. The transportation challenges are tremendous.

I am pleased to report that even with this dramatic growth in design and construction activity in our state, we have been able to maintain an excellent record on cost-control and project oversight. Still, we would like to do better. Recently we audited Nevada's highway construction projects completed in the last four years, and found that our change orders averaged 9 percent over the low-bid amount. We in Nevada have identified 10 areas where we feel improvements could be made to reduce change orders. I include these areas to give you some insight into the normal project level issues with some examples of solutions which could benefit all projects, including the so called "MEGAPROJECTS" which have been the subject of so much review in the past several years.

The Nevada list is as follows:

1. Project Tracking needs to be improved so we know what the level of change orders are at any given time and can flag projects for special attention during construction.

2. Design expertise has been lost in recent years, because of retirements and inadequate salary levels (for example, 77 of our 111 roadway-design positions turned over in 2000). The Nevada Legislature approved a 19 percent pay increase for our engineers effective July 1, 2001.

3. Design manuals, checklists and training need to be improved, especially in view of the inexperience of the workforce, both in- house and with new consultant personnel.

4. Construction inspection expertise has also dropped in recent years, and more oversight of new resident engineers is needed. A new section is being established in our Construction Division Headquarters to provide increased review.

5. Geotechnical considerations have caused unanticipated costs, and specifications have been changed to shift more of the risk to the contractor.

6. Unbalanced bidding by contractors has taken advantage of the "unit bid" nature of highway projects. (i.e. highway projects paid for based on the contractor's unit-price bid on each item of work for actual quantities of material provided, such as tons of asphalt, cubic yards of concrete, pounds of steel etc.) Actual quantities often vary from plan quantities, and a contractor may adjust his unit prices accordingly to take advantage of quantity overruns or under-runs. In Nevada we have set up a procedure to review all projects for unbalancing and have rejected bids for this reason. This procedure has recently withstood court challenges.

7. Increasingly complex systems such as traffic-control centers, high-tech traffic signals, and other intelligent transportation system have been a special challenge and require special attention.

8. Environmentally sensitive difficult locations, such as the Lake Tahoe Basin, always seem to have higher costs and require special attention during design as well as higher contingencies built into the cost estimates.

9. Right-of-Way issues, especially utility relocations, have caused significant delays during construction of new capacity projects. Better surveying and advance utility relocation are essential.

Let me now turn to the subject of this hearing-major project management from a national prospective, which I will refer to as project oversight. AASHTO's Task Force on Project Oversight was established to analyze issues in project oversight. Working thorough AASHTO's many committees; we share good practices among the states, develop guidance documents for the states, and formulate recommendations that can be offered as part of AASHTO's reauthorization proposals. Those reauthorization proposals will be considered at AASHTO's Annual Meeting in October, and we will develop our recommendations prior to that time.

History of Project Oversight: There has been a continuing need for project oversight since the inception of the Interstate System in 1956. The major issue that arose in that early period was fraud in the highway program. The Federal government responded by creating the Special House Subcommittee on the Federal-aid Highway Program (the Blatnick Committee), and provided the resources necessary to assure that fraud cases were addressed. AASHTO was a full partner in that effort, and AASHTO members worked to develop new tools and oversight procedures to assure that all elements of project oversight were addressed.

Specifically, AASHTO worked closely with the Federal Highway Administration to develop software known as the Bid Analysis and Management System (BAMS) which is part of a suite of project- management software products that AASHTO has developed for the states to assist in overall project management. This software can help state DOTs spot patterns in bidding that may point to fraudulent activity.

AASHTO has been a key sponsor with the U.S. Department of Transportation of the biannual National Fraud Conference, attended by representatives from virtually every state. This conference brings together national leaders in this area, as well as showcasing best practices from states on addressing fraud issues.

AASHTO has long supported assuring that there is adequate inspection of projects under construction, and has worked to assure that proper tools are available to examine project cost changes resulting from changed conditions. AASHTO has also disseminated information on best practices in project management, and continues to work with its members to share that information.

The Congress has focused on the projects that cost more than $1 billion, and now requires the development and approval of finance plans for those projects prior to the approval of funding. AASHTO is working to provide technical assistance on developing such plans, and will work with the State DOTs to assist in the development.

However, the issues that gave rise to concerns for the cost control on Megaprojects require more than finance plans. They require careful oversight by qualified personnel at the Federal and state level. They also require full disclosure of cost and scheduling information by contractors. We have learned a great deal from recent experience, and we intend to incorporate appropriate recommendations in our task force report.

Let me be more specific. We need to assure that we create an environment which makes oversight of Megaprojects a priority. That is, one that assures that we carefully consider the appropriate process for oversight of this type of project -- assigning highly qualified personnel with appropriate tools and authority to make such reviews, and assuring that they interact with project managers in a way that allows them to recognize issues as they arise. These reviews should also include financial- capacity assessments, as well as engineering reviews. It is also most important that top management be informed, on a regular basis of the status of Megaprojects and be given sufficient information to act when changes are necessary. Issues in Project Oversight: The remainder of my testimony will focus on a number of current issues in project oversight and project management. They fall under three headings: fraud protection, project cost control, and quality assurance, Fraud Protection: AASHTO and its member state DOTs are absolutely committed to eliminating fraud in the federal highway program. We are committed to working with the Federal Highway Administration, the US DOT Inspector General and the US Department of Justice in identifying and prosecuting instances of fraud. While we do not believe that costs associated with fraud are large, the instances of fraud undermine the whole program and bring into question the credibility of everyone involved. While zero tolerance is our goal, we must also be mindful of the costs of additional oversight and controls, especially if it adds significantly to project delivery time. So we will work with FHWA to achieve a balanced approach. One example is the increased attention to the Megaprojects, since the larger the project, the more opportunity for fraud. Project Cost Control: This issue involves both cost estimating and cost growth. In line with current planning requirements, cost estimates are made at the earliest stages of project development, and thus are only the most basic estimate of what costs may be. However, this early cost estimate gets a lot of publicity, as it is used to gain initial project approval. As the project progresses thorough design stages, more detail such as design alternatives and environmental considerations --becomes clearer and engineering cost estimates evolve and change. At the completion of the final design stage, plan specifications and estimates are fully developed and an "engineer's estimate" is prepared. This final "engineer's estimate" is used by FHWA to program the funding for the project. The project then goes to bid, and often addendums are issued to take care of design oversights discovered during the bid period. Then, a contract is executed based on the lowest acceptable bid. Virtually every project has change orders during construction, which usually result in a higher final project cost. A key issue in evaluating how much the project increased, in cost is the benchmark used. Do you use the pre-design planning estimate, the engineers estimate, the low bid, or some other benchmark? A major contributing factor in cost growth is time. It can take as long as 10 years for a project to make it through the planning, environmental and project-development process. This time factor will naturally lead to substantial changes in cost estimates. Streamlining the project-development process is essential to cost control. Project reviews during the pre-design and design phase need to be done concurrently, not sequentially. Also, costs are often compared to the initial estimate, creating the impression of dramatic cost swings in the project. Most of the cost growth from the early planning stages to start of construction is related to inflation and scope changes brought about by the public involvement and environmental mitigation requirements. A key issue in evaluating how much the project increased in, cost is the benchmark used. Do you use the pre-design planning estimate, the engineers estimate, the low bid, or some other benchmark? The Project Oversight Task Force is looking at ways to refine this estimating process, and will offer recommendations on how that might be accomplished. By way of example, we could much more clearly explain the estimates, and we want to work closely with FHWA to clarify the stages of project development. Construction cost control is also a critical part of project oversight and management. In that regard, AASHTO's Standing Committee on Highways--whose members are the Chief Engineers of State DOTs--conducted a survey of construction cost-growth. The survey, conducted last September, examined data from projects completed between January 2000 and May 2001. This sample included over 400 projects valued at $9.2 billion. The results showed that final cost vs. the engineer's cost estimate made prior to bids varied by an average of 3.3 percent. Further when comparing final costs to the contract bid prices, these projects experienced an average 11 percent change. This data clearly supports that conclusion that the largest share of cost variance occurs in the pre-construction phase of projects. Consequently we need to refine this part of the process to ensure the best estimates are made and understood. We are also examining the reasons for cost growth during construction and actions to take to control those costs. There is some project costs that are extremely difficult to estimate at the early stages, and may even be incurred after the end of construction. Specifically, environmental mitigation and the acquisition of right-of-way vary on a project-by-project basis and is frequently the subject of litigation, which can delay a project and add inflationary costs. Our Project Oversight Task Force will thus concentrate on design and construction costs. Quality Control: While cost is a significant factor in project management, quality control is of equal importance. Clearly, sacrificing quality simply to reduce the cost of a project is not the appropriate answer. . For the past 10 years, AASHTO has worked cooperatively with FHWA and our industry partners to help ensure that quality is our first priority in the construction of transportation projects. This has been conducted through the National Partnership for Highway Quality. Over the past decade, this partnership has advocated such items as increased public interaction and involvement, development of formal quality assurance and quality control plans (including specific methods to measure quality results), and the use of innovative approaches to add value to a given project - called Value Engineering. Down the road, these approaches lead to new design standards and construction specifications that improve the overall quality of our transportation system. Often, these new approaches and increased attention to detail increase the initial cost of a project. New approaches add benefits in the long run that can lead to decreased maintenance costs, less- frequent reconstruction, and reduced disruption to the traveling public. These long-term payoffs more than compensate for the initial increases in construction costs. We are also working with the States to increase the number of value engineering change proposals during construction. These changes suggested by the contractor result in cost savings with the saving shared with the contractor. Another area that we are turning to is the move to "performance-based" specifications for transportation projects. Instead of specifying particular construction materials and techniques, the State DOTs are experimenting with specifying the "outcomes" that a project should attain, such as certain levels of ride smoothness and the minimization of life-cycle costs. These performance-based outcomes lead to better-quality projects, but can also increase the initial project costs. State DOTs also are experimenting with quality incentives. This concept includes paying contractors to produce a higher level of quality on a project, such that the long-term benefits to the traveling public will outweigh the payment made. Incentives are also paid on certain projects for early completion of construction, which may increase the initial cost of a project, but which ultimately saves the taxpayers money by opening a facility sooner, thus reducing congestion and the time and money that is lost in traffic jams. Another major effort at quality control is AASHTO Materials Reference Lab (AMRL). The AMRL staff inspects and accredits laboratories to insure the quality of construction materials (aggregate, bituminous materials, cement & concrete). AMRL has accredited approximately 700 labs nationwide. Human Resources and Technical Resources: It is clear that the best systems are no substitute for well trained and experienced personnel. They are the linchpin of any system of project oversight. We are clearly experiencing the loss of some of our most experienced personnel to retirement and to the private sector. Personnel reductions at all levels of government contribute to this loss. I am not suggesting that we should add personnel in wholesale fashion. However, we need to assess the skills needed by our personnel to meet today's needs, and work to ensure that we appropriately add personnel who will represent the next generation of leaders in this field. To that end, AASHTO is working to promote interest in careers in the transportation field and is promoting the development of technical training to ensure we have the appropriate skills to meet the complex needs of today and tomorrow. Our personnel also need modern systems for project management. Many of our systems that were state-of-the- art have been overtaken by the extraordinary advances in technology. We need to help to provide the financial resources to upgrade these systems and to train personnel in their effective use. AASHTO supports increased resources authorized for training and development of project management tools, such as BAMS. Conclusions In conclusion, I would like to state that AASHTO and its members have always placed a premium on assuring that projects receive appropriate oversight and that our techniques and systems for estimating costs are well-maintained and updated. We have experienced an evolution in the project-management process, and we plan to utilize the wealth of experience we have gained over the years to assure an effective process. This will include the dissemination of best practices, the refinement and updating of software products used for project management and fraud detection, and to assure that well-trained personnel are in place to carry out our responsibilities. The Federal-aid Highway Program has been a major success and we look forward to assuring its continued growth and success in the future.



LOAD-DATE: May 6, 2002