oversight

Transportation Infrastructure: Managing the Costs of Large-Dollar Highway Projects

Published by the Government Accountability Office on 1997-02-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Subcommittee
                 on Government Management,
                 Restructuring, and the District of
                 Columbia, Committee on Governmental
                 Affairs, U.S. Senate
February 1997
                 TRANSPORTATION
                 INFRASTRUCTURE
                 Managing the Costs of
                 Large-Dollar Highway
                 Projects




GAO/RCED-97-47
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-270823

      February 27,1997

      The Honorable Sam Brownback
      Chairman, Subcommittee on
        Government Management, Restructuring,
        and the District of Columbia
      Committee on Governmental Affairs
      United States Senate

      Dear Mr. Chairman:

      In reponse to the request of the former Chairman of the Subcommittee, this report addresses
      the Federal Highway Administration’s oversight of large-dollar highway projects.

      As agreed with your office, unless you publicly announce its contents earlier, we plan no further
      distribution of this report until 30 days from the date of this letter. At that time, we will send
      copies to the Secretary of Transportation; the Administrator, Federal Highway Administration;
      and other interested parties. We will also make copies available to others upon request.

      If you have any questions concerning this report, please contact me at (202)512-2834.

      Sincerely yours,




      John H. Anderson, Jr.
      Director, Transportation Issues
Executive Summary


             Each year, the federal government distributes nearly $20 billion to the
Purpose      states for the construction and repair of the nation’s highways. To meet
             the nation’s transportation needs, states are planning or building
             large-dollar projects to both replace aging infrastructure and build new
             capacity. These large-dollar projects represent a substantial investment of
             federal and state funds. Moreover, because the Department of
             Transportation projects a $16 billion annual shortfall in funding from what
             is needed just to maintain the condition and performance of the nation’s
             highways at the 1993 level, it is essential that highway projects be well
             managed to ensure that costs are accurately estimated and controlled and
             that federal and state funds are efficiently used.

             Concerned about reports of increases in the costs of ongoing large-dollar
             highway projects, the former Chairman, Subcommittee on Oversight of
             Government Management and the District of Columbia, Senate Committee
             on Governmental Affairs, asked GAO to assess the effectiveness of the
             Federal Highway Administration’s (FHWA) oversight of the costs of
             large-dollar highway and bridge projects. The Subcommittee defined
             large-dollar projects as those projects with a total estimated cost of over
             $100 million. In particular, the Subcommittee asked GAO to (1) determine if
             large-dollar highway projects experience cost growth, (2) identify how
             FHWA approves large-dollar highway projects and agrees to their costs, and
             (3) identify how FHWA ensures that project costs are controlled and that
             federal funds are efficiently used. GAO also presents information on
             practices to manage the costs of projects that are being used in some of
             the six states that GAO visited and, because of the upcoming
             reauthorization of highway programs in 1997, observations on the federal
             role for managing the costs of large-dollar projects.


             Because FHWA does not maintain a national database that would provide
Background   the total number of active federal-aid projects with a total estimated cost
             of over $100 million, GAO reviewed environmental impact statements that
             had been filed with the Environmental Protection Agency between 1988
             and 1993 to identify 30 active projects that were receiving federal funds.
             These projects were estimated initially to cost between $101 and
             $695 million and were in various stages of development.

             A highway or bridge construction or repair project has four stages:
             (1) planning, (2) environmental review, (3) design and property
             acquisition, and (4) construction. After an initial cost estimate is
             developed for the overall project in connection with the environmental



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                   Executive Summary




                   review stage, a large-dollar project is usually divided into smaller, more
                   manageable, segments for design and construction. The federal
                   government generally provides funds for 80 percent of the total costs of a
                   federal-aid project. While states are responsible for planning, selecting,
                   designing, and constructing the project, FHWA is responsible for ensuring
                   that applicable federal laws and regulations are met and for approving the
                   expenditure of federal funds.

                   The extent of direct oversight by FHWA for a project depends on its cost,
                   location, and type of work. Generally, FHWA has “full” oversight
                   responsibility for new construction or reconstruction (replacing rather
                   than rehabilitating a road) projects on the National Highway System with
                   an estimated cost of $1 million or more.1 This oversight includes approving
                   design and construction specifications, periodically inspecting
                   construction sites, and formally accepting completed projects. States have
                   the authority to exempt other projects from this type of oversight. FHWA
                   oversees and administers funding for federally aided projects through its
                   52 division offices, located in each state, the District of Columbia, and
                   Puerto Rico.


                   Cost growth has occurred on many of the large-dollar highway projects
Results in Brief   that GAO examined. However, the amount of and reasons for increases
                   beyond the initial cost estimates on large-dollar highway projects cannot
                   be determined because data to track this information over the life of
                   projects are not readily available from FHWA or state highway departments.
                   GAO developed limited data showing that as of August 1996, costs on 23 of
                   30 ongoing projects initially estimated to cost over $100 million had
                   increased from their initial estimates, while estimates on 7 projects had
                   decreased or had remained the same. However, determining if some
                   portion of the cost increases on those projects GAO reviewed could have
                   been minimized is difficult because of the lack of reliable data.

                   FHWA’s project approval process consists of a series of incremental actions
                   that occur over the period of years required to plan, design, and build a
                   project. FHWA approves the estimated cost of a large-dollar project in
                   segments when those project segments are ready for construction, rather
                   than agreeing to the total cost of the project from the outset. By the time
                   FHWA approves the cost of a large-dollar project, a public investment


                   1
                    Designated in 1995, the 160,000 mile National Highway System, consists of the Interstate Highway
                   System and other principal arterial routes that serve major population centers, international border
                   crossings, national defense requirements, and interstate and interregional travel needs. Other
                   highways and roads make up the 4 million miles of roads in the United States.



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                            Executive Summary




                            decision may have effectively been made because substantial funds will
                            already have been spent on designing the project and acquiring property,
                            and much of the increases in the project’s estimated costs will have
                            already occurred. While many factors can cause costs to increase, GAO
                            found several factors that worked together to increase costs beyond the
                            initial estimates for projects in the six states visited: (1) initial estimates
                            are preliminary and not designed to be reliable predictors of a project’s
                            cost, (2) initial estimates are modified to reflect more detailed plans and
                            specifications as a project is designed, and (3) a project’s costs are
                            affected by, among other things, inflation and changes in scope to
                            accommodate economic development that occurs over time as a project is
                            designed and built.

                            Cost containment is not an explicit statutory or regulatory goal of FHWA’s
                            “full” oversight. As such, FHWA has done little to ensure cost containment is
                            an integral part of the states’ project management. FHWA influences the
                            cost-effectiveness of projects by its review and approval of design and
                            construction plans and through daily interaction with state departments of
                            transportation. Some states GAO visited have initiated project management
                            practices that focus on cost containment. These practices include
                            preparing, early in a project, estimates that better represent what the
                            project’s total cost might be, establishing goals for project cost
                            performance, and tracking progress against these goals. However, FHWA
                            has not been proactive in working with states to evaluate these practices
                            and disseminate information on them to help other states enhance their
                            cost management practices. Moreover, because of the reauthorization of
                            highway programs in 1997, the debate has already begun on the
                            appropriate federal role in funding and overseeing federal-aid highway
                            projects, particularly those that receive substantial federal funds.



Principal Findings

Cost Growth Has Occurred    FHWA does not track the cost performance of large-dollar projects because
on Large-Dollar Projects;   its information system for highway projects is designed to record funds
but Data Are Limited        obligated for segments of federally funded projects, rather than to capture
                            complete project-related estimates and costs. In addition, although some
                            states have systems that can potentially be used to track cost estimates
                            and reasons for cost increases over the life of a project, FHWA and state




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                           Executive Summary




                           officials told GAO that states do not maintain this information, and none of
                           the states that GAO contacted did so.

                           Because data were not available, to obtain an indication of the extent of
                           large-dollar projects’ cost growth, GAO identified 30 active projects
                           receiving federal funds whose total costs were estimated to exceed
                           $100 million. GAO developed data showing that 23 of the 30 projects had
                           costs that increased beyond the initial estimates. These increases ranged
                           from 2 to 211 percent, with about half of the projects’ costs increasing by
                           more than 25 percent. Cost estimates on the remaining seven projects
                           either decreased or remained the same.


FHWA Approval Process Is   When FHWA agrees to the estimated cost of a project segment, a substantial
Incremental                investment of federal funds to design and acquire property for that
                           segment may have already occurred. For example, $1.3 billion, or about 13
                           percent, of the estimated $10.4 billion cost of the Central Artery/Tunnel
                           project in Boston, Massachusetts, is for the design and property
                           acquisition stages of the project. Property acquisition can also
                           substantially affect the public. One new construction project, I-105 in
                           California, displaced 18,200 people before construction could begin.

                           In addition, most of the cost growth that occurs on a project happens
                           before construction begins. For example, costs on the nearly complete
                           I-595 project in Maryland have increased by over $200 million from the
                           initial cost estimate—from about $188 million to about $390 million. State
                           officials provided data showing that about $160 million of that $200 million
                           increase—around 80 percent—occurred before the construction stage.
                           One reason for cost increases is that while initial cost estimates are
                           developed in connection with the environmental review stage, a complete
                           estimate of the total costs of a project is not an objective of the
                           environmental review. Rather, estimates developed at this stage are
                           limited and are not intended to be reliable predictors of a project’s total
                           cost or financing needs. They are based on a “rough footprint” that
                           identifies the type of highway or bridge and the number of lanes and
                           interchanges and are rough estimates based on historic per-mile costs and
                           square footage costs for that state. Also, costs increase during the design
                           process as preliminary design concepts are refined into detailed plans and
                           specifications. For example, detailed soil investigations and environmental
                           testing can reveal engineering or other problems that were not known
                           earlier and that can substantially increase costs. Furthermore, because a
                           large construction project takes several years to progress through the



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                             Executive Summary




                             environmental and design stages to construction, its costs can increase as
                             changes occur to address, among other things, increased economic
                             development and environmental or other new laws. Projects may also be
                             “stretched out” to accommodate federal and state funding cycles, thus
                             increasing costs if for no other reason than the effects of inflation.


FHWA’s Oversight of          The primary goal of FHWA’s oversight is to ensure that federal-aid highway
Large-Dollar Projects Does   projects managed by state departments of transportation meet applicable
Not Focus on Cost            federal safety and quality standards. In this capacity, FHWA influences the
                             cost-effectiveness of projects and can increase or decrease project costs.
Containment                  For example, in Arkansas, FHWA’s suggestion that the state use smaller
                             drainage structures on the U.S. 71 new construction project reduced the
                             project costs by about $2.6 million. Conversely, FHWA’s request that
                             Massachusetts upgrade the design for tunnel reconstruction on one
                             segment of the Central Artery/Tunnel project to meet interstate speed and
                             safety design standards added $46 million to the project’s costs.

                             With no statutory requirement to focus on project costs, FHWA has
                             generally not established requirements nor encouraged states to put
                             management procedures or mechanisms in place to contain costs. In 1995,
                             however, the Secretary of Transportation announced that, for any project
                             estimated to cost over $1 billion, state highway departments would be
                             required to develop a finance plan describing the total cost of that project
                             and the sources of funding over the life of the project. Such a plan helps to
                             focus attention on project costs so that decisions can be made to reduce
                             costs or to obtain additional financing if costs increase. To date, the
                             requirement has applied only to the Central Artery/Tunnel project in
                             Boston, Massachusetts, and to the reconstruction of Interstate 15 in Salt
                             Lake City, Utah. GAO is currently reviewing the most recent Central
                             Artery/Tunnel project finance plan to determine how funding shortages
                             will be addressed. A finance plan has not been completed for the I-15
                             project in Utah.

                             GAO found several positive practices that states had initiated to focus more
                             specifically on containing project costs. These practices included
                             improving the quality of initial cost estimates, establishing cost
                             performance goals and strategies, and using external review boards to
                             approve cost increases. Although it disseminates information to state
                             departments of transportation on a wide variety of technical and research
                             topics, GAO found that FHWA does not evaluate and disseminate among all
                             the states information on their best cost management practices. Being



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                          Executive Summary




                          more proactive in this regard could provide states with strategies that
                          could contain project costs and promote more cost-effective project
                          management.

                          Moreover, while specific cost management practices will certainly not
                          preclude all increases in project costs, they could help foster a culture that
                          emphasizes cost containment without impinging on safety or quality. They
                          could also give states an early warning of the need to develop cost control
                          or financing solutions before problems occur. For example, while GAO is
                          currently assessing the progress made by the Central Artery/Tunnel
                          project to achieve its cost containment goals, the project’s most recent
                          finance plan stated that managing the project to cost performance goals
                          has allowed the project to emphasize cost control on a day-to-day basis,
                          control proposed changes, and identify potential cost increases early.


Observations on the       As reauthorization of highway programs approaches in 1997, debate has
Federal Role in Project   already begun about the federal role in funding and overseeing highway
Cost Management           projects. Some argue that the federal role should be reduced by returning
                          the majority of revenues from federal gas taxes back to the states, which
                          would give states more flexibility in using these revenues and reduce the
                          cost and time involved in complying with federal requirements. Others
                          believe that continuing the existing federal role is appropriate to ensure
                          that the national objective of preserving our interconnected highways is
                          accomplished.

                          Ultimately, the Congress and the administration will decide on the most
                          appropriate federal role in large-dollar highway projects. Cost
                          management of these projects is just one part of the federal government’s
                          role. If appropriate, expanding that part could take the form of requiring
                          the states to enhance their cost management practices by using some of
                          the same strategies some states already use, such as establishing baseline
                          cost estimates as well as goals and strategies for cost performance. Such
                          strategies have the potential to promote more effective and efficient use of
                          limited federal and state highway dollars and control the cost growth that
                          could adversely impact the funding available for other projects. A more
                          active role for FHWA in overseeing state management of project costs is
                          another scenario. FHWA’s involvement could help to ensure the
                          reasonableness of cost estimates and financing plans as well as the
                          progress in meeting cost performance goals.




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                  Executive Summary




                  GAO  recommends that the Secretary of Transportation direct the
Recommendation    Administrator, FHWA, to work with the states to evaluate information on
                  the best state practices concerning cost management and to disseminate
                  this information to all states to enhance their ability to manage costs on
                  large-dollar highway projects.


                  We provided copies of a draft of this report to DOT and FHWA for their
Agency Comments   review and comment. FHWA officials who reviewed the draft, including the
                  Associate Administrator for Program Development, generally concurred
                  with the information contained in the report and agreed with the
                  recommendation




                  Page 8                      GAO/RCED-97-47 Managing the Costs of Highway Projects
Page 9   GAO/RCED-97-47 Managing the Costs of Highway Projects
Contents



Executive Summary                                                                                     2


Chapter 1                                                                                            12
                        The Focus of the Federal-Aid Highway Program Has Changed                     12
Introduction            How to Build a Federal-Aid Highway                                           14
                        Objectives, Scope, and Methodology                                           16

Chapter 2                                                                                            18
                        Data on Large-Dollar Projects Are Not Readily Available                      18
Data to Track Cost      Many Large-Dollar Highway Projects Experience Cost Growth                    19
Growth Not Readily      Some State Systems Could Capture Cost Performance Data                       22
Available, but Costs
Grew for Many of the
Projects for Which We
Collected Data
Chapter 3                                                                                            23
                        FHWA Approval Process Is Incremental                                         23
FHWA Approves           Substantial Federal Investments Can Occur Before Construction                25
Projects                Most Cost Growth Occurs Before Construction                                  26
Incrementally and
Agrees to Costs at
Construction
Chapter 4                                                                                            30
                        FHWA’s Primary Oversight Emphasis Is Safety and Quality                      30
Controlling Costs Is    FHWA Has Few Formal Project Cost Management Requirements                     31
Not a Focus of FHWA     Some State Management Practices Focus on Cost, but Best                      33
                          Practices Are Not Being Shared
Oversight               Conclusions and Recommendation                                               36
                        Agency Comments                                                              37

Chapter 5                                                                                            38

Observations
Appendixes              Appendix I: Oversight of Federal-Aid Highway Projects                        40
                        Appendix II: Major Contributors to This Report                               44




                        Page 10                    GAO/RCED-97-47 Managing the Costs of Highway Projects
         Contents




Table    Table I.1: States’ Use of Full Oversight, Exemption, and                      42
           Certification Acceptance Provisions

Figure   Figure 2.1: Cost Increases on Projects Over $100 million, 1988-93             21




         Abbreviations

         AASHTO     American Association of State and Highway Transportation
                         Officials
         DOT        Department of Transportation
         EIS        environmental impact statement
         FHWA       Federal Highway Administration
         FMIS       Fiscal Management Information System
         GAO        General Accounting Office
         ISTEA      Intermodal Surface Transportation Efficiency Act
         NHS        National Highway System
         NEPA       National Environmental Policy Act
         OMB        Office of Management and Budget
         PS&E       plans, specifications, and estimates
         STIP       Statewide Transportation Improvement Program


         Page 11                     GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 1

Introduction


                      Under the federal-aid highway program, billions of dollars are distributed
                      annually to the states for construction and repair of highways, bridges, and
                      other activities. Federal funding is channeled through federal-aid
                      projects—a state enters into a project agreement with the federal
                      government for the planning, design, or construction stages of a highway
                      project. In these agreements, the federal government agrees to pay for a
                      portion of the project as specified in law—usually 80 percent—while the
                      state agrees to provide the remaining needed funds and to undertake the
                      project in accordance with applicable federal laws, regulations, and
                      standards. The Federal Highway Administration (FHWA) oversees the
                      state’s management of these projects and administers funding through its
                      52 division offices located in each state, the District of Columbia, and
                      Puerto Rico.


                      From 1956 until the early 1990s, the focus of the federal-aid highway
The Focus of the      program was construction of the 44,000 mile Interstate Highway
Federal-Aid Highway   System—now a component of the National Highway System.2 The
Program Has Changed   Interstate Highway System was built on a “cost-to-complete”
                      basis—projects received federal funding annually through the Interstate
                      Construction Program based on the estimated costs of building the
                      specific projects needed to complete the Interstate System. State highway
                      departments were required to build the system in accordance with
                      federally-endorsed design and construction standards. FHWA exercised
                      “full” project oversight over interstate construction projects, approving
                      design and construction specifications, periodically inspecting
                      construction sites, and formally accepting the final product.

                      The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)
                      brought about major changes to the federal-aid highway program. The
                      Congress acknowledged that the Interstate Highway System was nearly
                      complete and authorized final funding for the Interstate Construction
                      Program which was distributed in fiscal year 1995. Consequently, because
                      this category of project-specific funding is no longer available, most
                      projects receiving federal aid compete within a state for other categories
                      of federal funding that are provided by formula annually to each state.

                      ISTEAalso changed the nature of federal oversight. Prior to ISTEA, FHWA had
                      begun to move away from “full” oversight, which focused on specific
                      projects, to oversight of each state’s ability to manage and oversee

                      2
                       Designated in 1995, the 160,000 mile National Highway System consists of the Interstate Highway
                      System and other principal arterial routes that serve major population centers, international border
                      crossings, national defense requirements, and interstate and interregional travel needs.



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                            Chapter 1
                            Introduction




                            construction projects. ISTEA devolved even greater authority to the states
                            by allowing a large number of projects to be exempted from “full” FHWA
                            oversight. As a result, generally new construction projects or
                            reconstruction projects—removing and replacing the roadway instead of
                            rehabilitating existing pavement—on the National Highway System with
                            an estimated cost of $1 million or more require “full” FHWA oversight.3
                            Appendix I describes in greater detail the legal requirements and states’
                            choices concerning federal oversight of highway projects.

                            Within the “full” oversight category, FHWA realized the need to be more
                            involved on very costly projects. As a result, the Secretary of
                            Transportation announced in February 1995 that FHWA would require
                            states with federally assisted projects estimated to cost over $1 billion to
                            submit a finance plan to FHWA describing the costs of the project and how
                            it would be financed. At that time Massachusetts was the only state
                            required to submit a finance plan, for the Central Artery/Tunnel project.
                            FHWA is now requiring a finance plan from Utah for the reconstruction of
                            Interstate 15 in Salt Lake City. However, as of December 1996, FHWA had
                            not provided guidance to the states on what stage of a project a finance
                            plan is required or the factors that should be included in the plan.


A Continued Need Exists     Although the Interstate Highway System is substantially complete, states
for Large-Dollar Projects   continue to plan large-dollar projects to meet highway reconstruction and
                            new capacity needs. Some of these projects can involve substantial federal
                            and state funds. For example, between 1988 and 1993, the states filed 38
                            draft environmental impact statements with the Environmental Protection
                            Agency for projects estimated to cost more than $100 million. As of 1994,
                            over 24 percent of bridges on the Interstate System were structurally or
                            functionally deficient, meaning they required significant maintenance or
                            were not sufficiently wide or high enough to serve the current traffic
                            demand. Reconstruction or replacement can be expensive—for example, a
                            project to replace the Woodrow Wilson Bridge and adjacent interchanges
                            on Interstate 95 near Washington, D.C., is estimated to cost around $1.5
                            billion.4


                            3
                             A preexisting provision of law—certification acceptance—allows states to avoid full review of
                            projects not on the Interstate Highway System by a certification by the state if FHWA finds that
                            projects being carried out under state laws, regulations, directives, and standards will accomplish the
                            policies and objectives of federal law.
                            4
                             Because the Woodrow Wilson Bridge is a federally owned bridge, it will be managed differently than a
                            conventional highway project that receives federal aid. However, it illustrates the potential costs for
                            future projects to replace bridges. The estimated cost of replacing the bridge alone, without any of the
                            work on the interchanges, is over $400 million.



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                      Chapter 1
                      Introduction




                      FHWA estimates that around 35 percent or 15,000 miles of the nation’s
                      40-year old Interstate Highway System is in poor or mediocre condition
                      and will require reconstruction immediately or within the next 5 years. In
                      Utah, reconstructing and widening of Interstate 15 is estimated to cost
                      more than $1 billion. In addition, many states and regions are planning
                      new capacity. For example, in passing ISTEA in 1991, the Congress found
                      that many regions of the nation were not adequately served by the
                      Interstate System or comparable highways and identified 21 high-priority
                      corridors to be developed on the National Highway System to help meet
                      the demands for increased capacity. Also, some states continue to sponsor
                      ambitious infrastructure development programs. For example, Arkansas is
                      constructing U.S. Route 71 throughout the state; the next phase—from
                      Texarkana to Fort Smith—is now estimated to cost $1.4 billion. Most of
                      these large-dollar projects are new construction or major reconstructions
                      of highways on the National Highway System and will fall under “full”
                      FHWA oversight.



                      Applying for and receiving federal reimbursement designates a project as
How to Build a        federal-aid. A state has wide latitude in defining a project throughout the
Federal-Aid Highway   four stages of project development—planning, environmental review,
                      design and property acquisition, and construction. Once planning and
                      environmental review are completed, large-dollar projects are frequently
                      divided into smaller, more manageable segments for design and
                      construction. For example, if a state is building a 20-mile highway, it may
                      apply for federal funds for the planning and environmental review for the
                      entire 20 miles as one federal-aid project, while breaking the project into
                      four 5-mile segments for the design and construction stages. In this report,
                      “project” is used to refer to an entire project, while “segment” refers to a
                      portion of that project.

                      FHWA has a role throughout the four stages of the project development
                      process; this role ranges from approving a state’s long-range
                      transportation plan to approving a change to a specific construction
                      contract. Chapter 3 provides the details about FHWA’s role for each of the
                      stages.


Planning Stage        Each state is required through ISTEA and earlier authorizing legislation to
                      prepare both a statewide long-range transportation plan and a short-range
                      statewide transportation improvement program (STIP). The long-range plan
                      identifies the state’s transportation needs and proposed projects for at



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                       Chapter 1
                       Introduction




                       least the next 20 years, but may not identify specific projects. For
                       example, while the plan may discuss a highway corridor that is likely to
                       become heavily congested within the next 15 years, it may not identify a
                       specific solution. In contrast, the STIP covers a shorter timeframe—usually
                       3 years—and describes specific projects or project segments, including the
                       scope and estimated costs. FHWA requires the states to identify sources of
                       financing that will adequately fund both the statewide transportation plan
                       and the STIP.

                       Since October 1993, FHWA and the Federal Transit Administration have
                       jointly implemented a new planning tool—the major investment study—to
                       assist state and local transportation decision makers as ISTEA shifted more
                       of the transportation planning and decision making to the state and local
                       level. The major investment study is used where states are considering
                       high-cost and high-impact transportation alternatives. State and local
                       transportation officials use this tool to evaluate multi-modal alternatives to
                       a transportation problem and provide the necessary information to further
                       define specific projects or segments that need to be included in the STIP.
                       This process can occur prior to or in conjunction with the environmental
                       review process.


Environmental Review   Before detailed plans and designs for a proposed highway can be
Stage                  developed, the state’s highway agency must first identify and assess the
                       environmental consequences of alternative proposals and make this
                       information available to public officials and citizens, as required by the
                       National Environmental Policy Act (NEPA) of 1969. For projects that will
                       significantly affect the environment, NEPA requires the preparation of an
                       environmental impact statement (EIS), which, among other things,
                       identifies project alternatives and the environmental mitigation efforts
                       required for each alternative and allows an opportunity for public
                       comments. Before the project can proceed to the design and property
                       acquisition stage, FHWA must approve the EIS and issue a record of decision
                       that, among other things, describes the preferred alternative and why it
                       was chosen.


Design and Property    After the preferred alternative is selected, a large-dollar project is
Acquisition Stage      generally broken into multiple segments. Engineers then prepare design
                       plans and specifications for each segment, including such features as type
                       and thickness of pavement, the width of shoulders, and the placement of
                       noise walls. These plans and specifications include a listing of necessary



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                     Chapter 1
                     Introduction




                     materials and construction methods and are prepared in sufficient detail
                     to allow a contractor to construct the project. The specifications are also
                     used to develop a project segment cost estimate precise enough to predict
                     federal and state financial obligations and to effectively review and
                     compare construction bids received.


Construction Stage   After completing the design stage, the state advertises for bids to construct
                     that segment of the project. Once the state has received bids from
                     construction contractors, it awards the construction contract, usually to
                     the lowest responsive bidder. After the contract is awarded, any changes
                     that require changing the scope of the original contract or significantly
                     increasing costs are usually documented in a change order.


                     Concerned about increases in costs of ongoing large-dollar highway
Objectives, Scope,   projects, the former Chairman of the Senate Subcommittee on Oversight
and Methodology      of Government Management and the District of Columbia, Committee on
                     Governmental Affairs, asked us to examine cost growth on large-dollar
                     projects and the federal government’s oversight of them. Specifically, we
                     were asked to (1) determine if large-dollar highway projects experience
                     cost growth, (2) identify how FHWA approves large-dollar highway projects
                     and agrees to the costs, and (3) identify how FHWA ensures that project
                     costs are controlled and that federal funds are efficiently used.

                     To determine if large-dollar projects experience cost growth, we examined
                     data prepared in 1995 by FHWA at the request of the Senate Subcommittee
                     on Oversight of Government Management and the District of Columbia,
                     Committee on Governmental Affairs on the cost performance of 20
                     ongoing highway construction projects in 17 states. Estimated total costs
                     for these projects ranged between $205 million and $2.6 billion per project.
                     FHWA identified these projects as those with the largest cost increases from
                     the initial cost estimate for the total project.

                     Because FHWA had specifically chosen the 20 projects that had experienced
                     a large percentage of cost growth, we wanted to examine a universe of
                     large-dollar projects where we did not know whether their costs had
                     increased. Therefore, we examined cost growth on 38 additional projects
                     that had an environmental impact statement filed between January 1, 1988
                     and October 1, 1993 and had an initial cost estimate of more than
                     $100 million. For these 38 projects located in 19 states, we surveyed FHWA
                     officials to determine the current cost estimates for the individual



                     Page 16                     GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 1
Introduction




projects, eliminated 8 projects either because the project had not been
undertaken or was undertaken without using federal funds, and
determined how much costs had grown since the initial estimate on the
remaining 30 projects in 15 states.

We obtained information on the reasons for cost growth from FHWA and
from state departments of transportation on seven projects. Five of these
projects were on the list of 20 projects that FHWA had provided information
on to the Senate Subcommittee on Oversight of Government Management
and the District of Columbia. These projects were U.S. 71 in Arkansas,
I-105 in California, I-595 in Maryland, M-59 in Michigan, and U.S. 183 in
Texas. In addition, we examined the I-90/I-93 Central Artery/Tunnel
project in Massachusetts and the I-880 Cypress Viaduct reconstruction
project in California. We selected these projects to provide geographic
diversity and to include a mix of large-dollar new construction and
reconstruction projects at various stages of completion. To obtain
information about information systems at state highway departments for
tracking the projects’ costs, we discussed state practices with state
transportation officials in the six states we visited and in Colorado,
Indiana, Iowa, Maine, Minnesota, Nebraska, Oregon—states identified as
having advanced project information systems.

To identify how FHWA approves large-dollar projects and agrees to costs
and to identify how FHWA ensures that the costs of projects are controlled
and that federal funds are efficiently used, we reviewed federal laws and
regulations and interviewed FHWA officials in Washington, D.C., and the six
states visited. We also reviewed project documentation at FHWA and the
states we visited as well as their regulations and procedures. We discussed
the states’ project development process and FHWA’s role with state
transportation officials. We also interviewed FHWA and state transportation
officials about federal and state initiatives to contain costs and help ensure
efficient use of highway funds and discussed dissemination of state
practices to other states and FHWA offices.

We performed our work from May 1996 through December 1996 in
accordance with generally accepted government auditing standards.




Page 17                      GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 2

Data to Track Cost Growth Not Readily
Available, but Costs Grew for Many of the
Projects for Which We Collected Data
                       The amount of and reasons for cost increases beyond the initial cost
                       estimates for large-dollar highway projects cannot be determined because
                       data to track this information over the life of a project are not readily
                       available from FHWA or state highway departments. FHWA’s information
                       system for highway projects records funds obligated for segments of
                       projects that are federally funded rather than recording complete
                       project-related costs and estimates; it also does not document the reasons
                       for cost growth. Furthermore, FHWA officials said states do not track cost
                       increases from the initial estimate or determine the reasons for these
                       increases as part of normal project management; this was supported by
                       highway officials in 13 states. However, limited data shows that cost
                       growth has occurred on many of the large-dollar projects for which we
                       collected data.


                       FHWA’s information system for highway projects—the Fiscal Management
Data on Large-Dollar   Information System (FMIS)—cannot be used to determine the amount of
Projects Are Not       and reasons for cost increases on large-dollar highway projects. FMIS
Readily Available      records the obligation and subsequent expenditure of federal funds for
                       specific project segments rather than recording total cost estimates or
                       tracking total project costs over the life of a project. This way of recording
                       obligations allows FMIS to only capture project data for segments where a
                       state uses federal funds. For example, if a state highway department uses
                       state funds to design a project and does not request federal funds until
                       construction, then FMIS will not capture those earlier costs associated with
                       the design stage.

                       In addition, FMIS records a project’s segments as separate projects and
                       does not link them to the total project unless the states provide additional
                       data for each segment. For example, on projects with multiple segments,
                       states must enter data from related projects—such as state, project
                       number, and appropriation code—for each segment. On large-dollar
                       projects with many segments, this process can be cumbersome. FMIS also
                       records projects that use multiple federal highway funding categories as
                       separate projects. For example, if two categories, such as the Bridge
                       Program and National Highway System, are used for a single project
                       segment, then FMIS considers that segment to be two separate projects.
                       Officials said that FHWA is currently considering modifications which may
                       improve FMIS’ ability to link related projects.

                       According to FHWA officials, states do not track estimates of total project
                       costs and the reasons for cost growth. In addition, the 13 states we talked



                       Page 18                      GAO/RCED-97-47 Managing the Costs of Highway Projects
                    Chapter 2
                    Data to Track Cost Growth Not Readily
                    Available, but Costs Grew for Many of the
                    Projects for Which We Collected Data




                    to—the 6 we visited and the 7 others we contacted—do not track this
                    information as part of normal project management. Since most large-dollar
                    projects are financed by segment, some state officials did not see the
                    benefit in tracking cost growth of total project costs.

                    Because neither FHWA nor the states track estimates or record the reasons
                    for changes in project costs, FHWA manually reconstructed this information
                    from the project files at either FHWA’s division offices in the states or at
                    state highway departments to respond to a request from the Senate
                    Governmental Affairs Committee, Subcommittee on Oversight of
                    Government Management and the District of Columbia. In September
                    1994, the Subcommittee asked FHWA to identify the 20 largest highway
                    projects nationwide that had experienced the greatest amount of cost
                    growth from their initial cost estimates. In April 1995, FHWA provided this
                    information on 20 projects in 17 states whose estimated total costs ranged
                    from $205 million to $2.6 billion and whose increases ranged from around
                    40 percent to nearly 400 percent.5

                    However, the information FHWA provided on the reasons for these cost
                    increases—the only such data available that we could find—was often
                    incomplete and generally unreliable. FHWA was not able to provide
                    information on the reasons for cost growth on 2 of the 20 projects.6
                    Reasons for cost growth on another project included the caveat “wild
                    guess only.” On the 18 projects for which FHWA reported reasons for cost
                    growth, it did so in 74 different categories, which made a comparative
                    analysis of projects in different states nearly impossible. For example,
                    FHWA reported the amount of cost growth attributable to inflation in 7
                    states, but the amount of cost growth attributable to inflation in the
                    remaining 11 states could not be determined from the data provided. Also,
                    the amount of cost growth attributable to increases in scope on the 18
                    projects could not be determined from the data provided.


                    Data that we collected show that while cost growth has occurred on 23 of
Many Large-Dollar   30 large-dollar projects, about half of the projects had increased more than
Highway Projects    25 percent. We identified all projects estimated to cost more than
Experience Cost     $100 million (38 in all) with draft environmental impact statements filed
                    with the Environmental Protection Agency between 1988 and 1993. Thirty
Growth
                    5
                     This excludes one outlier. One project reported cost growth of 1,530 percent over the original EIS
                    cost estimate. Cost growth over a supplemental EIS cost estimate prepared in 1988 was 120 percent.
                    6
                     FHWA stated that data was not available for one project and could not be reconstructed for the other
                    project because the scope had significantly changed after the initial estimate.



                    Page 19                               GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 2
Data to Track Cost Growth Not Readily
Available, but Costs Grew for Many of the
Projects for Which We Collected Data




of those projects in 15 states are still active and receiving federal funds.
We found that current estimates on 23 of the 30 projects had increased,
while estimates on 7 projects decreased or remained the same. As shown
in Figure 2.1, cost increases on the 23 projects that experienced cost
growth ranged from 2 to 211 percent, with about half of the projects
increasing by more than 25 percent. Of the seven projects for which
estimates decreased or remained the same, estimates for three decreased
by less than 10 percent, estimates for three decreased by more than
25 percent, and estimates for one remained the same. Because neither
FHWA nor the states keep data on reasons for cost increases, we could not
identify the reasons for increases or decreases.




Page 20                           GAO/RCED-97-47 Managing the Costs of Highway Projects
                                           Chapter 2
                                           Data to Track Cost Growth Not Readily
                                           Available, but Costs Grew for Many of the
                                           Projects for Which We Collected Data




Figure 2.1: Cost Increases on Projects Over $100 Million, 1988-93
   Percentage increase
   225


   200


   175


   150


   125


   100


    75


    50


    25


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                                           Source: FHWA division offices and GAO analysis.




                                           In addition to information received from state highway departments about
                                           cost increases on the 30 projects, our recent work on two large-dollar
                                           transportation projects also demonstrates significant cost increases
                                           beyond the initial estimate. For example, we reported that the Central
                                           Artery/Tunnel project in Boston, Massachusetts, which was originally
                                           estimated to cost $2.6 billion in 1985, is now estimated to cost $10.4 billion




                                           Page 21                            GAO/RCED-97-47 Managing the Costs of Highway Projects
                     Chapter 2
                     Data to Track Cost Growth Not Readily
                     Available, but Costs Grew for Many of the
                     Projects for Which We Collected Data




                     at completion.7 In addition, reconstruction of the Cypress Viaduct in
                     Oakland, California, which was originally estimated to cost $695 million as
                     of 1991, is now estimated to cost $1.1 billion at completion.8


                     Although the states we talked to are not tracking cost performance
Some State Systems   information over the life of projects, we found that some state highway
Could Capture Cost   departments have information systems that could be modified or linked
Performance Data     with other systems to track cost estimates, cost growth, and reasons for
                     cost growth. For example, the American Association of State Highway and
                     Transportation Officials (AASHTO) in conjunction with more than 20 states
                     developed TRNS•PORT, a transportation information management
                     system.9 Although originally developed to analyze bids to detect bid
                     collusion, TRNS•PORT has since been expanded to include cost
                     estimating, proposal development, contract award, and construction
                     management. Thirty-one states are currently using the system. Further,
                     other states have purchased cost-tracking systems from software
                     developers.

                     We contacted officials in 11 of the 31 states that use TRNS•PORT and they
                     said they do not use the system to track cost estimates, actual costs, and
                     reasons for cost growth over the life of the project as part of normal
                     project management. Some officials we talked to said they do not track
                     this information because they are not sure of the benefit. However, other
                     officials we spoke with plan to modify TRNS•PORT or link it with other
                     information systems to track this information in the future.




                     7
                      Transportation Infrastructure: Central Artery/Tunnel Project Faces Continued Financial Uncertainties
                     (GAO/RCED-96-131, May 10, 1996).
                     8
                       Emergency Relief: Status of the Replacement of the Cypress Viaduct (GAO/RCED-96-136, May 6,
                     1996).
                     9
                      TRNS•PORT was previously named the Bid Analysis Management System.


                     Page 22                               GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 3

FHWA Approves Projects Incrementally and
Agrees to Costs at Construction

                The FHWA project approval process consists of a series of incremental
                actions that occur over the period of years needed to plan, design, and
                build a project. There is no federal approval of, or agreement to, the total
                cost at the outset of a project; rather, FHWA approves the estimated cost of
                a large-dollar project in segments when those segments are ready for
                construction. However, by the time FHWA approves the costs of a
                large-dollar project, a public investment decision may have effectively
                been made because substantial funds will already have been spent on
                project design and acquiring property and much of the increases in the
                project’s estimated costs will have already occurred. While many factors
                can cause costs to increase, we found several factors that worked together
                to increase costs beyond the initial estimates for projects in the six states
                visited: (1) initial estimates are preliminary and not designed to be reliable
                predictors of a project’s cost, (2) initial estimates are modified to reflect
                more detailed plans and specifications as a project is designed, and (3) a
                project’s costs are affected by, among other things, inflation and changes
                in scope to accommodate economic development that occurs over time as
                a project is designed and built.


                FHWA approval of a project or a segment occurs incrementally throughout
FHWA Approval   the planning, environmental review, design and property acquisition, and
Process Is      construction stages. During the planning stage, FHWA approves concepts
Incremental     that identify new projects that are needed. According to FHWA officials, the
                agency acts in partnership with the states to identify these needs. For
                example, FHWA may participate in a major investment study that identifies
                the need for additional highway capacity to relieve congestion in a
                particular corridor or approve a state transportation plan that identifies a
                proposed highway project or segment. However, FHWA officials emphasize
                that the agency’s participation in planning and approval of state
                transportation plans does not constitute approval of a specific project or
                segment or commitment on the part of the federal government to finance
                it.

                In the environmental approval stage, FHWA approves an EIS and issues a
                record of decision describing, among other things, the preferred
                alternative and why it was selected. In the record of decision, FHWA
                approves the location and layout of the specific project and documents the
                environmental mitigation efforts required to design and build it. The
                record of decision also allows a state to apply for and receive federal
                reimbursement to design the project and acquire the property needed to
                build it. Although cost estimates are included in the EIS, these estimates



                Page 23                      GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 3
FHWA Approves Projects Incrementally and
Agrees to Costs at Construction




are used only to compare alternatives. FHWA’s issuance of the record of
decision does not constitute approval of the costs estimated for the
selected alternative or a commitment by the federal government to finance
the project.

During the design stage of a project under “full” FHWA oversight, if a state
wants to use design standards other than the federally-approved AASHTO
design standards, FHWA must fully approve all exceptions to ensure that
safety and quality features are not adversely affected. FHWA must also
approve all property acquisition, including the cost of the property, and
ensure that the legal requirements regarding persons relocated by highway
projects are satisfied.10 In addition, FHWA may have formal approval at
selected points during the design stage, as specified by the state. For
example, in one state FHWA formally approved designs when the plans
were 30 and 90 percent complete, while in another state FHWA participated
with state officials for the most part informally throughout the design
stage. FHWA approval of property acquisition actions is a commitment of
the federal government to finance the cost of acquiring the property;
however, this decision, as well as design exceptions and other actions
taken during this stage does not constitute approval of the costs of
constructing the project or a commitment by the federal government to
fund it.

After the design stage is complete, the state prepares a bid package
consisting of the plans, specifications, and estimates (PS&E) for each
project segment for FHWA’s approval. This document contains the detailed
design plans and list of materials needed for a contractor to construct the
project segment as well as a detailed cost estimate. The cost estimate in
the PS&E becomes part of the project authorization—the agreement
between FHWA and the state that permits the project to go out for bid.
According to FHWA officials, FHWA’s approval of the PS&E and authorization
begins the process of FHWA’s agreeing to the costs of the project segment.
The project authorization is considered a contractual commitment by the
federal government and thus FHWA’s agreement to finance the project




10
 These requirements are contained in the Uniform Relocation Assistance and Real Property
Acquisition Policies Act of 1970, and FHWA is required to ensure the act is followed whether the
project is exempt from direct oversight or not.



Page 24                               GAO/RCED-97-47 Managing the Costs of Highway Projects
                      Chapter 3
                      FHWA Approves Projects Incrementally and
                      Agrees to Costs at Construction




                      segment.11 However, the cost of the project segment is not established
                      until bids are received and a contract for the work is awarded. Once the
                      state receives the contractor’s bids, FHWA reviews them to ensure the bid
                      process was fair and competitive and formally concurs with the state’s
                      decision on who to award the contract to. FHWA’s concurrence includes
                      agreement to the contract price and thus its concurrence to the project
                      segment’s cost. A project agreement is then executed between FHWA and
                      the state to identify the location, scope, and estimated cost of the project
                      segment, the conditions of the state’s acceptance of federal funds, and the
                      amount of federal funds to be obligated.

                      During the last stage, construction, FHWA periodically reviews the progress
                      of construction. FHWA must also review and approve “major” contract
                      change orders that change the scope of the work or exceed a certain dollar
                      threshold. This threshold is not specified in federal law or regulation and
                      varies by state. If the costs of the project segment increase and exceed the
                      ceiling in the project agreement, FHWA must approve the increase upon a
                      request from the state for an amendment to the agreement. As
                      construction proceeds, progress payments are submitted by the state and
                      approved by FHWA. When construction is complete, FHWA conducts a final
                      inspection and certifies through final acceptance that the project was
                      constructed in reasonable close conformance with the PS&E and
                      subsequent changes. At that time the state submits to FHWA the project
                      segment’s final voucher—the request for reimbursement for all costs for
                      that project segment. These costs may include some incurred through
                      minor change orders that FHWA did not review and approve. FHWA’s
                      approval of the final voucher allows the state to receive full and final
                      federal reimbursement for all project segment costs specified in the
                      project agreement.


                      Although FHWA does not approve the estimated cost of a project segment
Substantial Federal   or agree to finance it until construction is ready to begin, a substantial
Investments Can       investment of federal and state funds can occur on a large-dollar project
Occur Before          before this approval occurs. FHWA’s approval of a record of decision in the
                      environmental process allows a state to request and receive federal
Construction          reimbursement to design the project and to acquire the property needed to

                      11
                        There are some exceptions. For example, in an advance construction project, the state begins the
                      project using state funds only with the intent of converting the project to a federal-aid project at a later
                      date. To preserve this option, the project segment must meet the same federal requirements and be
                      processed through a project agreement in the same manner as other federal-aid highway projects.
                      However, the state cannot receive federal reimbursement until the project is formally converted to a
                      federal-aid project. Until this conversion occurs, FHWA’s approval of an advance construction project
                      does not constitute its commitment to finance the project segment.



                      Page 25                                 GAO/RCED-97-47 Managing the Costs of Highway Projects
                             Chapter 3
                             FHWA Approves Projects Incrementally and
                             Agrees to Costs at Construction




                             build it. These activities must be completed before construction on a
                             project segment can begin.

                             On a large-dollar project, design activities can be substantial. Large-dollar
                             projects may require the services of a design consultant and several years
                             to design. For example, on the Central Artery/Tunnel project, construction
                             segments have averaged almost 3 years, but taken up to 6 years, to design.
                             Design activities are estimated to account for nearly $900 million (about 8
                             percent) of the total estimated cost of the project. In addition, all property
                             needed for a project must be acquired before FHWA can approve a project
                             for construction. Large-dollar projects—both new highway construction
                             and reconstruction projects that add lanes—can require that substantial
                             amounts of property be acquired for highway rights-of-way. Property
                             acquisition can be costly. To add lanes to M-59 in Michigan, property
                             acquisition costs were about one-half of the nearly $300 million that was
                             estimated for total project costs. Property acquisition can also result in a
                             substantial impact on the public. One new construction project—I-105 in
                             California—displaced 18,200 people and required the state to acquire 5,800
                             housing units. Michigan’s M-59 project displaced 136 residences and 69
                             businesses.


                             While FHWA’s data systems do not track project costs over time, FHWA and
Most Cost Growth             state officials in states we visited agreed that most of the cost growth that
Occurs Before                occurs on projects happens before construction begins. For example,
Construction                 costs on the nearly complete I-595 project in Maryland have increased
                             from an initial cost estimate of $188 million to about $390 million.
                             However, state officials provided data showing that about $160 million of
                             that $200 million increase—around 80 percent—occurred before the
                             construction stage.

                             While many factors influence project costs, we found several factors that
                             worked together to increase costs for projects in the six states we visited:
                             (1) initial estimates are preliminary and not designed to be reliable
                             predictors of a project’s cost, (2) preliminary design concepts are refined
                             into detailed plans and specifications as a project is designed, and (3) the
                             length of time to progress through the environmental, design and property
                             acquisition, and construction stages.


Initial Cost Estimates Are   An initial estimate for the total cost of a project is generally developed at
Not Reliable                 the outset of a project in connection with the environmental review



                             Page 26                        GAO/RCED-97-47 Managing the Costs of Highway Projects
                            Chapter 3
                            FHWA Approves Projects Incrementally and
                            Agrees to Costs at Construction




                            process. However, developing a complete project cost estimate that
                            reliably predicts a project’s total cost is not the objective at the
                            environmental stage. The purpose of the initial cost estimate is to compare
                            project alternatives; as such, the purpose is to develop cost estimates to
                            the same level of specificity so all project alternatives can be evaluated on
                            an equal basis. The estimates we reviewed did not factor in the time
                            required to construct a project and thus did not include the effects of
                            inflation. As officials in one state highway agency told us, it is not
                            important to have an accurate cost estimate, but rather to ensure that
                            assumptions used for all the alternatives’ estimates are the same.

                            According to FHWA and state highway officials, initial cost estimates are
                            preliminary and based on a “rough footprint” of the proposed project
                            alternatives that broadly identifies the type of highway or structure to be
                            built, the alignment, and the number of lanes and interchanges.
                            Alternatives are based on generally no more than 30 percent of design.
                            Cost estimates are calculated based on historic state data on the per-mile
                            cost of highways, square-footage cost of bridges and other structures, and
                            per-acre cost of land. Preliminary data specific to the project may also be
                            included, particularly where environmental impacts are expected, such as
                            wetlands mitigation and restoration.

                            FHWA  has no requirements for preparing cost estimates. We found that
                            each state we visited used its own standards or methods and database for
                            compiling estimates during the environmental review stage. As a result,
                            the estimates we reviewed differed substantially in the cost categories
                            they included. For example, one state we visited included the costs of
                            designing the project while two others did not.


Project Costs Are Greatly   During the design stage, costs can increase as preliminary project
Refined During the Design   concepts are refined into the detailed plans and specifications needed by a
Stage                       contractor to construct a project segment. For example, per-mile highway
                            costs are revised to reflect more detailed pavement design specifications,
                            such as describing the thickness of the pavement needed, while detailed
                            ground surveys reveal the exact grade of the highway. Per-acre costs to
                            acquire property are replaced with detailed real estate appraisals
                            establishing a fair market price.

                            In refining the “rough footprint” during the design stage, cost estimates are
                            also refined and can increase—sometimes substantially. In two of the
                            states we visited, soil structures were found to be insufficiently stable to



                            Page 27                        GAO/RCED-97-47 Managing the Costs of Highway Projects
                      Chapter 3
                      FHWA Approves Projects Incrementally and
                      Agrees to Costs at Construction




                      support the highway structures originally planned. For example, on the
                      U.S. 71 project in Arkansas, soil problems were identified by detailed
                      testing performed during the design stage—no soil borings had been
                      drilled for the initial estimate. The state had to build an additional bridge
                      because unstable soil made supporting the highway with fill dirt, as
                      originally anticipated, difficult.

                      Although the initial cost estimate identifies environmental mitigation
                      costs, the extent of the mitigation for some projects in the states we
                      visited was not known until testing for the detailed design was done. On
                      the reconstruction of I-880 in California, the state’s EIS had identified the
                      need to clean up hazardous material sites along the highway’s alignment.
                      However, drilling and testing for hazardous materials during the design
                      stage revealed the presence of more contaminated soil and groundwater
                      than had been expected. The costs of controlling and disposing of these
                      contaminants increased the cost of this project by about $40 million. In
                      Maryland, a noise study was performed for the EIS to estimate the need for
                      and costs of soundwalls for the I-595 reconstruction project. However,
                      more detailed noise readings taken during the design stage affected the
                      size and length of the required soundwalls and added $2.6 million to the
                      project’s costs.


Project Development   Large-dollar highway projects usually take a number of years to move
Occurs Over Time      through the environmental, design and property acquisition, and
                      construction stages. Compounding the time involved is the approach most
                      states use for allocating funds. This approach funds projects over several
                      budget years as states apply limited federal and state funding to numerous
                      highway and bridge projects concurrently. This incremental funding
                      approach may result in all projects being “stretched out,” thus increasing
                      individual project costs if for no other reason than the effects of inflation.

                      Stretching out a project also means that there is more time for land costs
                      to increase, planned economic development to occur, and the passage of
                      environmental or other laws or regulations that could increase the
                      project’s costs. One or more of these factors resulted in increased costs on
                      6 of the 7 projects we reviewed. For example, increased property
                      acquisition costs accounted for the majority of the cost increases on two
                      projects—U.S. 183 in Texas and M-59 in Michigan. State highway officials
                      said that property acquisition costs increased beyond what had been
                      initially estimated because land values increased before the acreage was
                      purchased, either because of market conditions or due to development.



                      Page 28                        GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 3
FHWA Approves Projects Incrementally and
Agrees to Costs at Construction




In the six states we visited, the scope of each project changed to varying
degrees to accommodate future development that was not anticipated
when the initial cost estimate was made. In Maryland, project costs
increased by nearly $27 million to add or modify lanes and interchanges to
accommodate unanticipated growth in traffic, including increased traffic
generated by a research center that was planned after the initial cost
estimate was prepared for I-595. FHWA officials said modifying the ongoing
project was more cost-effective than making changes after the project was
built. Before construction was complete on I-105 in California, a decision
was made to add a transitway in the highway’s median, which added about
$320 million to the project’s cost. Part of the increased cost for some
changes in scope, such as additional lanes or interchanges, was caused by
the need to acquire additional property for the right-of-way.

In two states we visited, increases in environmental mitigation costs
occurred due to changes in law or regulations. For example, Maryland
enacted a new storm water management law that required the state
highway administration to control storm water runoff on projects so that
discharges to rivers and streams would not increase. To comply with this
law, the state had to design and construct storm water management ponds
for runoff from the I-595 project which added nearly $60 million to its cost.
In Texas, a new state regulation added requirements for protecting a local
aquifer from pollution. The state highway agency subsequently designed
water treatment facilities to filter roadway and storm water runoff from
project sites crossing the protected area. These additional features cost an
estimated $21 million.




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                        FHWA’s primary goal on projects where it has “full” oversight is ensuring
                        that the applicable safety and quality standards contained in law and
                        regulations are met. Cost management and cost containment are not
                        explicit statutory or regulatory goals of FHWA’s oversight or part of its
                        organizational culture. As a result, FHWA has few requirements that ensure
                        cost containment is an integral part of large-dollar highway project
                        management. FHWA influences project costs through its review and
                        approval of design and construction plans, and through day-to-day
                        interaction with state departments of transportation. We found several
                        cost management practices that states had initiated to improve highway
                        project management and to focus more specifically on containing project
                        costs. These practices included improving initial project cost estimates,
                        establishing goals for project cost performance, and tracking the progress
                        of projects against such goals. However, FHWA has not been proactive in
                        working with states to evaluate these practices and disseminate
                        information on them to help other states enhance their cost management
                        practices. Moreover, as debate begins on the reauthorization of highway
                        programs in 1997, a range of roles exist for FHWA’s oversight of large-dollar
                        projects.


                        On projects where it exercises “full” oversight, FHWA’s primary focus is to
FHWA’s Primary          help ensure that the applicable safety and quality standards contained in
Oversight Emphasis Is   laws and regulations for the design and construction of highway projects
Safety and Quality      are met. For example, in reviewing design plans, FHWA engineers use their
                        best engineering judgement to determine whether the design of the
                        roadway meets the AASHTO standards for speed, lane and shoulder width,
                        and pavement design. FHWA engineers review safety features, such as
                        guardrails, and whether unobstructed “clear zones” and roadway lighting
                        are sufficient. If designs do not meet the standards, FHWA must approve
                        exceptions to the design submitted by the state.

                        According to FHWA officials, controlling costs is not a goal of their
                        oversight. They did emphasize, however, that ensuring that projects are
                        designed and constructed in a cost-effective fashion is an integral part of
                        engineering judgement. In the six states we visited, we found several
                        examples where FHWA’s influence resulted in states adopting more
                        cost-effective approaches that decreased project costs. FHWA’s review of
                        the design for constructing U.S. 71 in Arkansas showed that smaller
                        drainage structures could be used to accomplish the same objective at a
                        lower cost. The state subsequently used the recommended smaller
                        drainage structures on the project and saved about $2.6 million. In



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                      reviewing Maryland’s plans to construct new noise walls on an existing
                      interstate highway, FHWA noted that the state was also planning to widen
                      the road a few years later and, in most instances, the walls would have to
                      be moved, and its foundations destroyed and rebuilt to accommodate the
                      widening project. FHWA recommended that the state construct the walls at
                      the location envisioned for the widening project. State officials resisted
                      because it would require additional expenditures in the short term to
                      acquire the property needed. FHWA contended this approach was not cost
                      effective and informed the state it would only fund construction of the
                      walls one time. The state adopted FHWA’s approach which, according to
                      FHWA officials, saved about $3 million.


                      FHWA’s review of design and construction plans can also result in increased
                      costs to meet federal standards for highway projects. In Massachusetts,
                      FHWA contended that the state’s plans for reconstructing an existing tunnel
                      on a segment of the Central Artery/Tunnel project did not meet applicable
                      Interstate speed and safety design standards. The modifications agreed to
                      by the state and FHWA added about $46 million to the project’s cost. In
                      Texas, FHWA denied the state’s request for a design exception to retain an
                      existing twin bridge structure on the U.S. 183 reconstruction project
                      because it did not meet design speed safety standards. Replacing the
                      structure added $4 million to the cost of the project.

                      An FHWA official also stated that the availability of funding itself is an
                      incentive for states to control costs. Since the end of the Interstate
                      Construction Program and the specific earmarking of funds for Interstate
                      projects, the states have an incentive to control costs themselves because
                      needs generally outweigh available funds.


                      While FHWA’s formal review of safety and quality issues provides
FHWA Has Few          opportunities to influence states’ cost management of highway projects,
Formal Project Cost   FHWA has no mandate to encourage or require practices to contain costs of

Management            large-dollar highway projects. Unlike direct procurement programs, such
                      as Department of Defense weapons procurement, that have specific cost
Requirements          management requirements, the federal-aid highway program is a federally
                      assisted, state-administered partnership. As a result, FHWA has few
                      requirements that ensure cost containment is an integral part of state
                      highway project management.

                      Several initiatives already underway at the federal level are designed to
                      help the federal government manage its operations and projects in a cost



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effective way. The Vice President’s National Performance Review in 1993,
for example, identified widespread concern about the need for the federal
government to better manage the planning, budgeting, and acquisition of
fixed assets and suggested improvements. Furthermore, the Government
Performance and Results Act of 1993 generally requires that federal
agencies target resources and develop specific, measurable goals and
plans to achieve them. For federal agencies acquiring large-dollar capital
assets such as buildings, equipment, and information systems, the Office
of Management and Budget (OMB) requires cost containment practices. OMB
requires federal agencies to prepare baseline cost and schedule estimates
and to track how well actual costs and schedules perform against that
baseline. If actual costs or schedules exceed the estimate by more than
10 percent, agencies are required to report the reasons for this to OMB and
to identify corrective actions to bring the project back within its baseline
costs or schedule. If estimates indicate these baseline goals are not
achievable, the agency may revise them with OMB approval. However, it
must continue to report the original baseline as well as the new goals.
These requirements apply to programs managed by and acquisitions made
by federal agencies and not to federally assisted state programs.
Nevertheless, these cost management concepts could be an appropriate
model for management of large-dollar highway projects.

One federal requirement that many state officials cited as a formal cost
containment mechanism is value engineering. As defined by federal
statute, value engineering analysis is a systematic review by a team of
persons not involved in the project to provide suggestions during the
design stage to reduce costs while maintaining or improving the project’s
quality. Since the mid-1970s, FHWA has encouraged states through guidance
and training to perform value engineering on federally aided projects and
has required its use on projects it directly administers on federal lands.
However, FHWA has never required the states to perform value engineering
on highway projects that receive federal funds. In 1993, FHWA reported that
only 7 states had active value engineering programs accounting for over 70
percent of all value engineering studies nationwide while limited programs
in 27 other states accounted for the remainder. In 1995, the Congress
required that all projects on the National Highway System that have an
estimated total cost of $25 million or more be subject to value engineering
analysis. FHWA has not yet issued guidance to the states to implement the
law.

Since 1995, FHWA has become more involved in the cost management and
oversight of the Central Artery/Tunnel project in Boston, Massachusetts.



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                               FHWA has required the state to prepare and periodically update a plan that
                               identifies the costs of the project and how the state intends to successfully
                               finance it to completion. In 1996, at FHWA’s request, the state began
                               tracking the cost performance of the project against its cost estimate and
                               providing a monthly report to FHWA. FHWA has also required the state to
                               provide up-front state funding or bonding authority for the full value of the
                               contracts it plans to finance over a period of years to help to ensure that
                               revenue sources will be sufficient when bills come due. FHWA officials told
                               us that the Central Artery/Tunnel project is unique because of its
                               $10.4 billion estimated cost and the substantial funding shortfalls
                               projected over the next few years. In October 1996, FHWA also required a
                               finance plan for the I-15 reconstruction project in Salt Lake City, Utah.
                               FHWA officials said they would determine the appropriate level of
                               involvement on other projects on a case-by-case basis, according to each
                               project’s costs and financing needs.


                               Some of the states we visited had practices in place similar to some
Some State                     elements of the OMB federal requirements to help control a project’s costs
Management                     and its overall cost-effectiveness. These practices included (1) improving
Practices Focus on             the quality of initial cost estimates, (2) establishing cost performance goals
                               and strategies, and (3) using external review boards to approve cost
Cost, but Best                 increases. However, FHWA has not been proactive in disseminating
Practices Are Not              information about these practices among states.
Being Shared
Quality of Initial Estimates   Two of the six states we visited are seeking to improve the quality of their
Can Be Improved                initial cost estimates to make them more representative of the final costs
                               of projects. Officials in Maryland told us that their goal was to ensure that
                               initial estimates differed from the final costs by no more than 10 percent.
                               To help achieve this goal, initial cost estimates included contingency
                               factors to account for cost increases that usually occur as a project is
                               designed. For example, Maryland would include a 35 to 40 percent
                               contingency in the estimates for bridge and other structures to account for
                               changes that might arise from detailed design studies done after the initial
                               estimate. However, because the state did not track and report costs and
                               cost increases from the start of a project to its completion, we could not
                               verify whether the state was meeting its goal or assess the validity of the
                               contingency factors used.




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                        California has instituted a series of project management practices,
                        including a process to improve the quality of its initial project cost
                        estimates. According to the state’s guidelines,

                        “The reliability of project cost estimates at every stage in the project development process
                        is necessary for responsible fiscal management. Unreliable cost estimates result in severe
                        problems [and] . . . affects [the state highway administration’s] relations with . . . the
                        Legislature, local and regional agencies, and the public, and results in loss of credibility.”


                        The state’s guidance provides a detailed methodology to help control cost
                        increases. For example, the state develops a project study report to help it
                        avoid unforeseen items of work before a project proceeds into the final
                        design phase. The guidance describes cost categories that should be
                        included in an initial cost estimate, such as the length of a project,
                        inflation, and overhead, as well as a 25 percent contingency as a proxy for
                        future unknown costs.

                        According to FHWA officials, the accuracy of an initial project cost estimate
                        compared to the final project cost is directly related to the amount of
                        design. As discussed in chapter 3, additional environmental and
                        engineering studies are conducted during the design stage, removing
                        uncertainties and allowing for a more accurate cost estimate. This can,
                        however, create a dilemma for state transportation departments because
                        the state must look at several alternatives during the environmental
                        process. Developing all alternatives to a higher level of design can be
                        costly. If federal dollars are used to support the environmental process,
                        the NEPA implementing regulations require that all alternatives be designed
                        to the same level because designing one project to a higher level could
                        prejudice the selection process.


Establishing Cost       One of the six states we visited, Massachusetts, established specific cost
Performance Goals and   performance goals in 1995 for the design and construction phases of the
Strategies              $10.4 billion Central Artery/Tunnel project. Project officials set two goals:
                        (1) limit increases in the estimated cost of construction during the “final
                        design” process to zero,12 and (2) limit cost increases during the
                        construction phase to 7 percent of the contract’s bid value.

                        To accomplish the latter goal, the state instituted a “design-to-cost”
                        program, under which contractors design their segments of the project

                        12
                          In the Central Artery/Tunnel project, the state’s management consultant does “preliminary design,”
                        up to about 25 percent of design. A design contractor then does the “final design” phase for the
                        remainder.



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                          within an agreed baseline budget for the construction cost. The design
                          contractor is required to submit periodic interim designs as well as a final
                          design. If an estimate in any of the submittals exceeds the agreed baseline
                          budget (assuming that the state has not requested changes to the
                          contract), that contractor is required to redesign the project—at the
                          contractor’s own expense—so that the estimated construction cost
                          remains within the baseline budget. Project officials and contractors told
                          us that the design-to-cost program has generally made them much more
                          cost-conscious. They said this approach has been particularly helpful on a
                          large project like the Central Artery/Tunnel project in which multiple state,
                          local, and federal agencies review—and can influence—the project’s
                          designs.

                          In 1996 we reported that Massachusetts did not have a formal program or
                          specific strategy to limit cost increases during the construction phase and
                          that experience with the design-to-cost program had been limited and the
                          results mixed.13 The state has recently initiated an action plan to control
                          construction costs, and we are currently assessing the state’s progress in
                          meeting its design and construction cost containment goals for the project.


Entities Outside State    Two of the six state highway administration programs we examined were
Highway Administrations   subject to state external review boards—organizations outside state
Review Highway Project    highway administrations that review and approve cost increases. Michigan
                          had an external review board for certain changes to all state contracts,
Costs                     including change orders over $100,000. California’s transportation
                          expenditures were governed by an independent transportation
                          commission that approved all projects, budgets, and changes; any change
                          in a project cost exceeding 20 percent required the commission’s approval.
                          Officials from both states stated that they scrutinize potential cost
                          increases more closely to avoid appearing before the review boards.
                          However, we found that when a change was brought before the
                          independent entities, cost increases were rarely denied because, according
                          to state officials, the additional costs had been thoroughly examined by
                          the state and were deemed necessary.

                          In Maryland, the highway administration uses a post-project consultant
                          review to evaluate cost increases on projects. According to state officials,
                          the consultant examines all project change orders over $100,000, identifies
                          common problems that caused costs to increase, and makes

                          13
                           Transportation Infrastructure: Central Artery/Tunnel Project Faces Continued Financial
                          Uncertainties (GAO/RCED-96-131, May 10, 1996).



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                          Controlling Costs Is Not a Focus of FHWA
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                          recommendations to avoid these costs in future projects. For example, in
                          response to one of these reviews, the state required more soil sampling at
                          an earlier stage for all of its highway projects to try and control cost
                          increases attributed to not having a good understanding of the soils.


FHWA Does Not             FHWA  has many different mechanisms for disseminating information to
Proactively Disseminate   state departments of transportation, such as written guidance, technical
Cost Management           conferences, training classes, case studies on best practices, a web site on
                          the Internet, as well as letters and memorandums. Through these
Information               channels, FHWA disseminates a range of technical information and best
                          state practices on a wide variety of topics, including highway research
                          results, successes with the Major Investment Study Process, and computer
                          software to compare projects from different modes, such as air and rail,
                          for investment decisions.

                          FHWA has used these mechanisms to encourage some initiatives that have
                          the potential to improve the cost-effectiveness of highway projects. For
                          example, FHWA has promoted and gathered information on states’
                          experiences with management initiatives, such as design/build, warranties,
                          and partnering, and shared this information with other states. Warranties
                          have been used on a limited basis to hold a contractor more accountable
                          for the work performed, thereby improving quality and reducing
                          maintenance costs. In partnering, the state and contractor sign a list of
                          common goals, such as to construct the project with no loss of time due to
                          accidents, before construction begins. Officials in several states told us
                          that partnering has proven useful to reduce contractor claims and law
                          suits as well as bring the job in on time and within budget.

                          While FHWA’s dissemination network is in place and is being used to share
                          information, we found that FHWA has not actively evaluated the project
                          management practices in the states discussed above and used its network
                          to highlight “best practices” for other states. For example, a California
                          official told us that while the state is sharing information on its efforts to
                          improve the quality of initial project cost estimates with other states, FHWA
                          has not asked for information on the state’s program. In Maryland, where
                          outside consultants were providing reports on the causes of cost increases
                          in completed projects, FHWA did not receive copies of those reports.


                          Although FHWA disseminates information to state departments of
Conclusions and           transportation on a wide variety of technical and research topics, GAO
Recommendation

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                  Controlling Costs Is Not a Focus of FHWA
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                  found that FHWA does not evaluate and disseminate information on state
                  best cost management practices among all states. Being more proactive in
                  this regard could encourage states to undertake cost management
                  strategies that have the potential to promote cost-effective project
                  management and result in more effective use of limited federal and state
                  highway dollars.

                  To enhance states’ ability to manage costs on large-dollar highway
                  projects, we recommend that the Secretary of Transportation direct the
                  Administrator, FHWA to work with states to evaluate and disseminate
                  information on best state practices concerning cost management to all
                  states.


                  We provided copies of a draft of this report to DOT and FHWA for their
Agency Comments   review and comment. FHWA officials who reviewed the draft, including the
                  Associate Administrator for Program Development, generally concurred
                  with the information contained in the report and agreed with the
                  recommendation.




                  Page 37                         GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 5

Observations


               The nation’s highways and bridges are vital to its economy and national
               defense. Because of limited resources available to build and maintain
               them, it is essential that highway and bridge projects be well managed.
               Because large-dollar projects generally take longer to build and usually
               have more significant environmental and community impacts than the
               majority of federal-aid highway projects, they have greater potential to
               experience substantial cost increases and lengthy construction delays.
               These cost increases can potentially overwhelm other highway projects
               and erode the already limited funds available to meet overall highway
               needs. Effective project management related to containing costs can help
               ensure that cost growth resulting from schedule delays and other factors
               are minimized and that our transportation capital investment dollars are
               spent wisely and efficiently.

               As reauthorization of the federal-aid highway program approaches in 1997,
               discussion has already begun on how the federal programs should be
               structured and what the federal role should be. Balancing the states’ desire
               for flexibility and more autonomy with the federal role of ensuring that
               taxpayers get the most bang for their federal dollar, as well as safe, quality
               highways, is difficult. FHWA’s “full” oversight approach does not focus on
               management of highway project costs. In contrast, cost management
               requirements promulgated by OMB for the federal government on its own
               large-dollar projects are very specific. Further, from a broader perspective,
               the federal government has been moving in the direction of managing
               programs by establishing goals and measuring performance through such
               initiatives as the Government Performance and Results Act of 1993.

               Ultimately, the Congress and the administration will have to decide on the
               appropriate federal role. Cost management of large-dollar projects is just
               one part of a federal role in highway projects. Changing that part, if
               appropriate, could take the form of requiring states to improve their cost
               management practices by using strategies that some states already have in
               place. Such strategies have the potential to provide a cost-conscious
               discipline as well as an early warning of possible problems. For example,
               improving the quality of a project’s initial cost estimate so it more reliably
               represents the total costs of a project could provide a more realistic
               baseline from which to track costs and finance large-dollar projects,
               particularly where multiple sources of financing are used.

               Some states have tried improving initial cost estimates by including
               contingencies to represent potential future unknowns—the cost increases
               that typically occur during the design phase as preliminary concepts give



               Page 38                      GAO/RCED-97-47 Managing the Costs of Highway Projects
Chapter 5
Observations




way to detailed engineering plans needed to construct the project.
Collecting data on common problems experienced by projects could
provide a basis for establishing such contingencies as well as provide
real-time information on which managers could make decisions about
project changes that could impact costs. Another way to improve initial
estimates is to do a more detailed project design at the environmental
phase. While this approach removes some of the uncertainties that can
only be addressed through the detailed design stage, it more than likely
would not be feasible for many projects because of the cost. Further, this
approach can work at cross purposes with an environmental process that
seeks to see all alternatives equally considered.

Once an initial cost estimate is developed, establishing cost performance
goals based on this estimate and a strategy to accomplish them would
make cost awareness and cost containment an integral part of how states
manage a project over time. This does not mean that an initial cost
estimate cannot be increased if contingencies were not sufficient to cover
increases generally expected through design changes; however, any
change and reason for it should be agreed to. Strategies, such as those
being used on the Central Artery/Tunnel project, have the potential to
improve accountability for cost increases and create a culture where cost
control is part of day-to-day activities.

Increased federal oversight of state management of project costs is
another way to look at a federal role. Such actions as establishing
standards for cost estimates, including what elements should be included;
evaluating the reasonableness of cost estimates and finance plans; and
monitoring cost growth and financing could help to ensure that the
large-dollar highway projects are being effectively and efficiently
managed.




Page 39                     GAO/RCED-97-47 Managing the Costs of Highway Projects
Appendix I

Oversight of Federal-Aid Highway Projects


                  Under federal law, federally aided highway projects are managed and
                  constructed by the 52 state highway departments in the 50 states, Puerto
                  Rico, and the District of Columbia, in accordance with state and federal
                  law, subject to the inspection and approval of the Secretary of
                  Transportation. The Secretary’s responsibilities have been delegated to the
                  Federal Highway Administration (FHWA). Federal law and regulations
                  detail FHWA’s inspection and approval responsibilities; as discussed in
                  chapters 1 and 3, this “full” FHWA oversight includes approving planning
                  and environmental review documents; reviewing design and construction
                  specifications; approving plans, specifications, and estimates (PS&Es);
                  periodically reviewing construction in progress; and inspecting and
                  approving the completed project.

                  In 1973 the Congress added a provision to the law entitled certification
                  acceptance. As subsequently amended, this provision permits FHWA to
                  discharge its oversight responsibilities to the states for any projects that
                  are not constructed on the Interstate Highway System by accepting a
                  state’s certification that projects being carried out under state laws,
                  regulations, directives, and standards will accomplish the policies and
                  objectives of federal law. FHWA may allow either partial or complete
                  exemption of project processes under certification acceptance, and FHWA
                  must still approve certain aspects of the project, such as planning and
                  highway safety.

                  The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)
                  devolved even greater authority to the states by allowing a larger number
                  of projects to be exempted from “full” FHWA oversight. Sections 1016(b)
                  and (d) provided the following:

              •   Projects that are not constructed on the National Highway System (NHS)
                  would be designed, constructed, operated, and maintained in accordance
                  with state—rather than federal—laws, regulations, and standards.
              •   A state can request that FHWA no longer review PS&Es for any project not
                  constructed on the NHS or for any NHS projects estimated to cost under
                  $1 million. After receiving any such request, FHWA may undertake such
                  reviews only if requested to do so by the state.
              •   A state may, on a project-by-project basis, waive FHWA review of PS&Es on
                  any NHS project that involves resurfacing, restoration, or rehabilitation (but
                  not reconstruction),14 if the state certifies that all work will meet the
                  standards approved by FHWA.

                  14
                    Resurfacing, restoration, and rehabilitation refers to maintaining an existing roadway or bridge, while
                  reconstruction involves tearing down and replacing an existing roadway or bridge.



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Appendix I
Oversight of Federal-Aid Highway Projects




The only projects that would not fall under the ISTEA exemption provisions
are new construction or reconstruction projects on the NHS that are over
$1 million. However, because certification acceptance applies to any
projects that are not constructed on the Interstate Highway System, the
only projects which must unconditionally be constructed under “full”
oversight provisions are Interstate construction or reconstruction
activities over $1 million.

In January 1992, the FHWA Executive Director issued guidance to FHWA’s
field offices that interpreted and implemented ISTEA’s exemption
provisions. This guidance stated that states electing to use ISTEA’s
exemption provisions would be exempt from FHWA’s oversight of design
activities, PS&E approval, concurrence in award, and review of
construction activities. The guidance also directed FHWA field personnel to
strongly encourage states to avail themselves of the ISTEA exemption
provisions.

According to a 1995 FHWA report, most states have availed themselves of
ISTEA’s oversight exemption options. In the case of non-Interstate NHS
projects over $1 million, 32 out of 52 state highway administrations
construct these projects under full FHWA oversight while 20 do so under
certification acceptance. Additional information on the number of states
choosing these provisions is provided in Table I.1.




Page 41                          GAO/RCED-97-47 Managing the Costs of Highway Projects
                                            Appendix I
                                            Oversight of Federal-Aid Highway Projects




Table I.1: States’ Use of Full Oversight,
Exemption, and Certification
Acceptance Provisions                                                                                   Interstate Construction
                                                                                                                Program
                                            Oversight options
                                            Full oversight                                             All
                                                                                                       (required)
                                            NHS 3R (exempt project-by-project)                         N.A.
                                            Non-NHS and NHS <$1M (entire program exempt)               N.A.
                                            Certification acceptance                                   N.A.
                                            Total                                                      N.A.




                                            Page 42                          GAO/RCED-97-47 Managing the Costs of Highway Projects
                                              Appendix I
                                              Oversight of Federal-Aid Highway Projects




                  NHS-Interstate System                                           NHS-Not part of Interstate
                                   Resurfacing, restoration,                                     Resurfacing, restoration,
       New/reconstruction             and rehabilitation               New/reconstruction           and rehabilitation            Non-NHS
>$1 million        <$1 million     >$1 million   <$1 million >$ 1 million <$ 1 million >$ 1 million <$ 1 million
All                          14             19             13                32              8              14               7                  2
(required)
N.A.                        N.A.            31                4               0              0              25               2                  0
N.A.                         36              0             33                 0             34               0              35                 46
N.A.                          0              0                0              20             10              13               8                  4
N.A.                         50             50             50                52             52              52              52                 52
                                              Note: The Interstate Highway System columns do not include Alaska and Puerto Rico, which have
                                              no Interstate Highway System routes. Totals for projects not located on the Interstate Highway
                                              System reflect the 50 states, the District of Columbia, and Puerto Rico.

                                              N.A. = Not applicable.

                                              Source: FHWA.




Additional Actions by                         In 1991, just prior to the passage of ISTEA, FHWA adopted a Statement of
FHWA                                          Operational Philosophy in response to their reduced role in overseeing
                                              federal-aid highway projects as well as their increasingly limited staff
                                              resources. This statement recognized FHWA’s increased focus on areas of
                                              greatest risk and the need to devolve more direct project oversight
                                              activities to states. It stated in part, that

                                              “. . . it is FHWA’s policy to increasingly rely on the State transportation agencies to
                                              adequately perform and/or provide management and oversight of detailed, project-related
                                              activities. In keeping with this policy, the use of process review/product evaluation
                                              procedures will be the agency’s primary mode of operation in carrying out all of its
                                              program oversight responsibilities . . . [This] does not however, preclude the use of other
                                              program monitoring techniques including project-specific activities when appropriate.”


                                              Process review/product evaluations are broad based reviews of state
                                              highway administration operations conducted by FHWA in cooperation with
                                              state officials. These reviews range widely in topic from pavement
                                              rideability testing to assessing how frequently contract schedules are met.
                                              FHWA’s division offices develop multiyear plans to review various areas of
                                              operation, emphasizing potential high-risk areas.




                                              Page 43                              GAO/RCED-97-47 Managing the Costs of Highway Projects
Appendix II

Major Contributors to This Report


                       Steve Cohen
Resources,             Gary L. Jones
Community, and         Phyllis F. Scheinberg
Economic               Sara B. Vermillion

Development Division
Washington, D.C.
                       Jason A. Bromberg
Boston,                Teresa D. Dee
Massachusetts          Lena B. Natola


                       Catherine A. Colwell
Chicago, Illinois      David I. Lichtenfeld




(342908)               Page 44                 GAO/RCED-97-47 Managing the Costs of Highway Projects
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