At the February meeting of Metropolitan Water District’s Special Committee on the Bay-Delta, Committee members heard a presentation on the cost estimates and risk assessment work that has been done on the California Water Fix project. But prior to that, Steve Arakawa, manager of the Bay-Delta Initiatives Program, gave a brief update on the status of the California Water Fix approval process.
Mr. Arakawa noted that in 2016, the biological assessment was completed, the application for the state’s Section 2081 permit was submitted, and the final Bay Delta Conservation Plan/ California Water Fix EIR-EIS was released. He reminded that there is no decision on the document yet, as that decision is awaiting completion of the biological opinions; once the biological opinions are completed and the state and federal decisions on the ESA are made, then the decision would be made on the EIR and EIS.
Ahead, other than the state and federal decisions on the biological opinions and the Section 2081 permit, there is the Army Corps permit which has to do with dredge and fill in the channels for the project, and the Record of Decision and the Notice of Determination (the “ROD/NOD”) in 2017. A decision by the State Water Board on approving the change in the point of diversion will likely occur in 2018.
Mr. Arakawa presented a graph showing how the timing and sequencing of the procedures lays out. The Delta Science Program of the Delta Stewardship Council is conducting an independent peer review on portions of the biological opinions, the state and federal. Then once the peer review is completed, the agencies would then finalize the 2081 document and the biological opinion documents and then they would consider a decision, and that would lead to a decision on the environmental reports, the ROD, and the NOD.
The Army Corps of Engineers 404 permit has to do with dredge and fill in channels, and that decision will occur sometime by the end of the year.
Mr. Arakawa said that they have been monitoring the sessions of the science panel review, and they are expecting the report soon. “Generally they were conveying that the analytical framework is generally something that they can support or approve; they didn’t’ see any real issues there, but they did also make some comments regarding the assumptions that go into the analysis, and where the sources of uncertainty are,” he said. “We’ll just have to see what types of characterizations actually show up in the final report when they issue that.”
The decisions on the biological opinions for salmon and smelt as well as the state Section 2081 permit are expected in the springtime. “The fisheries agencies, the Bureau and the Department are continuing to work towards those timeframes on their schedule, but also recognizing with a new federal administration, there are some unknowns there in terms of decision making and appointments that are still in transition. We’ll have to see how that goes, but at the regional level, all of the parties involved are operating as if the decisions are going to be made in that timeframe.”
PROJECT IMPLEMENTATION CONSIDERATIONS FOR CAL WATER FIX
The bulk of the meeting was dedicated to a presentation on the cost estimates and risk assessment work that has been done on the California Water Fix project. Assistant General Manager Roger Patterson introduced Chuck Gardner, the program manager for the outside group of consultants who prepared the estimate and risk assessment for the California Water Fix project.
Chuck Gardner began by assuring Committee members that the cost estimates were prepared accurately, without an optimism bias or an attempt to match a particular number. “We, as a group, recognize that it’s our job to do the best that we can to make sure that we do wind up with the right estimate and therefore the right budget number, recognizing that it is not our responsibility to decide if this project is affordable to the stakeholders or not,” he said.
One of the lessons learned from studying other large-scale projects is to have active and early risk management. The purpose is to consider everything that could go wrong with the project and then assess the cost impact if those things occurred. “Generally what you want to do is you want to be able to reduce the risk, eliminate the risk, or in some way maybe transfer the risk,” Mr. Gardner said. “Back in April and May of last year, we had about 60 experts who participated in the workshops, and the workshops were basically divided along their area of expertise. So a couple benefits that you get from this kind of assessment is you do have a plan in place for when or if you encounter those risks, but another good byproduct of this is to do a check on did we have enough contingency in our original estimate.”
The original specification was for a class 3 estimate for three 3000 cfs intakes along the Sacramento River, the intake pipelines; two tunnels to Clifton Court, and two pumping plants at Clifton Court.
“Our philosophy and the way we work is you build a plan, you build a project on paper, and then you price it,” said Pat Pettiette. “You take a scope and you put a price to it. This is a ground up detailed estimate. It includes labor costs, equipment, materials, detailed material take off, so you have a ground up price here. It’s not a unit price extension program, it is tailored specifically to this region in California, the Pacific labor base, equipment availability based on independent third party and Corps of Engineer rates, and the State of California Department of Labor.”
Mr. Pettiette presented a slide showing the distribution of costs for the California Water Fix. The estimate is $9.5 billion, which does not include any contingencies. It is the what the program would have cost in 2014 dollars. “This is based on the April 2015 conceptual engineering report,” he said. “Every discrete component in there are literally thousands of detailed line items in this estimate. Each part, each component was crewed with equipment spread, with productivity assessed to it, and detailed takeoffs. Material takeoffs are taken from area vendors; they were not plugged numbers. We went out and we sought material and equipment, and independent labor prices to go into this estimate.”
Bob Goodfellow with Aldea Services was retained to do a risk assessment for the California Water Fix program. Aldea Services is a construction engineering firm with a specialty in risk management, particularly tunnel and underground design.
Mr. Goodfellow explained the process as such: in the workshops, they tried to identify risks and assess them; they next generated a risk register with a scoring chart, and they then identified control and mitigation measures. They will then implement those control measures, but the information back into the risk register, creating a loop.
“It’s a fairly straightforward three step process as part of that loop where we avoid risk where we possibly can, mitigate what we can’t avoid, and allocate what we can’t fully and completely mitigate,” Mr. Goodfellow said. “So as you work your way through that pipeline of tasks, the avoidance in the tunnel business of avoiding risks, we’re mitigating and we’re allocating. If you allocate risk to yourself, that’s sometimes called acceptance, you accept those risks; if you transfer risks to others, that’s allocation through a contract document to the contractor.”
Mr. Goodfellow noted that guidance documents from the tunnel industry identify three items: to have an experienced project team, the use of a risk register as a risk management and risk presentation tool, and having a consistent and continuous risk management process from the early planning, all the way through the life of the project.
The scoring came up with many risks that were considered; the big risks are classified in red. “The idea of the risk management process is to take these red risks and drive the scores down through action, not just by changing the score, but by actually doing something, and you reduce then the exposure of the project to those risks into the yellow and hopefully into the white zone,” he said.
He noted that the risks they came up with were not necessarily unexpected for the size and complexity of a project of a similar size as the California Water Fix. “You’re looking at things like the initial enabling works being delayed that causes consequent delays to subsequent contracts and work being done,” he said. “That can snowball through a major program like this and cause substantial delays to the end date, leading to additional costs. The geotechnical delays, either in design or in construction with such a lot of tunneling involved, geotechnical is obviously going to be a major risk that needs to be attended to and mitigated considerably.”
Mr. Goodfellow said they then took Mr. Pettiette’s estimate, using the base estimate number at the 50th percentile; they then quantified the risks, put them into time and dollars, and compared the risk exposure numbers with the line item of contingency from the base estimate. They allocated the costs into the year it would be expended, shown in blue on the distribution of costs through time, with peak spending just over $1.5 billion in 2022. They next added in the risk, which is shown in red on the bar.
“We made the effort in our analysis to escalate those 2014 dollars to the year of expenditure, and that’s what shows here in the purple bar, extending the base cost,” he said.
So how did these things distribute into a probability curve? He presented a slide showing the distribution, noting that the numbers are all lined up along the 75th percentile of cost certainty. “That’s the number that gives us the 75% level of certainty that the construction cost will be at that dollar value or less,” Mr. Goodfellow explained. “Just a 25% probability of being in excess.”
He noted that is a little higher than normal – normal practice would be somewhere in the 50-60th percentile, but they opted to be more conservative for a program of this size and technical complexity.
Once they added in the risks to the cost, the number goes up to $11.7 billion; they were able to reduce that through successful mitigation down to a base cost plus risk number of $10.7 billion at the 75th percentile, Mr. Goodfellow said. He noted that the green curves to the right include the costs of escalation. “This is year of expenditure dollars, so pre and post risk mitigation, the $14.9 and the $13.6 billion are fully escalated numbers,” he said. “I do want to emphasis though for comparison purposes with the budget and with the cost estimate, we’re looking at the $10.7 billion as this is again in 2014 dollars.”
Mr. Gardner then presented a slide with a side by side comparison to show how it all lines up. “Pat’s estimate of $9.5 billion was a bid-day estimate; you might say that’s the optimistic view of how things would go. We added a contingency of about 35-36% to his number to account for any unforeseen conditions risk, and so that gives the subtotal of the $12.88. You can also see the constants that we have in the numbers: there’s the $1.91 billion for the PM, the CM, and the engineering, and then land acquisition. Then over the 75th confidence interval, with risk identified, and with the mitigation plan in place, you can see that the $9.5 billion goes up to $10.66 billion. There’s no contingency carried with that number because that number now has been risk adjusted to include any contingencies that we might encounter, and then just reading the rest of the way down, the numbers just hold constant for the PM, the CM, the land acquisition, for a total of $12.72 billion.”
Mr. Gardner noted that they hired Jacobs Engineering to do a completely independent cost estimate, so they reestimated the project much the same way that 5RMK did initially. Jacobs Engineering estimated the cost at $8.86 billion. “I think what this is telling us is that we have a pretty conservative cost estimate reading across the board at $14.9 billion,” he said.
Mr. Gardner noted that the main reason it’s in 2014 dollars is that they are waiting for the next round of funding to do the estimate in 2016 dollars. However, an advantage to keeping things in 2014 dollars allows how design changes in the project affect the costs
“There’s any number of ways you can slice and dice this cost estimate,” Mr. Gardner said. “You can not only include escalation, you can start including the cost of interest, and there’s any number of iterations about how you do interest – if you capitalize interest, or if you just decide you’re going to amortize the loan all the way from the beginning, so there are a lot of ways you can slice and dice it. For us, we stuck with this clear way of looking at it in the same dollars, just so the stakeholders get a sense of is the project really going up or not as we start to make design changes.”
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