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Estimate preparation

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For construction works, VicRoads used the practice of “all-up” historical rates that included all contractor costs and margins (on-costs) related to the measured quantity of work.

While this methodology was not precluded from conforming to the guideline, it was not Evans

& Peck’s preferred method or the preference of industry or other agencies, particularly for medium to large projects and projects at a pre-tender estimate stage. The main reason for this was that cost estimates based on the “all-up” historical rates tend to lack transparency.

The preferred method uses a first principle approach to estimating.

Contingency

The amount of contingency on top of the base estimate was estimated to be 34% at P50 and 46% at P90.2 These contingency estimates appeared excessive for a project at the pre-tender stage compared to other projects of a similar size and scope.

Limited or no assessment has been made of contingent risks (such as political, environmental, latent conditions, contractual, adverse weather etc.)

Escalation

The escalation calculation is excessive as the cash flow extends well beyond the milestone completion dates stated in the PPR. Completed work would not continue to attract price escalations as all construction costs have been incurred.

The escalation rate in the November and December 2009 PPRs was specified in the linear form, which was not in line with the guidelines. These require escalation in a compound form.

In the process of undertaking this ex-post case study, VicRoads made a number of comments on the Evans & Peck (2010) review which are summarised below:

The consultants’ investigations and procedures were not accepted by VicRoads as there was no evidence that their suggested approach was superior.

The high contingency in the initial cost estimate took into account the possibility that a large amount of fill might need to be transported to the site if contractors weren’t able to gain access to a private quarry. The owner of the quarry had refused to enter into an agreement with the project office at the time when the initial project cost estimates were prepared.

Evans & Peck’s cost estimating approach reflects a quantity surveyor approach rather than one from a civil engineering cost expert.

The Nation Building Unit subsequently revamped and revised their advice to jurisdictions on how cost estimates should be carried out which was less aligned to the recommendations and findings contained in the Evans & Peck (2010) report.

Appendix B.4 • IV Methodological issues in ex-post evaluation Time and knowledge constraints in the ex-post evaluation team meant cost estimation issues for this project weren’t investigated further. The project review team in the Department of Infrastructure, Regional Development and Cities may be in a better position to review this (if required) as it has a strong focus on project cost review.

Residual values

Residual values (RVs) capture the remaining benefits that the project may offer beyond the evaluation period. However the ex-ante analysis did not include residual value estimates and so under-estimated the project benefits.

In this ex-post evaluation, RVs were estimated using five methods:

straight-line depreciation (SLD)

component method

decreasing net benefits (DNB)

constant net benefits (CNB)

increasing net benefits (INB).

Appendix E of the main report describes each of these methodologies.

The SLD method was adopted as the reference for this study and estimates from other methods were used for sensitivity testing.

Estimation of RVs requires an assumption about the length of project life. Different components of the project have different lifespans with different costs. It was assumed that the average lifespan of the project was 50 years. This was based on previous estimates where a road project is expected to have an economic life of 40 to 60 years (Queensland Department of Transport and Main Roads, 2011, Transport for NSW 2013 and Austroads 2003).

FYRR

The required project evaluators for a road infrastructure project are the NPV and benefit-cost ratio (BCR). For non-mutually exclusive options, BCR is usually the deciding metric. However, investment timing is also an important factor to consider. The first-year rate of return (FYRR) test is useful for this purpose. The original analysis did not calculate or report FYRR as a performance evaluator; this is calculated in table 7 using the P90 CBA results contained in the VicRoads PPR lodged in December 2009 (2009c).

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Delay for optimal timing refers to the number of years needed to delay a project until the discounted first-year net benefits are greater than or equal to 4% of the discounted construction costs. Figure 7 shows the ex-ante FYRR never rises above the threshold rate of 4% during the evaluation period, disregarding the spike caused by rehabilitation costs in the base case.

Figure 7 Ex-ante first year rate of return @ 4%

Note: The spike in FYRR in the 19th year was due to the large base case rehabilitation cost being avoided under the project case.

Externalities

Ex-ante CBAs included some minor external benefits associated with reductions in greenhouse gas and other emissions (nitrogen oxides, carbon monoxide, non-methane volatiles and sulphur oxides). No other forms of externalities were considered in the analyses. The same methodology was adopted in the ex-post evaluation to estimate externality effects.

Base and price year

The price year was set to 2009 in this ex-post analysis, the same as the ex-ante CBA.

The base year in the ex-ante analysis was stated as 2008 in the PPR and the CBA results table incorrectly labelled the base year as 2010. The actual base year used in ex-ante CBA calculations was 2009. In the ex-post analysis, the base year was set to 2009, the same as the price year.

Discount rate

The discount rate used in the ex-ante CBA was 4.4%. For consistency, the reference rate used in the ex-post CBA for discounting was set to 4% with 7% for sensitivity testing.

-2%

V Reconstruction of the ex-ante

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