Cost Factors and Future Price Factors in PR and VI: PA Technical Panel Recommendations Jaly 9, 2019 cal Panel consisting of engincers from the Public Assistance Division, including all four Consolidated Resource Centers (CRCs), reviewed proposals to ensure that cost estimates for PR and VI accurately reflect post-disaster conditions and expected future construction conditions. This paper summarizes the Technical Panel's findings and recommendations. ‘Cost Factor Recommendation Future Price Factor Recommendation Puerto Rico | Use RS Means 3-zone CCls for PR Use RAND predictive modeling, but use an FPF curve over time rather than a single FPF. In the meantime, use RAND proposed FPF adjusted to account for use of the 2019 PR CCI instead of national average costs Virgin Islands | Commission RS Means CCl and use | Use RAND predictive modeling, but use RAND-proposed cost factor in the an FPF curve over time rather than a meantime. single FPF and adjust the FPF to account for changes in labor mix and wage rates. In the meantime, use RAND proposed EPE Background and Terminology ‘The basis for RS Means cost estimates, used by PA for construction cost estimates, is a large database of the national average unit costs for a wide range of construction materials and City Cost Indices (CCI) to adjust the variation of material, labor, and equipment costs for specific locations across the country. For most disasters nationwide, PA construction estimates rely on location-specific RS Means CCls as the basis for estimates. At the beginning of recovery operations, robust CCIs did not exist in PR or VI ‘Therefore, both field operations proposed the use of Cost Factors that would apply to the national average CIs to account for location-specifie considerations. FEMA uses the Cost Estimating Format (CEF) as a uniform methodology to develop PA construction cost estimates. The CEF is divided into 8 parts. Part A is the base construction cost for labor, equipment, and materials and is driven by unit costs (CCIs) from RS Means. Parts B-H allow for estimates to include contingencies, permitting fees, and the like. Part E in particular accounts for potential cost escalation over the life of the construction project In Puerto Rico (PR) and the Virgin Islands (VI), standard Part escalation may not be sufficient t0 account for the expected shock to the construction industry in those locations resulting from billions of construction dollars flowing in at the same time, The sheer volume of expected PA funding is expected to puta significant strain on local resources and dramatically inerease the cost of construction in those locations. Therefore, FEMA is also considering implementing a future Price Factor (FPF) to account for the expected shock of billions of dollars of construction all at the same time. This document summarizes and analyzes recommendations for CIs and FPFs in PR and VI based on the work of three entities:© Gordian, the company responsible for RS Means, * RAND, the Federally Funded Research and Development Corporation (FFRDC) contracted by the PR and VI operations to develop cost estimating approaches and future price factors, and ‘© The Puerto Rico Center of Excellence, a small group of FEMA and COR3 technical experts charged with developing a cost estimating methodology for PR. Italso summarizes the recommendations of the Technical Panel for the implementation of CCls and FPEs in both locations with the goal of balancing: L. Timely action to enable the development of fixed cost estimates, 2, Accuracy and faimess in cost estimates, and 3. Consistency with cost estimating approaches nationwide. ‘The Technical Panel consisted of: © Tadele Belay, CRC East © Clifford Cotillier, CRC Central © Russel Hyde, CRC Central * Julia Moline, P.E., PA HQ * Anthony Ndum, P-E., PA HQ © Sam Ronveaux, CRC Central/CRC Atlantic © Pablo Santos Rivera, CRC Atlantic © Gary Tubach, P.E., CRC West Puerto Rico ‘At the beginning of the Recovery operation, RS Means included a single set of Cs for San Juan, which did not account for rural areas or remote islands of PR. Therefore, the JRO issued a contract to RAND to develop a cost estimating approach to take into account location-specific and disaster-specific considerations. In addition, the COE was stood up to develop cost factors for PR. Gordian has since updated the RS Means database to include an updated CCI for San Juan, as well as two additional CCIs: One for rural areas of the main island, and one for remote islands (Vieques and Culebra), ‘The Technical Panel reviewed the following documents for Puerto Rico: © Cost Factors: (© Cost Factors developed by the Ct: (© Cost Factors developed by RAND ‘© CIs developed by Gordian © Future Price Factors: © FPF proposal by RAND (© Predictive Analytics whitepaper by Gordian Cost Factors ‘This section summarizes and analyzes the three proposals for cost factors in Puerto Rico. Summary and Analysis of COE Proposal The Center of Excellence proposed using the 2018 San Juan CCI in RS Means, and applying dis factors for labor, material, and equipment to adjust those prices to account for post-disaster conditions. For their analysis, the COE used an estimated total construction cost of $50B aver 15 years. Specifically: rele«The Jabor adjustment accounts for an expectation that local resources will be depleted, and the overall mix of labor is expected to be about 40.5% local labor, 59.5% CONUS labor. The COE recommended that the labor component of the San Juan CCI adjusted RS Means costs be increased by a factor of 4.36 to account for this CONUS mix of labor. ‘© The material adjustment is based on a limited assessment of material supply on island and new tariffs on stee! and aluminum import. The COE determined that materials costs are approximately 4.43% higher than the San Juan CCI and recommended an inctease of 10% on materials costs over the San Juan CCI adjusted material costs. ‘The equipment adjustment is based on a limited assessment of equipment rental prices on istand. Based on analysis and omission of outliers, the COE recommended an increase of 32% on equipment costs over the San Juan CCI adjusted material costs. The Technical Panel makes the following assessment of the COE approach: «The Technical Panel agrees that the labor mix is Itkely favor heavily CONUS resources as ‘massive construction projects are underway. ‘© The Technical Panel agrees with the approach to treating labor, materials, and equipment as separate entities with separate variations. «The methodologies to determine cost factors for materials and equipment were based on very limited sample sizes over a long construction horizon and therefore may not account for variations in methods, materials, and construction timelines. ‘Summary and Analysis of RAND Proposal RAND proposed using RS Means national average costs and applying a single factor accounting for labor ‘and materials to adjust those prices For post-disaster conditions. RAND proposed adjusting equipment rates using the FPF. RAND proposes combining the recommended cost factor (1.16) and future price factor (1.21, discussed below) into a single factor of 1.4 to be used on cost estimates using RS Means national average unit costs. ‘© The Jabor adjustment accounts for increased labor costs in PR and a labor mix of $0% local/50% CONUS. The recommended labor cost factor is 1.3 times the national average. © The materials adjustment accounts for the mix of materials used in PR compared with CONUS. ‘The recommended materials cost factor is 1,07 times the national average. ‘+ The combined cost factor, accounting for labor and materials but not equipment, weights materials at 60% and labor at 40%, resulting in a recommended cost factor of 1.16 over the national average for labor and materials. With the FPF of 1.21, RAND's overall recommended escalation factor is 1.4 to be applied to the total national average RS Means unit costs comprised ‘of material, abor, and equipment costs. RAND proposes applying an escalation factor of 14 to the entire Part A cost estimate, rather than to unit prices in Part A of the CEF. RAND also provides guidance for applying its recommended cost factors to cost estimates developed using the San Juan CCI rather than the national averages, and proposes applying cost factors to labor, taterials, and equipment separately in this case: ‘© The labor adjustment is 5.38 times the San Juan CCl. © The materials adjustment is 1.11 times the San Juan CCL © The equipment adjustment is 1.66 times the San Juan CCl.The Technical Panel makes the following assessment of the RAND approach ‘+ ‘The Technical Panel agrees that the labor mix is likely to favor heavily CONUS resources as massive construction projects are underway. © The Technical Pancl disagrees with using the national average CCI instead of the PR CCI, because materials costs may vary differently in PR than they do CONUS. # Aluiwughs it may be simpler to combine labor and materials into a single factor for application to the national average unit cost estimate, doing so may neglect the wide variations of materials ccosts in Puerto Rico from the national average material costs. ‘Summary and Analysis of RS Means Proposal ‘Atthe request of another client, beginning in 2018, Gortian updated the San Juan CCI and developed a 3- location, custom CCI to account for urban areas in PR (such as San Juan), rural areas on the PR main island, and remote PR islands. The result is an updated CCI for all three locations accounting for PR- specific variations in material and equipment, and an updated labor rate. The updated research resulted in several key findings: ‘© Prior materials prices were overstated, and others were understated. The upcoming release of the San Juan CCI is expected to lower materials costs overall © Whereas before labor rates were not differentiated by trade, the new CCI will account for unique wages for each PR trade. ‘© Local research found sufficient capacity for equipment at the (ime Uf the research, ‘* Local research found that productivity was on par with the southeastem US. Of the three entities, Gordian is the only private company engaged in developing cost data for PR. As such, there is a cost associated with some of these efforts. Specifically: ‘©The updated San Juan CCI will become a part of the standard RS Means update cycle and will not carry additional cost for FEMA. © The other two, location-specifie CCls (rural and island) are not part of the standard RS Means update cycle, Accessing those costs and updating them a regular basis will increase the per-user licensing fee from $2,540.46 10 $4,875, with am Of 50 licenses per year. PEMA users in Puerto Rico currently account for approximately 100 licenses ‘The Technical Panel makes the following assessment of the Gordian approach: «FEMA uses lacation-specific CIs everywhere else in the country, ‘© Gordian does not seem to account for a heavy mix of CONUS labor. FEMA is eoncerned that PR labor will be insufficient to keep up with demand. Discussion and Recommendation The RAND and COE approaches were developed when there were not expected to be updated, post- disaster CCIs for PR, broken across urban, rural, and island regions. Location-specific CCls are the most ‘accurate way to account for location- and geography-specific factors, and are used everywhere else in the nation to form the bases of PA construction cost estimates, The Technical Panel agrees with the methodology Gordian used to update the San Juan CCI and develop CCIs for rural and island regions in PR and therefore recommends that the PR CCTs developed by Gordian are used in lieu of cost adjustments based on older San Juan CCls or national averages. The Technical Pane! recommends purchasing access to the location-specific CCIs at a cost of approximately $233,500,‘The Technical Panels largest concem with the Gordian methodology hs to do with the labor mix-but COE and RAND identified a strong likelihood that the labor mix is likely to be at least 50% CONUS, labor. The Technical Panel does not recommend changing the methodology used to develop the RS Means CCI; however, the Technical Panel proposes relying on the FPF, described below, to account for the expected increased use of CONUS fabor in the FPF. Future Price Factors This section summarizes and analyzes two proposals for accounting for shocks to the construction economy resulting from large amounts of PA funding. ‘Summary and Analysis of RAND Proposal To determine likely future increases in construction prices, RAND built an economic model based on expected construction conditions for constriction firms, changes and expected growth in the PR economy, local labor force conditions, and local market conditions. RAND uses the model to consider ‘three possible scenarios: a one-time shock followed by stead investment, steady multi-year increases, and a rapid ramp-up in multiple year-over-year increases. RAND developed ranges of labor, material, and equipment escalations over a 10-year construction horizon and made recommendations for each category. RAND then combined all three escalation factors with the CCI factors recommended above to arrive at a single factor of 1.4, accounting for both location specific considerations and future price considerations, +o be applied to Part A of the CEF. RAND also provided application options for the factors to be applied to the 2018 RS Means San Juan cost data. ‘+ The Jabor adjustment reflects an anticipated increase in wages of 25-30% due to demand, variation based on multiple trades in PR, and a potential increase of CONUS labor of up to 75%. ‘The modified labor index is therefore expected to be 1.49 over the national average CCI. «The material adjustment is based on the economy-wide model and reflects an expected increase of material prices of about 25%, The modified material index is therefore expected to be 1.25 over the national average CCI. ‘©The equipment adjustment is based on a lack of construction equipment and an expected ramp-up of construction. The modified equipment index is therefore expected to be 1.42 over the national average CCI. The Technical Panel makes the following assessment of the RAND approach: ‘The model and approach used to determine the likely escalation of construction processes appear to be based on sound academic research and economic principles. © A one-time future price factor over 10 years may be simple but also may overestimate projects constructed after the construction cycle has peaked and may underestimate projects constructed at the peak of the cycle. * Combining the CCI factor and FPF factor to apply to the national average unit costs neglects variations in material costs and labor trade costs in Puerto Rico from the national average costs, and neglects when in the construction cycle work will be completed. ‘+ The FPF as calculated is intended to be applied to the national average unit costs. If applied to the PR CCI, it may underestimate construction costs. Summary and Analysis of Gordian Proposal Gordian has developed predictive modeling capacity to account for escalation nationwide combining, empirical evidence with data mining. This model is promising for PR and nationwide. However, Gordianestimates that a PR-specific predictive model may take a minimum of 6 months to complete at a cost of $400-S600K. This timeframe is not sufficient to ensure that cost estimates ean be propared timely for FEMA. Discussion and Recommendation Although the Gordian proposal is promising, itis not expected to yield results quickly enough to be useful in PR, FEMA generally agrees with the methodology RAND employed to determine an FPF; however, FEMA disagrees with using a single FPF for all projects regardless of schedule and disagrees with combining the FPF with the CCI factor. Therefore, the Technical Panel recommends using the RAND model for FPF in PR to determine an FPF curve that can be applied based on the anticipated construction schedule af a project. In other words, the RAND model should be used to general escalation factors at each year of a construction project rather than a single escalation factor. Recommended Approach in Puerto Rico The Technical Panel recommends using the 3-zone RS Means CCls for Part A construction costs. The Technical Panel recommends using the RAND model for FPF, adjusted to account for the use of the PR Cs rather than national average unit costs. In addition, the Technical Panel recommends that, rather ‘dan using a single FPF, providing an FPF curve that can be applied based on the construction schedule. Because the development of an FPF curve may take some time, and there is an urgent need to develop cost estimates now, the Technical Panel recommends using the single FPF, adjusted to account for the use ofthe PR CCls rather than the national average unit costs, until the FPF curve is finalized. US Virgin Islands RS Means does not include a CCI for the USVI, and Gordian has not developed USVI costs. Developing @ USVI would take approximately 2 months from the issuance of a contract and cost FEMA approximately $159,000. Accessing and maintaining those costs would be included in the pricing cited for RS Means licenses for PR data, The only Cost Factor and FPF proposal for the VI was developed by RAND using the same methodologies described above. Cust Factors RAND proposed using the RS Means national average unit costs and applying a single factor accounting for labor and materials tn adjust those prices for post-disaster conditions. RAND proposed adjusting, equipment rates using the FPF. RAND proposes combining the recommended cost factor (1.32) and future price factor (1.14, discussed below) into a single factor of 1.51 to be applied to cost estimates using national average RS Means unit costs + The materials adjustment accounts for the mix of materials used in VI compared with CONUS. The recommended materials cost factor is 1.23 times the national average. + RAND did not calculate a Jabor adjustment separate from the materials factor. However, RAND provided the basis for the labor component of the cost factor, including the mix of local and CONUS labor and productivity. The resulting calculation yielded a combined materials and labor factor of 1.32 over the mativual average for labor and materials. ‘+ With the FPF of 1.14, RAND’s overall recommended factor is 1.51 RAND proposes applying an escalation factor of 1.51 to the entire Part cost estimate, rather than to unit prives in Part A of the CEF. Future Price FsRAND used the same economic model described for PR and three shock scenarios ($100M, $200M, and $300M expansions) to derive FPPs in VI. + The Jabor adjustment is not calculated separately from the CCI, because the CCI labor calculations include consideration of wage adjustments and labor mix. * The material adjustment is based on the economy-wide model and reflects an expected increase of material prices of ahout 20%, The modified material index is therefore expected tu be 1.2 uver the national average CCI. ‘The equipment adjustment is based on a lack of construction equipment and an expected ramp-up of construction. The modified equipment index is therefore expected to be 1.5 over the national average CCL. Recommended Ay in the Virgin Islands ‘The Technical Panel recommends commissioning Gordian to develop a VI-specifie CCI and using the RAND-proposed cost factors until the VI CCLis finalized. The Technical Panel makes the same recommendation for the FPF in VI as it does in PR—that RAND develop an FPF curve that can be applied based on the expected construction schedule.