Federal-Aid Highways: Cost and Oversight of Major Highway and Bridge Projects--Issues and Options
Published: 2003-05-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Improving the oversight and controlling the costs of major highway and bridge projects is important for the federal government, which often pays 80 percent of these projects' costs. Widespread consensus exists on the need to fund such projects, given the doubling of freight traffic and worsening congestion projected over the next 20 years, yet growing competition for limited federal and state funding dictates that major projects be managed efficiently and cost effectively. The Federal Highway Administration (FHWA) provides funding to the states for highway and bridge projects through the federal-aid highway program. This funding is apportioned to the states, and state departments of transportation choose eligible projects for funding. FHWA provides oversight to varying degrees, and, under the Transportation Equity Act for the 21st Century (TEA-21), FHWA and each state enter into an agreement documenting the types of projects the state will oversee. This statement for the record summarizes cost and oversight issues raised in reports and testimonies GAO has issued since 1995 on major highway and bridge projects and describes options that GAO has identified to enhance federal oversight of these projects, should Congress determine that such action is needed and appropriate.
section_title: What GAO Found
paragraphs: GAO and others have reported that cost growth has occurred on major highway and bridge projects; however, overall information on the amount of and reasons for cost increases is generally not available because neither FHWA nor state highway departments track this information for entire projects. GAO has found that costs grow, in part, because initial cost estimates, which are generally developed to compare project alternatives during a required environmental review phase, are not reliable predictors of projects' total costs. In addition, FHWA approves the estimated costs of major projects in phases, rather than agreeing to the total costs at the outset. By the time FHWA approves the total cost of a major project, a public investment decision might, in effect, already have been made because substantial funds could already have been spent on designing the project and acquiring property. FHWA's implementation of a TEA-21 requirement that states develop annual finance plans for major projects estimated to cost $1 billion or more has improved the oversight of some major projects, and FHWA is incorporating more risk assessment in its day-to-day oversight activities. Should Congress determine that enhancing federal oversight of major highway and bridge projects is needed and appropriate, GAO has identified options, including improving information on the cost performance of selected major projects, improving the quality of initial cost estimates, and enhancing and clarifying FHWA's role in reviewing and approving major projects. Adopting any of these options would require balancing the states' sovereign right to select projects and desire for flexibility and more autonomy with the federal government's interest in ensuring that billions of federal dollars are spent efficiently and effectively. In addition, the additional costs of each of these options would need to be weighed against its potential benefits.

section_title: Letter
paragraphs: We appreciate the opportunity to offer this statement for the record  concerning efforts by the Federal Highway Administration (FHWA) to  oversee and control the costs of major highway and bridge projects—80  percent of which are often paid by the federal government. With freight  traffic expected to double and congestion projected to worsen over the  next 20 years, widespread consensus exists on the need to maintain and  improve the nation’s surface transportation infrastructure. Given that both  the federal government and state governments are facing budget deficits in  the hundreds of billions of dollars in the coming years, it is even more  important that major highway and bridge projects be managed efficiently  and cost effectively. While effectively managing these projects involves  many factors other than cost—including safety, quality, mobility, and  environmental impact—cost increases on major projects often take center  stage, especially in light of the growing competition for federal dollars.
My statement today is based on a body of work we have performed and  products we have issued since 1995 on the costs and oversight of major  highway and bridge projects. (See the list of related GAO products at the  end of this statement.) Today’s statement (1) summarizes these cost and  oversight issues, (2) discusses FHWA’s recent efforts to improve the  management and oversight of these projects, and (3) describes options we  have identified that might enhance federal oversight of these projects,  should Congress determine that such action is needed and appropriate.
We have reported—as has the Department of Transportation’s (DOT)
Inspector General and various state audit and evaluation agencies—that  cost growth has occurred on many major highway and bridge projects.  However, overall information on the amount of and reasons for cost  increases on major projects is generally not available because neither  FHWA nor state highway departments track this information over the life  of projects. While many factors can cause costs to increase, we have  found, on projects we have reviewed, that costs increased, in part, because  initial cost estimates were not reliable predictors of the total costs or  financing needs of projects. Rather, these estimates were generally  developed for the environmental review—whose purpose was to compare  project alternatives, not to develop reliable cost estimates. In addition, we  reported in 1997 that FHWA had done little to ensure that containing costs  was an integral part of the states’ project management, in part because  FHWA believed it had no mandate to either encourage or require states to  adopt such practices. Finally, we have noted that FHWA generally  approves the estimated cost of a major project in phases, when individual  project segments are ready for construction, rather than agreeing to the  total cost of the entire project at the outset. By the time FHWA approves  the total cost of a major project, a public investment decision might, in  effect, already have been made because substantial funds would already  have been spent on designing the project and acquiring property, and  many of the increases in the project’s estimated costs might already have  occurred.
Since 1998, FHWA has taken a number of steps to improve the  management and oversight of major projects, including implementing a  requirement of the Transportation Equity Act for the 21st Century (TEA- 21) that states develop, and that the Secretary approve, annual finance  plans for any highway or bridge project estimated to cost $1 billion or  more. As of May 2003, FHWA had approved finance plans for 10 federal- aid highway projects and expected finance plans to be prepared 5  additional projects in the future. As I testified in May 2002, while  indications are that the finance plan requirement has improved the  oversight of some major projects, many multibillion-dollar corridor  projects representing a substantial investment of federal funds will not be  covered by the requirement because the projects will be constructed as a  series of smaller projects that will cost less than $1 billion each. Other  steps FHWA has taken to improve its oversight include introducing greater  risk-based oversight into its day-to-day activities and attempting to resolve  conflicting interpretations of its oversight role that it believes have  occurred since 1991, when the states began assuming greater  responsibility for approving the design and construction of many projects.
Finally, FHWA has taken actions to respond to a DOT task force report on  the management and oversight of major transportation projects, such as  developing and publishing core competencies for managers overseeing  major projects. However, FHWA has not yet developed goals or  measurable outcomes linking its oversight activities to its business goals in  its performance plan, as an FHWA task force recommended in 2001. As I  testified in May 2002, until FHWA takes these actions, it will be limited in  its ability to judge the success of its efforts or to know whether conflicting  interpretations of the agency’s roles have been resolved.
Our past work, including my testimony of May 2002, presented options for  enhancing FHWA’s role in overseeing the costs of major highway and  bridge projects, should Congress, in reauthorizing TEA-21, determine that  such action is needed and appropriate. These options include improving  information on the cost performance of selected major highway and  bridge projects, improving the quality of initial cost estimates, and  enhancing and clarifying FHWA’s role in reviewing and approving major  projects. Each of these options entails a commitment of additional  resources and poses costs and challenges that must be weighed against  the option’s potential benefits. Adopting one or more of these options  would require Congress to determine the appropriate federal role— balancing the state’s sovereign right to select its projects and desire for  flexibility and more autonomy with the federal government’s interest in  ensuring that billions of federal dollars are spent efficiently and  effectively.
subsections: section_title: Background
paragraphs: FHWA provides funding to the states for roadway construction and  improvement projects through various programs collectively known as the  federal-aid highway program. Most highway program funds are  distributed to the states through annual apportionments according to  statutory formulas; once apportioned, these funds are generally available  to each state for eligible projects. The responsibility for choosing projects  to fund generally rests with state departments of transportation and local  planning organizations. The states have considerable discretion in  selecting specific highway projects and in determining how to allocate  available federal funds among the various projects they have selected. For  example, section 145 of title 23 of the United States Code describes the  federal-aid highway program as a federally assisted state program and  provides that the federal authorization of funds, as well as the availability  of federal funds for expenditure, “shall in no way infringe on the sovereign  right of the states to determine which projects shall be federally financed.”
While FHWA approves state transportation plans, environmental impact  assessments, and the acquisition of property for highway projects, its role  in approving the design and construction of projects varies. Relatively few  projects are subject to “full” oversight, in which FHWA prescribes design  and construction standards, approves design plans and estimates,  approves contract awards, inspects construction progress, and renders  final acceptance on projects when they are completed. Under TEA-21,  FHWA exercises full oversight only of certain high-cost Interstate system  projects. For other federally assisted projects, there are two options.  First, for a project that is not located on the Interstate system but is part of  the National Highway System, a state may assume responsibility for  overseeing the project’s design and construction unless the state or FHWA  determines that this responsibility is not appropriate for the state. Second,  for a project that is not part of the National Highway System, the state is  required to assume responsibility for overseeing the project’s design and  construction unless the state determines that this responsibility is not  appropriate for it. Under both options, TEA-21 requires FHWA and each  state to enter into an agreement documenting the types of projects for  which the state will assume oversight responsibilities.
A major highway or bridge construction or repair project usually has four  stages: (1) planning, (2) environmental review, (3) design and property  acquisition, and (4) construction. The state’s activities and FHWA’s  corresponding approval actions are shown in figure 1.
In TEA-21, Congress required states to submit annual finance plans to DOT  for highway and bridge projects estimated to cost $1 billion or more.  Congress further required each finance plan to be based on detailed  estimates of the costs to complete the project and on reasonable  assumptions about future increases in such costs.
section_title: Issues Identified with the Costs and Oversight of Major Highway and Bridge Projects
paragraphs: Our work has raised issues concerning the cost and oversight of major  highway and bridge projects, including the following:    Cost growth has occurred on many major highway and bridge projects.
For example, on 23 of 30 projects initially expected to cost over $100  million, our 1997 report identified increases ranging from 2 to 211  percent—costs on about half these projects increased 25 percent or more.  In addition, the DOT Inspector General has recently identified cost  increases on major projects such as the Wilson Bridge, Springfield  Interchange, and Central Artery/Tunnel projects. As I testified in 2002,  reviews by state audit and evaluation agencies have also highlighted  concerns about the cost and management of major highway and bridge  programs. For example in January 2001, Virginia’s Joint Legislative Audit  and Review Commission found that final project costs on Virginia  Department of Transportation projects were well above their cost  estimates and estimated that the state’s 6-year, $9 billion transportation  development plan understated the costs of projects by up to $3.5 billion.  The commission attributed these problems to several factors, including  not adjusting estimates for inflation, expanding the scope of projects, not  consistently including amounts for contingencies, and committing design  errors.
Although cost growth has occurred on many major highway and bridge  projects, overall information on the amount of and reasons for cost  increases on major projects is generally not available because neither  FHWA nor state highway departments track this information over the life  of projects. Congressional efforts to obtain such information have met  with limited success. For example, in 2000 the former Chairman of this  subcommittee asked FHWA to provide information on how many major  federal-aid highway projects had experienced large cost overruns. Because  FHWA lacked a management information system to track this information,  officials manually reviewed records for over 1,500 projects authorized  over a 4-year period. FHWA’s information, however, measured only the  increases in costs that occurred after the projects were fully designed.  Thus, cost increases that occurred during the design of a project—where  we have reported that much of the cost growth occurs—were not reflected  in FHWA’s data. In contrast to the federal-aid highway program, the Office  of Management and Budget requires federal agencies, for acquisitions of  major capital assets, to prepare baseline cost and schedule estimates and  to track and report the acquisitions’ cost performance. These requirements  apply to programs managed by and acquisitions made by federal agencies,  but they do not apply to the federal-aid highway program, a federally  assisted state program.
While many factors can cause costs to increase, we have found, on  projects we have reviewed, that costs increased, in part, because initial  cost estimates were not reliable predictors of the total costs or financing  needs of projects. Rather, these estimates were generally developed for  the environmental review—whose purpose was to compare project  alternatives, not to develop reliable cost estimates. In addition, each state  used its own methods to develop its estimates, and the estimates included  different types of costs, since FHWA had no standard requirements for  preparing cost estimates. For example, one state we visited for our 1997  report included the costs of designing projects in its estimates, while two  other states did not. We also found that costs increased on projects in the  states we visited because (1) initial estimates were modified to reflect  more detailed plans and specifications as projects were designed and (2)  the projects’ costs were affected by, among other things, inflation and  changes in scope to accommodate economic development over time.
In 1997, we reported that cost containment was not an explicit statutory or  regulatory goal of FHWA’s full oversight. On projects where FHWA  exercised full oversight, it focused primarily on helping to ensure that the  applicable safety and quality standards for the design and construction of  highway projects were met. According to FHWA officials, controlling costs  was not a goal of their oversight and FHWA had no mandate in law to  encourage or require practices to contain the costs of major highway  projects. While FHWA influenced the cost-effectiveness of projects when it  reviewed and approved plans for their design and construction, we found  it had done little to ensure that cost containment was an integral part of  the states’ project management.
Finally, we have noted that FHWA’s oversight and project approval  process consists of a series of incremental actions that occur over the  years required to plan, design, and build a project. In many instances,  states construct a major project as a series of smaller projects, and FHWA  approves the estimated cost of each smaller project when it is ready for  construction, rather than agreeing to the total cost of the major project at  the outset. In some instances, by the time FHWA approves the cost of a  major project, a public investment decision may, in effect, already have  been made because substantial funds have already been spent on  designing the project and acquiring property, and many of the increases in  the project’s estimated costs have already occurred.
section_title: Efforts by FHWA to Improve the Management and Oversight of Major Projects
paragraphs: Since 1998, FHWA has taken a number of steps to improve the  management and oversight of major projects. FHWA implemented TEA- 21’s requirement that states develop an annual finance plan for any  highway or bridge project estimated to cost $1 billion or more.  Specifically, FHWA developed guidance that requires state finance plans  to include a total cost estimate for the project, adjusted for inflation and  annually updated; estimates about future cost increases; a schedule for  completing the project; a description of construction financing sources  and revenues; a cash flow analysis; and a discussion of other factors, such  as how the project will affect the rest of the state’s highway program. As of  May 2003, FHWA had approved finance plans for 10 federal-aid highway  projects and expected finance plans to be prepared for 5 additional  projects at the conclusion of those projects’ environmental review phase.  In addition, FHWA established a major projects team that currently tracks  and reports each month on these 15 projects, and has assigned—or has  requested funding to assign—a full-time manager to each project to  provide oversight. These oversight managers are expected to monitor their  project’s cost and schedule, meet periodically with project officials, assist  in resolving issues and problems, and help to bring “lessons learned” on  their projects to other federally assisted highway projects.
As I testified in 2002, there are indications that the finance plan  requirement has produced positive results. For example, in Massachusetts,  projections of funding shortfalls identified in developing the Central  Artery/Tunnel project’s finance plan helped motivate state officials to  identify new sources of state financing and implement measures to ensure  that funding was adequate to meet expenses for the project. However,  some major corridor projects will not be covered by the requirement.  FHWA has identified 22 corridor projects that will be built in “usable  segments”—separate projects costing less than $1 billion each—and  therefore will not require finance plans. According to FHWA officials,  states plan these long-term projects in segments because it is very difficult  for them to financially plan for projects extending many years into the  future. Nevertheless, these major projects represent a large investment in  highway infrastructure. For example, planned corridor projects that will  not require finance plans total almost $5 billion in Arkansas, about $12.3  billion in Texas, about $5.3 billion in Virginia, and about $4.2 billion in  West Virginia. In addition, the $1 billion threshold does not consider the  impact of a major highway and bridge project on a state’s highway  program. In Vermont, for instance, a $300 million project would represent  a larger portion of the state’s federal highway program funding than a $1  billion dollar project would represent in California.
In addition to implementing TEA-21’s requirements, FHWA convened a  task force on the stewardship and oversight of federal-aid highway  projects and, in June 2001, issued a policy memorandum to improve its  oversight. The memorandum directed FHWA’s field offices to conduct risk  assessments within their states to identify areas of weakness, set priorities  for improvement, and work with the states to meet those priorities. Soon  afterwards, FHWA convened a review team to examine its field offices’  activities, and in March 2003, it published an internal “best practices”  guide to assist the field offices in conducting risk assessments. FHWA also  began an effort during 2003 to identify strategies for assessing and  managing risks and for allocating resources agencywide.
FHWA’s policy memorandum further sought to address the task force’s  conclusion that changes in the agency’s oversight role since 1991 had  resulted in conflicting interpretations of the agency’s role in overseeing  projects. The task force found that because many projects were classified  as “exempt” from FHWA’s oversight, some of the field offices were taking  a “hands off” approach to these projects. The policy stipulates that while  states have responsibility for the design and construction of many  projects, FHWA is ultimately accountable for the efficient and effective  management of all projects financed with federal funds and for ensuring  compliance with applicable laws, regulations, and policies.
While FHWA has been moving forward to incorporate risk-based  management into its oversight through the use of risk assessments, it has  not yet developed goals or measurable outcomes linking its oversight  activities to the business goals in its performance plan, nor has it  developed a monitoring plan as its task force recommended in 2001. As I  testified in May 2002, until FHWA takes these actions, it will be limited in  its ability to judge the success of its efforts or to know whether the  conflicting interpretations of its roles discussed above have been resolved.
Finally, FHWA has taken actions to respond to a DOT task force report on  the management and oversight of major projects. In December 2000, this  task force concluded that a significant effort was needed to improve the  oversight of major transportation projects—including highway and bridge  projects. The task force made 24 recommendations, including  recommendations to establish an executive council to oversee major  projects, institute regular reporting requirements, and establish a  professional cadre of project managers with required core competencies,  training, and credentials. The task force’s recommendations were not  formally implemented for several reasons, including turnover in key  positions and the need to reevaluate policy following the change in  administrations in January 2001, and higher priorities brought on by the  events of September 11, 2001. However, FHWA believes it has been  responsive to the task force’s recommendations by establishing a major  projects oversight team, designating an oversight manager for each  project, and, most recently, developing and publishing core competencies  for managers overseeing major projects.
In addition, 7 of the task force’s 24 recommendations would have required  legislation. For example, the task force recommended establishing a  separate funding category for preliminary engineering and design—those  activities that generally accomplish the first 20 to 35 percent of a project’s  design. The task force concluded that a separate funding category would  allow a new decision point to be established. Initial design work could  proceed far enough so that a higher-quality, more reliable cost estimate  would be available for decisionmakers to consider before deciding  whether to complete the design and construction of a major project—and  before a substantial federal investment had already been made.
section_title: Options to Enhance Federal Oversight of Major Projects
paragraphs: In my testimony of May 2002, I presented options for enhancing FHWA’s  role in overseeing the costs of major highway and bridge projects, should  Congress, in reauthorizing TEA-21, determine that such action is needed  and appropriate. Each of these options would be difficult and possibly  costly; each represents a commitment of additional resources that must be  weighed against the option’s potential benefits. Adopting any of these  options would require Congress to determine the appropriate federal  role—balancing the states’ sovereign right to select its projects and desire  for flexibility and more autonomy with the federal government’s interest in  ensuring that billions of federal dollars are spent efficiently and  effectively. These options include the following:    Have FHWA develop and maintain a management information system on  the cost performance of selected major highway and bridge projects,  including changes in estimated costs over time and the reasons for such  changes. While Congress has expressed concern about cost growth on  major projects, it has had little success obtaining timely, complete, and  accurate information about the extent of and the reasons for this cost  growth on projects. Such information could help define the scope of the  problem with major projects and provide insights needed to fashion  appropriate solutions.
Improve the quality of initial cost estimates by having states develop—and  having FHWA assist the states in developing—more uniform and reliable  total cost estimates at an appropriate time early in the development of  major projects. This option could help policymakers understand the extent  of the proposed federal, state, and local investment in these projects, serve  as a baseline for measuring cost performance over time, and assist  program managers in reliably estimating financing requirements.
Have states track the progress of projects against their initial baseline cost  estimates. Expanding the federal government’s practice of having its own  agencies track the progress of the acquisition of major capital assets  against baseline estimates to the federally assisted highway program could  enhance accountability and potentially improve the management of major  projects by providing managers with real-time information for identifying  problems early, and for making decisions about project changes that could  affect costs. Tracking progress could also help identify common problems  and provide a better basis for estimating costs in the future.
Establish performance goals for containing costs and implement strategies  for doing so as projects move through their design and construction  phases. Such performance goals could provide financial or other  incentives to the states for meeting agreed-upon goals. Performance  provisions such as these have been established in other federally assisted  grant programs and have also been proposed for use in the federal-aid  highway program. Requiring or encouraging the use of goals and strategies  could also improve accountability and make cost containment an integral  part of how states manage projects over time.
Expand FHWA’s finance plan requirement to other projects. While  Congress has decided that enhanced federal oversight of the costs and  funding of projects estimated to cost over $1 billion is important, projects  of importance for reasons other than cost may not, as discussed earlier,  receive such oversight. Should Congress believe such an action would be  beneficial, additional criteria for defining projects would need to be  incorporated into FHWA’s structure for overseeing the costs and financing  of major projects.
Clarify FHWA’s role in overseeing and reviewing the costs and  management of major projects. Changes in FHWA’s oversight role since  1991 have created conflicting interpretations about FHWA’s role, and our  work has found that FHWA questions its authority to encourage or require  practices to contain the costs of major highway projects. Should  uncertainties about FHWA’s role and authority continue, another option  would be to resolve the uncertainties through reauthorization language.
Establish a process for the federal approval of major projects. This option,  which would require federal approval of a major project at the outset,  including its cost estimate and finance plan, would be the most far- reaching and the most difficult option to implement. Potential models for  such a process include the full funding grant agreement process that the  Federal Transit Administration uses for major transit projects, and the  DOT task force’s December 2000 recommendation calling for the  establishment of a separate funding category for initial design work and a  new decision point for advancing projects. Establishing such a federal  approval process could have the potential to improve the reliability of the  initial baseline estimates and the cost performance of major projects over  time.
section_title: Contacts
paragraphs: For further information on this statement, please contact JayEtta Z.  Hecker (heckerj@gao.gov) or Steve Cohen (cohens@gao.gov).  Alternatively, they may be reached at (202) 512-2834.
section_title: Related GAO Products
paragraphs: Transportation Infrastructure: Cost and Oversight Issues on Major  Highway and Bridge Projects. GAO-02-702T. Washington, D.C.: May 1,  2002.
Surface Infrastructure: Costs, Financing, and Schedules for Large-Dollar  Transportation Projects. GAO/RCED-98-64. Washington, D.C.: February  12, 1998.
DOT’s Budget: Management and Performance Issues Facing the  Department in Fiscal Year 1999. GAO/T-RCED/AIMD-98-76. Washington,  D.C.: February 12, 1998.
Transportation Infrastructure: Managing the Costs of Large-Dollar  Highway Projects. GAO/RCED-97-27. Washington, D.C.: February 27, 1997.
Transportation Infrastructure: Progress on and Challenges to Central  Artery/Tunnel Project’s Costs and Financing. GAO/RCED-97-170.  Washington, D.C.: July 17, 1997.
Transportation Infrastructure: Central Artery/Tunnel Project Faces  Financial Uncertainties. GAO/RCED-96-1313. Washington, D.C.: May 10,  1996.
Central Artery/Tunnel Project. GAO/RCED-95-213R. Washington, D.C.:  June 2, 1995.
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