STOP using ACFs – The inherent flaws of Area Cost Factors
There are multiple false assumptions associated with Military Construction Budgeting and Area Cost Factors. As a result, more than 40 years after the introduction of area cost factors (ACFs), the Department of Defense (and the Federal Government in general) is no closer to its goals of having construction cost estimates match actual construction costs, or properly adjusting for regional (location based) and/or time-based cost variances.
Definition of Area Factor – A multiplicative value used to reflect relative geographical cost differentials. They are used in the development of military construction program projects and/or alternative basing studies.
The use of area cost factors (ACFs) for capital planning and budgeting repair, renovation (sustainment) and new construction factors remains a flawed approach. It’s been over 40 years since ACFs and the computerized use of ACFs have been introduced, and the initial concept and their use remains a significant barrier to construction and sustainment cost visibility and transparency.
ACFs are not a defensible method for adjusting for location-based and time-based variances in construction costs.
There is overwhelming statistical significance and audit reporting that the cost estimates used to for physical infrastructure decision-making are highly and systematically misleading. The result is continuous cost escalation of billions of dollars.
ACFs, and other forms of location factors, cost indices have been evaluated by several independent groups and through actual practices and proven not to be capable of providing a workable budget and/or reasonable estimate for future construction projects.
The use of Regional and Local area cost factors (ACFs) use a single factor to adjust all costs in an estimate which discounts the different impacts that local and regional markets have on labor, material, and equipment, as well as productivity. The errors in estimation caused by randomized use of adjustment factors result in a corresponding cumulative impact on the overall error of estimates.
Area Cost Factor assumptions erroneously posit that productivity is constant for all locations. In fact, many data publishers make the disclaimer that “productivity is not considered” in their location factors.
Area cost factors are simply incapable of accurately representing local market factors and costs. Variances in labor, material, equipment, productivity, and means and methods cannot be accounted for by simply using a cost factor Indeed, “broad cost factors for categories including facility type, and location are only accurate within -25+% to +40%” at best and 2x-3x at worst.
The net effect of using ACFs is lack of confidence among both the user base, and those responsible for obtaining and approving sustainment and new construction funding. Significant government overpayments on both large capital projects and the numerous on-going repair, renovation, and maintenance projects continues unabated.
Military leadership would be far better served to use objective, verifiable, and current locally researched construction cost data for all of its planning, procurement, and project delivery activities.
Furthermore, adoption of best value LEAN construction planning, procurement, and project delivery would not only provide higher cost visibility and transparency, but also assure the consistent delivery of quality of sustainment and new construction projects on-time and on-budget.
To date, military leadership must be graded poorly relative to its requirement to analyze, review and maintain all types of physical infrastructure cost estimates and associated planning, procurement, and project delivery.
DOD and congressional decision-makers simply do not have reliable estimates to inform their decisions regarding appropriations and the oversight of projects.
References
1981, NBSIR 81-2250 Estimating Area Cost Factors for Military Construction Projects: A Computerized Approach
1985, Cost overruns in public projects.
1990, Military Planning and Design Funding Requirements, Report AROIRI
2016, Investigation in Construction Cost Estimation Using Monte Carlo Simulation AFIT Scholar J.D Bucholtz
2016, Indefinite Delivery/Indefinite Quantity project selection framework using stochastic techniques
2018, Correlation between cost growth and procurement methods on USACE construction projects
2018, Action Needed to Increase the Reliability of Construction Cost Estimates, Defense Infrastructure, GAO-18-101