HomeMy WebLinkAboutMemo - Mail Packet - 4/24/2018 - Memorandum From Adam Jokerst And Eileen Dornfest Re: Halligan Water Supply Project - Updated Costs And TimelinesUtilities
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Fort Collins, CO 80522
970.221-6700
970.221.6619 fax V/TDD: 711
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MEMORANDUM
DATE: April 6, 2018
TO: Mayor Troxell and Councilmembers
FROM: Adam Jokerst, Water Resources Project Engineer
Eileen Dornfest, Special Projects Manager
THROUGH: Darin Atteberry, City Manager
Jeff Mihelich, Deputy City Manager
Kevin R. Gertig, Utilities Executive Director
RE: Halligan Water Supply Project (“Halligan Project”) – Updated Costs and Timeline
_______________________________________________________________________________________________________________
Staff recently completed a comprehensive cost update for the Halligan Project to address costs related
uncertainties in the federal permitting process, changes to the project timeline, and refinements to
project requirements. This memo provides updated costs and a timeline for the project, rationale for
changes from previous estimates, comparisons with other water supply alternatives, and
opportunities for improvement.
BOTTOM LINE:
The recent cost update is the most thorough evaluation of Halligan Project costs to date, and includes
an independent (i.e., third-party) contractor estimate of construction costs. The total estimated cost
for the project has increased to $74.1 million, indicating a need of $56.9 million in future
expenditures and $36.7 million in future appropriations. The revised cost estimate is $27.3 million
(58%) greater than the last reported project cost of $46.8 million.
The majority of the cost increases ($21.4 million of the $27.3 million) are attributable to the
following two items:
1) Escalation of costs attributable to increasing material and labor prices, which are
compounded by delays in the federal permitting process; and
2) A revised estimate of costs required to address project uncertainties, developed using
industry best practices for project risk management.
The timeline for completing federal permitting for the Halligan Project has been delayed again.
Staff now estimates the project’s draft environmental impact statement (“EIS”) will be released in
late-2018 or early-2019 and that construction will commence in 2023.
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4/6/2018
4/6/2018
4/9/2018
4/10/2018
4/12/2018
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Despite the increased costs, the Halligan Project remains the most economical project for Utilities to
secure additional water supplies. The project will provide firm yield at a price of $8,800 per acre-
foot, far less than other regional water supply projects. It also provides many other advantages over
other alternatives, such as delivering high quality water supplies and requiring no pumping.
1. REVISED PROJECT TIMELINE
A revised schedule from the U.S. Army Corps of Engineers (“Corps”) indicates that release of the
draft EIS is now projected for late-2018 or early-2019. This delay was caused, in part, by the City’s
development of a “Showing Document.” The Showing Document provides critical information not
currently addressed in the Corps draft EIS, such as flow improvements and wetland formation.
Staff also reassessed future permitting requirements based on recent observations of obstacles and
associated schedule delays encountered by other Front Range permitting projects. Staff believes it
prudent to allot an additional year than previously specified to secure all required permits. These
changes extend the overall project timeline by two years, with dam construction now estimated to
commence in 2023. A revised timeline is shown below.
This timeline differs from that provided in the Corps’ quarterly Front Range Water Supply Updates;
however, Corps’ schedules have consistently underestimated permitting timelines and milestones.
2. REVISED COST ESTIMATE
Over the past year, the Halligan Project has faced considerable uncertainty within the federal
permitting process, which has in turn delayed the project. Unanticipated permitting and mitigation
requirements have also been encountered within the past year. In response, staff initiated a revised
cost study in June 2017.
The revised cost estimate is the most comprehensive cost estimate to date and includes an
independent (third-party) contractor’s construction cost estimate and an in-depth review of
permitting, mitigation, and construction uncertainties and risks. Cost estimates of this detail have
not been performed in the past because project requirements were largely unknown or were likely to
change. For example, the size of the Halligan Reservoir enlargement has changed four times
throughout the 12-year history of the permitting process, a result of withdrawal of project partners
and reevaluation of the City’s water needs
1
.
1 It took until August 2016 for the Corps to finalize the size of the Halligan Reservoir enlargement carried forward in the
permitting process.
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
404 Permitting - Draft EIS
404 Permitting - Final EIS
404 Permitting - Permit Decision
Other federal & state permitting
Preliminary Design
Final Design
Construction
3
Staff presented revised cost updates to the Water Board at a February 1, 2018 work session, and
incorporated Water Board’s feedback into the present cost estimate.
2.1 Past Cost Estimates
Staff hires engineering contractors to provide project cost estimates when there are major dam design
alterations or when project requirements significantly change. Since 2002, five engineer’s cost
estimates have been prepared. The last engineer’s cost update was completed in July 2015 following
the withdrawal of the North Poudre Irrigation Company from the project, which reduced the size of
the dam enlargement. Engineer’s cost estimates form the basis for quarterly cost updates to City
Council. Staff last apprised Council of project costs and schedule in November 2017, at which time
costs were based on the engineer’s estimate prepared in 2015.
2.2 Cost Refinements
In addition to incorporating an independent construction cost estimate, the revised cost update
reflects several changes to the scope of the Halligan Project, changes in market conditions, and other
cost refinements, including:
An extension to the project timeline resulting in higher escalation costs and more ongoing
consultant costs;
Escalation of construction material and labor using local market rates;
Incorporation of numerous mitigation and enhancement measures identified within the last
year by the Corps and the City;
Addition of public recreation facilities at the enlarged Halligan Reservoir;
Reflection of more rigorous permitting requirements;
Refinements to construction sequencing, scheduling, and staffing based on input from the
third-party contractor; and,
Use of an industry best practice to identify project risks and to quantify the costs of
contingency required to address project risks and uncertainty.
The table below provides updated costs by category, comparisons with previously reported values,
and rationale for cost changes. All costs are provided in 4
th
quarter 2017 dollars and assume
construction commencement in the spring of 2023. Staff estimates that each year of construction delay
past the spring of 2023 will increase project costs by $3.4 million due to escalation and assumed
permitting costs.
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Item
Last
Reported
Cost ($M)1
Revised
Cost
($M)
Difference
($M)
Reason for Difference
Acquisition $3.8 $3.5 -$0.3
City owns more property around Halligan
Reservoir than initially claimed.
Construction
Construction $15.6 $17.5 $1.9 Independent cost estimate refinement.
Engineering,
Admin & Mgmt
$5.1 $7.0 $1.9
Independent cost estimate revised admin. and
management needs, including City personnel.
Identified
Mitigation
$2.4 $3.0 $0.6
Includes costs for recently developed mitigation,
enhancement, and recreation projects
Permitting $14.9 $16.8 $1.9
Recent delays increased permitting costs.
Additional costs added for non-Corps permits
based on other Front Range projects.
Debt Service $1.9 $1.9 $0.0
Escalation $0.0 $8.2 $8.2
Schedule delays. Independent cost estimate
revised escalation rates.
Risk Mitigation/
Contingency
$3.1 $16.3 $13.2
Additional funds required to address design,
construction, mitigation, and permitting risks and
uncertainties.
Total
2
$46.8 $74.1 $27.3
1) Project costs last reported November 1, 2017.
2) Line items may not sum to total due to rounding.
Most cost increases are attributable to two items, which warrant further discussion:
1) $13.2 million in risk mitigation/contingency to address project uncertainties; and
2) $8.2 million for escalation of material and labor costs.
2.3 Risk Mitigation and Contingency
At this stage in the project there remains considerable uncertainty in the dam’s design and permitting
and mitigation requirements. A project contingency of 40 percent of the total project cost is
currently allocated to address risks related to current project uncertainties, as described below.
Using best practices in project risk management, Staff compiled a register of identified risks in the
project’s permitting, mitigation, design, and construction phases. For each item in the risk register,
we estimated a cost of consequence and assigned a probability of occurrence. The cost of each risk
was then reduced to account for the unique probability of occurrence. The risk register identified
over 20 risks and $14.6 million in potential consequences. Based on the current level of design of
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the project, as well as input from independent construction contractors and Water Board, staff
increased this amount approximately 10% to $16.3 million. This equates to 40% of the total
anticipated project cost being held to address project risks associated with uncertainty. Retaining
40% of project costs to address risks and uncertainties is standard industry practice for project
budgeting purposes at this phase of conceptual design.
The risk register indicates that past engineer’s cost estimates generally underestimated project risks
and contingency requirements. Past engineer’s cost estimates could not contemplate certain risks
that are much better understood today, e.g., that permitting would take 15+ years to complete.
Further design of the dam enlargement will refine many of the costs included in the $16.3 million
contingency. However, given the high cost of such design work, combined with the project history
of changes in dam size and concept, staff has elected not to undertake these next project design steps
until the City is relatively assured the project will be permitted and until design requirements are
better developed through the permitting process. Waiting to complete preliminary and final design
until the permitting process is further resolved is not only prudent, but is common practice among
other Corps-permitted water supply projects. Staff intends to commence preliminary design
following public comment on the draft EIS.
The $16.3 million contingency also accounts for uncertainties of federal permitting and mitigation
requirements. Permitting processes and mitigation requirements are dictated by federal and state
agencies and are thus largely outside the City’s control. Although future permitting and mitigation
requirements have become much clearer in recent months, staff believes it prudent to include
contingency to address further permitting delays or more costly mitigation measures.
The City “owns” the entire contingency budget. The cost of risks that fail to materialize will not be
incurred.
2.4 Cost Escalation
Staff updates construction costs for the Halligan Project quarterly using national construction cost
indices
2
. While this rate has escalated 1.2% annually since 2015, local rates in the heavy
construction maket have seen escalation of 5% annually per input from local contractors. Staff
applied the 5% local escalation rate to all future project costs. Compounded annually and extended
by delays in the permitting process, even small adjustments to escalation rates lead to large increases
in project costs.
2.5 Cost Assumptions
The updated cost estimate is based on several assumptions that, if proven otherwise, could increase
the cost of the project. Such assumptions include:
Construction will commence in the spring of 2023;
Construction will be completed within two years (weather delays will increase costs);
Local material and labor costs escalate at or less than 5% annually;
Preliminary and final designs will not deviate substantially from the feasibility design;
The existing dam is structurally competent for enlargement and outlet works tunneling;
2 Indices taken from the U.S. Bureau of Reclamation’s quarterly construction cost trend for concrete dams.
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All mitigation will be accomplished by onsite measures; and,
The draft EIS will provide a significant majority of all resource studies needed for other
federal and state permits.
Costs do account for potential legal challenges to permit issuance.
3. FUTURE COSTS and APPROPRIATIONS
A summary of past and future expenses for the Halligan Project is provided in the table below. The
table indicates $56.9 million in future expenditures and a need for an additional $36.7 million in new
appropriations for the project. The project has received reimbursements for shared project expenses
of $4.6 million to date. These reimbursements have not been re-appropriated to the project budget but
are shown in the table below for completeness.
Future appropriations for the Halligan Project, if approved, will be sourced from Water Enterprise
Fund reserves. Revenue for the Water Enterprise Fund is provided from water rates and development
fees. In particular, revenue collected from cash-in-lieu payments for water supply requirements and
commercial water surcharges are accrued to the Water Rights Reserve Fund. The Water Rights
Reserve Fund is a component of the Water Enterprise Fund, and funds water supply development
projects such as the Halligan Project.
The current balance of Water Rights Reserve Fund is approximately $25 million. The updated project
cost estimate would increase the Utilities’ cash-in-lieu rate for Water Supply Requirements from
$17,300 per acre-foot to approximately $21,200 per acre-foot, an increase of 23%. The Utilities’ cash-
in-lieu rate is updated every two years, with the next update planned in 2020. Revised costs for the
Halligan Project, along with other water supply factors, will be evaluated prior to updating the cash-
in-lieu rate.
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Expenses ($M)1 To Date2 Future Total
Acquisition $3.3 $0.3 $3.6
Permitting & Mitigation $12.0 $9.1 $21.1
Construction - $31.3 $31.3
Debt Service3 $1.9 - $1.9
Risk Mitigation/Contingency - $16.3 $16.3
Total $17.2 $56.9 $74.1
Final Utility Cost ($M) To Date2 Future Total
Project Costs $17.2 $56.9 $74.1
Less Reimbursements4 ($4.6) ($0.1) ($4.7)
Total5 $12.6 $56.8 $69.4
Appropriations ($M) To Date2 Future Total
Past Appropriations $37.4 - $37.4
Required Future Appropriation - $36.7 $36.7
Total $37.4 $36.7 $74.1
1) Expenses include escalation in each line item. Line items may not sum to total due to rounding.
2) Past costs through December 2017.
3) Debt service payments from 2004 to 2014 were allocated as Halligan project expenses. All future debt service payments will not
be accounted as a project cost.
4) Reimbursements were received from former project partners (North Poudre Irrigation Co. and the Tri-Districts) between 2005 and
2014; miscellaneous reimbursements have been and will be collected from the City of Greeley and from rents in the future.
5) Total Utility cost includes debt service and deducts reimbursements.
4. ALTERNATIVE COMPARISON
Despite the increased costs, the Halligan Project remains, by a wide margin, the most economical
project for Utilities to secure additional water supplies. The Halligan Project will provide firm yield
(i.e., the amount of water supply that can be reliably provided in a drought) at a cost of $8,800 per
acre-foot
3
, which is far below the cost of other water supply options. For comparison, the market
rate for firm yield from the Colorado-Big Thompson project is $60,000 per acre-foot. Firm yield
from the Northern Integrated Supply Project (“NISP”) will cost approximately $25,000 per acre-foot
and from the Windy Gap Firming Project, firm yield will cost more than $14,000 per acre-foot. All
other alternatives analyzed in the federal permitting process have larger capital costs than the
Halligan Project.
3 Based on net cost of the project to Utilities of $69.4 million.
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Costs for other Front Range water supply projects have seen similar cost increases over time as the
project scope and requirements were refined. For example, the cost of NISP was reported in 2008 to
be $426 million
4
. Recently, the cost of was reported to exceed $1 billion.
Staff has evaluated numerous other water supply options, both within and outside the federal
permitting process, in recent years. In addition to cost savings, the Halligan Project provides many
advantages over these other alternatives, including:
Operates by gravity, thereby requiring no pumping or generating associated greenhouse gas
emissions;
Low operating costs;
Addresses deteriorating conditions and safety concerns of the nearly 110-year old Halligan
Dam;
Delivers high quality water supplies that require no pre-treatment;
Provides significant flow and habitat improvements to the North Fork of the Poudre River;
and,
Provides new reservoir recreation opportunities.
5. PROCESS IMPROVEMENTS
Staff has reflected on the events and past assumptions that led to the large increase in project costs to
identify opportunities for future improvement. Procedures used in the revised Halligan Project cost
study fit within the ongoing Utilities-wide effort to better quantify project risks and include funds for
project uncertainty and risk mitigation in preliminary project budgets. As noted above, nearly half
of the cost increase documented in this memo is attributable to additional budget to address project
risks.
The Halligan Project is unique among Utilities capital projects in that major costs (e.g., permitting,
mitigation, and certain dam requirements) will be mandated by federal and state agencies and are
thus outside the City’s control. Further complicating cost estimating is that permitting and
mitigation requirements frequently change. Nevertheless, staff has identified the following actions
to lessen future cost uncertainties:
Establish a project design team prior to release of the draft EIS.
Initiate site characterization and preliminary design following the public comment period on
the draft EIS.
Increase dialogue with other applicants for federally permitted water supply projects to
gather lessons learned (to this point, staff recently met with Denver Water and Colorado
Spring Utilities).
Increase the frequency of cost estimate updates.
Assess local labor and material market conditions more regularly.
CC: Water Board
Lance Smith, Utilities Strategic Finance Director
Owen Randall, Chief Engineer
Donnie Dustin, Water Resources Manager
4 Value from NISP Draft EIS
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Enlarged Halligan Operations
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