Life Cycle Cost Analysisin Pavement Design

- In Search of Better Investment Decisions -

Office of Asset Management

Federal Highway Administration

Executive Session

FHWA LCCA Methodology

Steps1. Establish Design Alternatives

2. Determine Activity Timing

3. Estimate Agency and User Costs

4. Compute Life-Cycle Costs

5. Analyze the Results

Inputs are discrete or point values•Initial costs are $11M•The discount rate is 4%

Outputs are discrete•Alternative “A” total cost = $20.5M•Alternative “B” total cost = $26.0M

Deterministic Approach

Deterministic Limitations

Doesn’t Address: Statistical Significance Variability

Subject to Manipulation

Lacks Credibility

Captures the uncertainty in the inputs,

Carries that uncertainty through the computation process to generate a

Probability distribution of result (a range of possible outcomes

along with their likely hood of occurrence).

Probabilistic Approach

$

%

Inputs

NetPresentValue

Results

M

O

D

E

L

Simulation Modeling

Deterministic ApproachProject cost estimate is $12 million

Probabilistic Approach 75 percent chance the project will cost $12 million or less.

LCCA Results

Accounting for variability in inputs:

•Activity timing, costs, discount rate

Quantitatively determines risk in alternative

strategy selection

Elevates the decision from questioning the

inputs to discussing the merits of each

alternative

Role of Probability in LCCA

Agency NPV

B

A

Fre

quen

cy

Net Present Value

Advantages

More Informed Decisions• Evaluate all possible outcomes

• Expose areas of uncertainty...Quantify risk

• Determine significance of difference between alternatives

• Examine influence of underlying variables on final results

• Provide those vested with appropriate authority the opportunity to make decisions about risk taking

Benefits of LCCA Software

Performs LCCA as per FHWA best practice Requires same data inputs as manual

process Better, faster & cheaper analysis Automates user cost process

Software Data Input

Software Data Input

Software Outputs

Software Outputs

4. Why Use LCCA

Requirements

FHWA’s Philosophy

Benefits of LCCA

LCCA Requirements

NHS Designation Act (1995)Required States to conduct LCCA of

each NHS high cost ($25M or more) useable project segment.

TEA-21 (1998)Eliminated this requirement.

FHWA Philosophy

LCCA: Decision support tool Results are not decisions Rigorous analytical process can be as important as the results

Benefits of LCCA

Better information for decisions Improved rehabilitation strategies Consideration of user costs Support for overcoming the

“first cost” limitations

FHWA LCCA Guidance

LCCA Software LCCA Primer, Technical Bulletin

DP-115 http://www.fhwa.dot.gov/infrastructure/asstmgmt/lcca.htm

5. Management’s Role

Management Support for Development and Application of LCCA.

Develop LCCA Guidelines including Recommendations on Input Values

Management Support

Requires “buy-in” of risk management by senior executives

Technical Champion Top management support

Developing Guidelines Analysis Periods Type of Dollars…Treatment of Inflation Type and Value of Discount Rates Treatment of User Cost Value assigned to user delay time Choice of Economic indicator Remaining service Life Ignore Sunk Cost

Developing Guidelines Analysis Periods Type of Dollars…Treatment of Inflation Type and Value of Discount Rates Treatment of User Cost Value assigned to user delay time Choice of Economic indicator Remaining service Life Ignore Sunk Cost

FHWA Recommends

• Real dollars and a real discount rate - do not account for inflation

• A real discount rate range of 3% to 5%

• Never mix real and nominal (inflation adjusted) costs and discount rate

Discounting … a mechanism for quantifying the time value of money

Developing Guidelines

Observations: Traffic grows over time Queuing cost dominate Hourly distributions key $ Value of time has a major influence Normal VOC between alternatives

negligible

Developing Guidelines

User Costs are calculated through a capacity analysis.

Passenger Vehicle $10 - $13

Single Unit Truck $17 - $19

Combo Truck $21 - $24

Value of Time Recommendations...

Developing Guidelines

1996 Dollars

Things to Remember

LCCA Decision Support Tool NHS LCCA Requirements Document Inputs Dispose of all Issues Provide Confidence Information