life cycle costanalysis guidelines
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APPENDIX C—LIFE CYCLE COST
ANALYSIS GUIDELINESPresented By: Afzal Waseem
Pavement Design and Management Civil Engineering Department Ryerson University
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LCCA
• LCCA allows comparisons of investment
alternatives having different cost streams. In
the highway arena, it is a formal, systematic
approach for considering most of the factorsthat go into making a pavement investment
decision.
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LCCA FRAMEWORK
LCCA framework represents the governing
criteria and principles by which a comparison of
costs of alternative design strategies is made.• Economic analysis technique.
• Real versus nominal dollars.
• Discount rate.
• Analysis period.• Cost factors.
• Approach to risk and uncertainty in LCCA.
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Economic Analysis Technique
1. Present Worth AnalysisThe PW analysis transforms future expenditures or costs into
present worth dollars
The NPV is the discounted monetary value of expected net benefits
(i.e., the benefits minus the costs).
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Economic Analysis Technique
2. Equivalent Uniform Annual Cost AnalysisIn this method of comparing multiple alternatives, all present
and future values are converted to EUAC (simply termed annual
cost).
The preferred method of determining EUAC is first to
determine the NPV
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Economic Analysis Technique
Some of the long-term costs are very difficult, if
not impossible, to predict. For example, an
extended surplus of material, economic
embargos, or international conflicts that maydeplete the supply or increase the demand of a
material can greatly affect long-term costs.
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Real Versus Nominal Dollars
Whether to use real or nominal dollars in thecalculation process.
Real (or constant) dollars reflect dollars with the same
or constant purchasing power over time.
Nominal (or inflated) dollars reflect dollars thatfluctuate in purchasing power as a function of time.
Depends upon inflation rate e.g greater the inflationrate greater will be the cost.
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Discount RateIt represents the real value of money over time and is
used to convert future costs to present-day costs (in
EUAC analysis, it is subsequently used to convert NPV
to annualized costs).
The discount rate is a function of both the interest rateand inflation rate
Low interest rates favour large capital investments with
low maintenance or user costs.
High interest rates favour large capital investments with
low maintenance or user costs.
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Analysis Period The analysis period is defined as the time period over
which the initial and future costs are evaluated for
different design alternatives.
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Cost FactorsThe analysis period is defined as the time period over which the
initial and future costs are evaluated for different design alternatives.
Agency Costs
Agency costs include all costs incurred directly by the agency over
the life of the project
User Costs
User costs are the costs incurred by the highway user over the life of
the project
• Time delay costs
•
Vehicle operating costs (VOCs)• Accident cost
• Discomfort cost
• Environmental costs
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Approach to Risk and Uncertainty in LCCA • This can be directly considered through probabilistic analysis
The type and
range of each
input sampling
distribution areuser-defined, and
may be developed
using either
objective or
subjective
methods
LCCA PROCESS
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LCCA PROCESS LCCA process consists of the following eight steps
Steps 2 through 6 are performed for each alternative strategy.
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Step 1—
Establish Alternative
Pavement Design Strategies
Pavement design strategies are established
based on historical experience, detailed
research, and/or agency policies, site-related
factors, such as traffic, climate, and theincorporation of new materials/technologies.
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Step 2 - Determine Pavement Performance and
M&R Activity Timing
It involves the determination of the
performance life for each design alternative and
the timings of subsequent M&R treatments
1. Determine Initial Performance Life of Design
Option
2. Determine Repair or Maintenance
Requirements
S 2 D i P P f d M&R
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Step 2 - Determine Pavement Performance and M&R
Activity Timing
Determine Initial Performance Life of Design Option
1. Design Guide distress
2. Ride quality prediction models
3. The Design Guide prediction models have been calibrated with
the LTPP monitoring data or performance.
4. Failure analysis (Survival Analysis)
This technique uses historical construction and rehabilitation data
for a family of pavements to construct a failure curve that depicts
the probability of failure with time (or traffic loadings)
S 2 D i P P f d M&R
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Step 2 - Determine Pavement Performance and M&R
Activity Timing
Determine Repair or Maintenance Requirements •
Routine maintenance• Major maintenance
• Rehabilitation
Determine the Expected Life of M&R Activities.
Analyzing data if not available then estimates of
experience engineer
/
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C.3.3 Step 3—Estimate Direct/Agency Costs
The agency costs are separated into the
following five categories• Design costs
• Initial construction costs
• Maintenance costs
• Rehabilitation costs
• Salvage value
/
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C.3.3 Step 3—Estimate Direct/Agency CostsDesign Costs
The design costs include preliminary engineering,
preparation of environmental impact statements, materialstesting and analyses, site investigations, traffic and climatic
analyses, pavement design, and preparation of plans and
specifications.
Initial Construction Costs
The costs associated with building a new section of
pavement or reconstructing or rehabilitating an existing
pavementEstimation of actual project construction costs involves risk
and is highly probabilistic.
i i /
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C.3.3 Step 3—Estimate Direct/Agency CostsMaintenance Costs.
Cost of maintaining a pavement at or above some predeterminedperformance level. e.g., administrative costs, operating or overhead
costs, traffic control costs, and any testing and contractadministration costs, if the agency contracts the maintenance work)
Rehabilitation Costs.
Rehabilitation costs cover the types of activities performed as part of
resurfacing or restoring the pavement.Salvage Value.
Worth of the pavement at the end of the analysis period.
1. Residual value
2. Serviceable lifeEstimation of Salvage Value.
Prorated Life Method converts remaining life into a cost value.
Reusable Material Value Method converts reusable material to cost
value.
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C.3.4 Step 4—Estimate Indirect/User Costs
• User Cost Components
• Time Delay Costs • Costs incurred as a result of additional time
spent completing a journey.
• Vehicle Operating Costs
• User Cost Model
Methods of Establishing Work Zone Traffic Control
1. Traffic Control in One Direction
2. Bi-Directional Traffic Control
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C.3.4 Step 4—Estimate Indirect/User Costs
• User Cost Components
• Work Zone User Cost Components1. Reduced Speed Delay
2. Speed Change Delay
3. Speed Change VOC4. Stopping Delay
5. Stopping VOC
6. Idling VOC7. Queue Delay
Forced Flow (Que)
Free Flow
/
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C.3.4 Step 4—Estimate Indirect/User Costs
• User Cost Components
• Computation of Work Zone User CostsThe method for calculating work zone user costs involves 12 different steps
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C.3.5 Step 5—Develop Expenditure
Stream Diagrams
• Expenditure stream diagrams are graphical
representations of expenditures over time
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C.3.6 Step 6—Compute Life Cycle Cost
•
Deterministic LCCADeterministic sensitivity analysis can be easily
done on a spreadsheet.
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• Probabilistic LCCA
Probabilistic LCCA / risk analysis involves randomlyselecting a value from each input parameter’ssampling distribution and the NPV/EUAC formula tocompute a single life cycle costs and repeating it
thousands of times.
The probabilistic simulation is performed using5,000 iterations (or “runs”) of the Monte Carlo
sampling process and corresponding NPV/EUACcomputation process
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C.3.7 Step 7—Analyze Results
Deterministic process gives a single NPV/EUACvalue while probabilistic yields a distribution of
NPV/EUAC values), that’s why its analysis is also
different.
C 3 7 St 7 A l R lt
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C.3.7 Step 7—Analyze Results
Deterministic LCCA be accompanied with a sensitivityanalysis on discount rate, initial costs, and initialperformance to study the effect on LCCA
GoalsFrequency with which, an alternative has lowest life cycle
cost.
The “favored” alternative should have the lowest life cyclecost for a majority of the circumstances tested. A goodrule of thumb is twice the frequency of the next lowestcost alternative (e.g., at least 67 percent when comparingtwo alternatives).
To affirm that favoured alternative is the low-cost
alternative under the “most likely” scenario.
Percent difference in life cycle costs
Analysis of Deterministic Life Cycle Cost Results
C 3 7 St 7 A l R lt
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C.3.7 Step 7—Analyze Results
1. Trial-by-trial comparisons of forecasted NPV/EUACvalues
2. Statistical analysis—differences between mean
values (z-score, ANOVA).3. Risk assessment of forecasted NPV/EUAC
distributions.
Analysis of Probabilistic LCCA Results.
z-score = −
Gives the probability of the observation value on the bell curve.
C 3 7 St 7 A l R lt
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C.3.7 Step 7—Analyze Results
1. Evaluation1—Trial-By-Trial Comparisons.Trials in which an alternative had the lowest life cycle cost
compared to all other alternatives) for each alternative,
dividing the respective wins by the total number of trialsperformed in the simulation, and multiplying by 100 percent,
the overall probabilities for each alternative to have the
lowest life cycle cost are determined.
Analysis of Probabilistic LCCA Results.
C 3 7 Step 7 Analyze Results
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C.3.7 Step 7—Analyze Results
1. Evaluation1—Trial-By-Trial Comparisons.
Analysis of Probabilistic LCCA Results.
538
1000x100
C 3 7 Step 7 Analyze Results
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C.3.7 Step 7—Analyze Results
1. Evaluation 2—Statistical Analysis.
Mean and standard deviation life cycle cost values calculated in Step 6 are used to
determine if significant differences exist between the means of each alternative.If the difference of the lowest mean life cycle cost values are significant than it is
selected.
Process is a t-test
The null hypothesis, which is assumed to be true until proven wrong is
Confidence level = 90 (prescribed minimum confidence level)
To reject the null hypothesis and conclude that the mean life cycle costs are
statistically significantly different, the calculated t-value must fall in a critical range.
Analysis of Probabilistic LCCA Results.
C.3.7 Step 7 Analyze Results
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C.3.7 Step 7—
Analyze Results
1. Evaluation 2—Statistical Analysis.
t-test Example
Analysis of Probabilistic LCCA Results.
Trial-by-trial
comparison indicated
that the favoured
alternative is
alternative BTo check if this difference is really
significant or not ?
C.3.7 Step 7 Analyze Results
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C.3.7 Step 7—
Analyze Results
1. Evaluation 2—Statistical Analysis.
t-test Example
Analysis of Probabilistic LCCA Results.
Although there is a potential for savings in selecting alternative A, that potential is
outweighed by alternative B over the range of most probable NPV outcomes—$1.51 to $1.7
million—as illustrated in figure
C.3.7 Step 7 Analyze Results A cost overrun occurs
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C.3.7 Step 7—
Analyze Results
1. Evaluation 3—Risk Assessment.
Analysis of Probabilistic LCCA Results.
1.45
there is
potential for a
cost underrun if
the true NPV is
low, say lessthan $1.45
million
downside riskUpside risk
At the tails of these two distributions, there are clear differences in the forecasted NPVs. In the
case of alternative A, there is potential for a cost underrun if the true NPV is low, say less than
$1.45 million. This opportunity for cost savings is termed upside risk. If, on the other hand, the
true NPV is high, say greater than $1.75 million, there is potential for a cost overrun associatedwith alternative A. This chance for financial loss is termed downside risk.
when the expenses
required to complete a
project, or one aspect
of a project, exceed the
amount budgeted
C.3.7 Step 7 Analyze Results
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C.3.7 Step 7—
Analyze Results
1. Evaluation 3—Risk Assessment.
Analysis of Probabilistic LCCA Results.
There is a 10
percent probability
that the NPV of
alternative A will be
less thanalternative B by as
much as $26,000
There is a 10
percent
probability that
alternative A will
exceed the cost of
alternative B by
up to $41,000.
C 3 8 Step 8 Reevaluate Strategies
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C.3.8 Step 8—Reevaluate StrategiesStructural design changes to the mainline and/or shoulder
pavements, revisions to the maintenance of traffic plans,
reductions in construction periods (accompanied by increasedpay item costs), or changes in rehabilitation designs or strategies
1. Probabilistic sensitivity analysis
Identifying which input has the greatest effect on all the other outputs
Correlation coefficients define the strength of the impact on output from+1 to -1
Where
+1 = direct relation
-1 = inverse relation
2. Balance between agency- and user-based life cycle costs
If user costs overwhelm agency costs for all of the alternatives, the analysismay indicate that none of the alternatives analyzed are viable, and that
changes must be made to drastically reduce work zone user costs. For
instance, pavement structural designs might be increased to delay the
timings
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C.4 LCCA2002 SPREADSHEET PROGRAM
Deterministic/probabilistic LCCA spreadsheet
program named LCCA2002.
Difference between Mechanistic and AASHTO ?
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Input Data
Cars as Percentage of AADT (%)
Single Unit Trucks as Percentage of AADT (%)Combination Trucks as Percentage of AADT (%)
Annual Growth Rate of Traffic (%)
Speed Limit Under Normal Condition (mph)No of Lanes in Each Direction During NormalOperation
Free Flow Capacity (vphpl)
Rural/Urban UrbanQueue Dissipation Capacity (vphpl)
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Improvements
• Estimation of pavement service life using
performance trend analysis or survival analysis
techniques, when sufficient and reliable
pavement history (construction and M&R
activities and dates) and performance (time-series pavement condition data) data exist.
• Considering increased user cost when a roadis frequently used by life saving services like
hospital and fire stations.