Economic Analysis: Applications to Work Zones March 25, 2004

Economic Analysis:

Applications to Work Zones

March 25, 2004

Economic AnalysisWhat Is It?

Benefits and/or costs of competing investment options are compared in common unit of the dollar

Makes non-like performance measures comparable

Why? Performance What? Greatest net benefit When? Optimal timing Where? Best alignment How? Best implementation

strategy

Economic AnalysisAddresses Key Project Questions

Economic AnalysisIssues and Concepts

Costs and benefits can be valued in dollars

Project life cycle is basis for comparison

To be compared, dollars in different years must be “discounted” to their present value amounts

Economic AnalysisTypical Life Cycle Profile

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Year

Initial Capital

Dollars

BenefitsCosts

Cost

Economic AnalysisAdjusting for Present Value

ttA

rPV

)1(

1

where

PV = present value at time zero (base year)

r = discount rate

t = time (number of year)

A = amount of benefit or cost in year t

What if we want to determine how much a $1,000 benefit in 30 years is worth to us today? $1000 is in “real” dollars (i.e., in

dollars with today’s purchasing power)

Discount rate is 3%

Economic AnalysisExample of Discounting

Plug values into discounting formula:

Do calculations:

$412 0.41199x 000,1$ PV

Economic AnalysisExample (continued)

30 30000,1$

)03.1(

1yearPV

Economic AnalysisDiscount Rate Is Important Higher the discount rate, the

lower the present value of a future dollar At 3%, $1,000 30 years from now is

worth only $412 today Worth $231 at 5% and $57 at 10%

Discount rate can influence project selection or design

EA Methods

Benefit-Cost Analysis Life-Cycle Cost Analysis

EA MethodsBenefit Cost Analysis (BCA)

BCA compares discounted value of project’s benefits to discounted value of its costs The blue and red bars on the life cycle

profile BCA is different from financial

analysis, which focuses on how to fund a project

EA MethodsBCA Formula

BCA is done using the basic multi-year discounting formula:

)()1(

1

0

tt

N

tt

CostBenefitr

PV

EA MethodsApplications of BCA

Project-level analysis Selecting ITS or operations

technologies Highway program-level analysis Regulatory analysis

EA MethodsLife-Cycle Cost Analysis (LCCA)

Subset of BCA The “blue bars” on the life cycle

profile LCCA reveals lowest life-cycle

cost alternative for a project Used only when all design

alternatives yield same benefits

EA MethodsLCCA Formula LCCA is done using the basic

multi-year discounting formula:

where “Cost” equals the cost for design alternative in year t

t

N

ttCost

rPV

0 )1(

1

EA MethodsApplications of LCCA

Evaluation of pavement preservation strategies

Project planning and implementation, especially the use and timing of work zones

Value Engineering

EA MethodsHow to Get Best LCCA Results

Evaluate all reasonable design alternatives for the project

Analyze alternatives over identical analysis periods

Evaluate all relevant costs that vary among the alternatives

EA MethodsCost Items Used in LCCAAgency Costs

Design and engineering

Land acquisition

Construction

Reconstruction/Rehabilitation

Preservation/Routine Maintenance

User Costs At Work ZonesDelay

Crashes

Vehicle Operating

EA MethodsValuation of User Time

Business travel valued at wage plus benefits

Personal travel valued at what travelers are willing to pay to reduce travel time Usually a percentage of wage

People do value their time

EA MethodsInclusion of User Costs in EA

Some agencies resist valuation of user delay caused by construction

However, agencies seeking to reduce work zone impacts without user cost data may overspend or underspend

Linking EA to Other Tools

Other tools increase the usefulness of BCA and LCCA Traffic Forecasting Risk Analysis Economic Impact Analysis

Linking EA to Other ToolsTraffic Forecasting

Queuing models Included in RealCost LCCA

Software Traffic simulation models

Corsim QuickZone

Travel demand models

Linking EA to Other ToolsRisk Analysis

Uncertainty can be measured and mitigated

Sensitivity and probabilistic methods

Risk can be mitigated using alternative engineering, contractual methods, etc.

Linking EA to Other ToolsEconomic Impact Analysis

EA focuses on direct benefits and costs of highway projects Time savings, safety, externalities

EIA “translates” EA results into indirect economic effects Delays affect business and jobs Not additive to value of direct benefits

and costs

LCCA Applied to Work Zones

LCCA can be used to compare construction/work zone mitigation strategies

FHWA’s RealCost LCCA software can measure agency costs (construction, rehabilitation, maintenance) and user costs over multi-year periods

LCCA Applied To Work ZonesMitigation Strategies

There are many ways to mitigate construction impacts TMP and work zone strategies Innovative contracting Design features and materials

Does value of mitigation justify costs?

LCCA Applied To Work ZonesComparing Strategies

Each construction/WZ strategy involves trade-offs Agency vs. user costs Initial vs. long-term costs

LCCA approach permits comparison of cost trade-offs

Application to Work Zones Example Consider Stone Matrix Asphalt

(SMA) vs. Superpave (SP), each with 24 hour vs. nighttime work zones

5 mile, 4 lane road mill & fill 25,000 vehicles Average Daily Traffic,

rising to 60,000 ADT in 35 years One lane closed each way

Application to Work Zones Example (Continued)

ADT is allocated by RealCost model to peak/off-peak times

RealCost model calculates user delay caused by work zones

35 year analysis period 4 percent real discount rate

Application to Work Zones Example (Continued)

SMA costs 20 percent more than SP per overlay but lasts longer 20 percent longer between rehabilitations

Nighttime work zones increase agency cost by 10 percent

LCCA Applied To Work ZonesExample Results

Agency User Agency User

Present Value $2,605 $4,969 $2,865 $1,226

Present Value $2,721 $3,715 $2,987 $1,055

Costs Over 35 Years in $1000

SP - 24 Hr WZ SP - Night Only

SMA - 24 Hr WZ SMA - Night Only

LCCA Applied To Work ZonesExample Results (Continued) Least cost option for the agency

(SP/24 hours) is highest cost for travelers

Using SMA reduces traveler cost due to fewer rehabs

Nighttime work zones eliminate most of delay for SP and SMA at little additional cost to the agency

For Further InformationEconomic Analysis Primer

FHWA IF-03-032, August 2003

Contents:

• Economic Fundamentals

• Life-Cycle Cost Analysis

• Benefit-Cost Analysis

• Forecasting Traffic

• Risk Analysis

• Economic Impact Analysis

For Further InformationLife-Cycle Cost Analysis Materials

Life-CycleCost AnalysisPrimer

RealCost

Software

and

workshops

– call your

Division

Office

For Further InformationOther Economic Materials

FHWA’s Office of Asset Management, Evaluation and Economic Investment Team:www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm