BLOCK 4SELECTION OF THE

PREFERRED ALTERNATIVE

Pavement DataCollection

Projectevaluation

Select feasiblealternatives

ReconstructionRestorationRecyclingResurfacing

Life-cyclecosts

Non-monetary

factors

Select preferred

alternative

Detailed PS & E

Construction

MonitorPerformance

Module 4-1

Selection of the Selection of the Preferred Rehabilitation Preferred Rehabilitation

AlternativeAlternative

Learning Objectives

• Define life-cycle cost analysis and some of the key computational variables.

• List major LCCA cost items for agency and user.

• Differentiate between probabilistic and deterministic LCCA.

• Identify treatment selection factors other than costs.

• Describe a process to evaluate multiple alternatives.

What Is Life Cycle Costing?• An economic analysis

– Compares design or rehabilitation alternatives

– Considers all significant costs– Evaluates the alternatives over the

same analysis period• Analysis approaches

– Deterministic– Probabilistic

Importance of LCCA

• All costs can be taken into account

– Agency costs

– User costs

– Salvage value

• Alternate strategies can be compared

– On an equivalent basis

– Based on assumptions made

Significance of LCCA

Time

Rehabilitation

Salvage

Construction

Maintenance

Time

RehabilitationPreventiveMaintenance

Salvage

Construction

Routine Maintenance

Present Worth Method

Takes a series of costs:

And converts costs to one point in time:

$

Equivalent UniformAnnual Cost Method

Takes a series of costs:

And converts costs to an equivalent series of payments:

$ $ $ $ $ $ $ $ $ $

Inputs to the LCCA Process• Agency costs

– Initial

– Future M & R

• Analysis Period

• Performance Period

• Nominal vs. Constant Dollars

• Discount Rate

• Salvage Value

• User Costs

Agency Costs

• Initial Construction Costs

– Overhead

– Design

• Future Maintenance and Rehab

• Where do these costs come from?

Analysis Period

• Time period over which future costs are evaluated

• Length of analysis period

– Long enough to reflect cost differences

– Force use of each rehabilitation alternative

Analysis Period vs.Performance Period

Co

nd

itio

n

Time

Analysis Period

2nd RehabPerformance

Period

1st RehabPerformance

Period

Nominal vs. Constant Dollars

• Nominal (inflated) dollars

– Future costs are inflated

• Real (constant) dollars

– Future costs are the same as current costs

• Use consistent dollars and discount rates in LCCA

Discount Rate• Time value of money

– $1 today is not worth $1 a year from now due to interest and inflation

• Significant effect on LCCA• Should reflect long-term historical trends• Discount Rate = (Int. – Infl.) / (1 + Infl.)

~ (Int – Infl.) Int. = Interest Rate (Treasury note)

Infl. = Inflation Rate (Consumer Price Index)

• FHWA suggests values in 3 to 5% range

Real Discount Rate

Amount Lostto Inflation

Real Discount RatesSource: OMB Circular A-94

Investment Maturity

YEAR 3 5 7 10 30

Feb 93 3.1 3.6 4.0 4.3 4.5

Feb 94 2.1 2.3 2.5 2.7 2.8

Feb 95 4.2 4.5 4.6 4.8 4.9

Feb 96 2.7 2.7 2.8 2.8 3.0

Feb 97 3.2 3.3 3.4 3.5 3.6

2001 3.2 3.2 3.2 3.2 3.2

Avg 3.1 3.3 3.4 3.5 3.7

(No Inflation Premium)

Effect of Discount Rate

• Costs occurring earlier are valued more

• Future costs are valued less

• Thus:

– Low rates favor high initial costs and lower future costs

– High rates favor lower initial costs and higher future costs

Salvage Value

• Residual Value

– Actual generated value

– e.g. recycling

• Serviceable Life

– Ratio of remaining years to life, times cost

0

10

20

30

40

50

60

70

80

90

100

5 10 15 20 25 30 35 40 45

Salvage ValueAnalysis Period

Time

Co

nd

itio

nResidual Value Illustrated

User Costs: A Closer Look

• Traffic delay costs

• Vehicle operating costs

• Crash costs

• Damage to freight

User Costs• Costs incurred by user over analysis period• Types:

– User delay costs– Vehicle operating costs– Crash costs

• Models available for calculation (MicroBenCost, QueWZ, HDM-IV)

• May overwhelm overall LCC (particularly on high volume roadways)– Should keep separate from other costs

Measures of User Costs

Hours Stuck in TrafficJams

Driving the Open Road

Source: TTI

Least Congested Cities, Annual

An Indication of Crash Costs

Median Jury Awards for all Traffic Crash FatalitiesRose 102% from $288,000 in 92 to $ 581,000 in 95.

Higher Traffic Fatality Awards

Source: Jury Verdict Research

Probabilistic LCCA

• “Risk-based” analysis

• Addresses variability of inputs

• Inputs needed

– Mean or expected value

– Standard deviation or range

– Type of distribution (typically normal distribution assumed)

Probabilistic LCC Results

0%

10%

20%

30%

$ Millions

Frequency

A

B

2223

PW Cost Distributionof Two Alternatives

FHWA Recommendations

• LCCA encouraged

• As noted in TEA-21...

– LCCA not required

– Recommendations on LCCA to be developed for States

– In conjunction with Executive and AASHTO guidelines

Treatment Selection Factors

• Available Funds

• Staged Construction

• Traffic Control

• Lane Closure

• Minimum Desired Life

• Future Maintenance

• Geometric Issues

Treatment Selection Factors (continued)

• Present and Future Utilities

• Right-of-Way Restrictions

• Regulatory Restrictions

• Available Materials and Equipment

• Contractor Expertise and Manpower

• Agency Policies

Selection Process• Develop feasible alternatives for

evaluation

• Identify key decision factors important to agency (e.g., cost, service life, traffic control, duration of construction, etc.)

• Assign weighting values for each decision factor

• Assign scoring values for each alternative

• Add scores and rank alternatives

Selection Worksheet

DecisionFactor 1

Decision Factor 2

Decision Factor 3

DecisionFactor 4

TOTAL SCOREWeight Weight 1 Weight 2 Weight 3 Weight 4

Alt 1

Alt 2

Alt 3

Alt 4

Weighting Factors

• Relative (weighted) importance of factors considered in selection process

• Number and types of factors will vary

• Should reflect an agency’s decision process

• Sum of all weighting factors must equal 100

Scoring Factors

• Feasible treatments scored comparatively against weighting factors

– e.g., lowest cost gets highest rating

• Somewhat subjective process

• Based on agency’s own experience

• Use whatever scale is appropriate (1-5, 1-10, 1-100, etc.)

Computing Scores

• Product of rating factor and scoring factor

• Computed for each treatment

• Treatment with highest total score is considered the “best” treatment for the specific project

Example Selection Worksheet

TOTAL SCOREWeight

Alt 1

Alt 2

Alt 3

Alt 4

60 50 8050

50 75 7070

40 75 6080

30 100 5090

30 12.5 12 5 59.50

25 18.75 10.5 7

61.25

20 18.75 9 8 55.75

15 25 7.5 9 56.50

LCCService

LifeTraffic Control

Reliable Design

50% 25% 15% 10%

Review

• What are some of the key computation variables in a life-cycle cost analysis?

• What are some major LCCA cost items for both the agency and the user?

• How does probabilistic LCCA differ from deterministic LCCA?

• What are some treatment selection factors other than costs?

Key References• Peterson, D. E. 1985. Life-Cycle Cost

Analysis of Pavements. NCHRP Synthesis of Highway Practice 122. Transportation Research Board, Washington, DC.

• Walls, J. and M .R. Smith. 1998. Life-Cycle Cost Analysis in Pavement Design—Interim Technical Bulletin. Federal Highway Administration, Washington, DC.