Economic Analysis Tools: Benefit Cost Analysis

Nathaniel D. Coley Jr.

Benefit Cost Analysis

Nathaniel D. Coley Jr.

Economic Analysis Program
FHWA Office Of Asset Management

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Agenda

•Economic Analysis and

Asset Management
•Benefit Cost Analysis
–Federal Activities
–Guidance
•Existing Tools

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
Transportation Economic Analysis(Definition)

“Transportations Economic Analysis is the

analysis of the design, construction,
preservation, maintenance, and
consumption of transportation assets and
services and the impact of those activities on
direct and indirect users and the
environment.”
Nat Coley

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Nathaniel D. Coley Jr.

Economic Analysis Supports the Vision

• We maintain, upgrade, and operate our

transportation assets to meet or exceed
the needs of our transportation users for
the long term.
• We seek to link user expectations and
needs for system condition, performance,
and availability with system management
and investment strategies over an extended
time horizon.

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Asset Management Principles

POLICY DRIVEN – decisions reflect policy goals and objectives

1 that define desired system condition and service levels

PERFORMANCE BASED – clear measures of performance and

2 target service levels are established

OPTIONS EVALUATED – comprehensive choices and tradeoffs

3 are examined at each level of decision-making

DECISIONS BASED ON QUALITY INFORMATION –

4 management systems and tools are used

CLEAR ACCOUNTABILITY – performance results are monitored

5 and reported

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Nathaniel D. Coley Jr.

Leveraging BCA to Support Policies

Transportation Asset Management Guide:Vol.2

A Focus on Implementation (Chapter 5)
Pavement Maximize
Management systemwide
System benefits

Transportation Priority setting

Bridge Equity and
Investment Tradeoff Resource allocation
Management distributional
Candidate Analysis Budgeting
System goals
File Programming

Maintenance Policy and

Management political
System goals

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

New Transportation Bill

National Surface Transportation Policy and

Revenue Study Commission recommends:
“…Federal funding that is performance-based
and focused on cost-beneficial outcomes
with accountability for the full range
of economic, environmental, and
social costs and benefits of
investments;”

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

FHWA Economic Analysis Activities

•Code of Federal Regulations Section 650 Various

bridge projects require a Benefit Cost Analysis
•Section 627 Value Engineering – Projects over
$25 million “establish a worth for that function,
generate alternatives through the use of creative
thinking, and provide the needed functions to
accomplish the original purpose of the project,
reliably, and at the lowest life-cycle cost without
sacrificing safety, necessary quality, and
environmental attributes of the project. “
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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

FHWA Economic Analysis Activities

•Section 450.320- Identification and evaluation of the

anticipated performance and expected benefits of
appropriate congestion management strategies that will
contribute to the more effective use and improved safety of
existing and future transportation systems based on the
established performance measures.
•Also Section 450 –”all of the reasonable alternatives under
consideration must be fully evaluated in terms of their
transportation impacts; capital and operating costs; social,
economic, and environmental impacts; and technical
considerations” The benefit cost analysis model also assists
practitioners develop reports required specifically by various
National Environmental Policy Act(NEPA) requirements
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Nathaniel D. Coley Jr.

FHWA Economic Analysis Activities

• US Code Title 23 Section §101 –Projects of

National and Regional Significance:
COMPETITIVE GRANT SELECTION AND
CRITERIA FOR GRANTS.
ii. to reduce congestion, including impacts in the State,
region, and Nation;
iii. to improve transportation safety, including reducing
transportation accidents, injuries, and fatalities
• Grants for Transportation Investment
Generating Economic Recovery(T.I.G.E.R.)
requirements

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Nathaniel D. Coley Jr.

FHWA Economic Analysis Activities

• The Transportation Infrastructure Finance and

Innovation Act (TIFIA)
• Engineering Economic Analysis Practices for
Highway Investment (NCHRP 20-05/Topic 41-03)
• FHWA's Office of Operations Technology Services
Developing a Benefit-Cost Analysis desk reference
to assess investments in management and
operations
• BCA in Freight

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Nathaniel D. Coley Jr.
Benefit Cost Analysis

“Benefit Cost Analysis is a calculation of the

stream of both benefits and costs over the
lifetime of the facility or strategy.”

FHWA Procedural Guidelines

for Highway Feasibility Studies

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Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

Typical Life-Cycle Profile

Benefits
Initial Capital Costs
Cost

Dollars

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

Year
Example Direct Benefits Example Indirect Benefits
•Reduced Accident Costs •Land use impacts
•Reductions in Delay Costs •Employment
•Reduced noise or emissions •Non-user benefits
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Nathaniel D. Coley Jr.

Calculate Present Values of Costs and Benefits

Initial
Activity Major Activity
$ Activities

Costs

Time

$
Benefits

Time
What is the present value of future sums?
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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Method

BCA Process
1. Define objectives 6. Analyze traffic
2. Specify assumptions 7. Estimate benefits and
3. Identify base case costs
and alternatives 8. Evaluate risk
4. Set analysis period 9. Compare net benefits
5. Define level of effort and rank alternatives
10. Make recommendations

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Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

Recommended BCA Measures

•Net Present Value (NPV)

•Benefit-Cost Ratio (BCR)
•Other measures include:
Equivalent Uniform Annual Value (EUAV)
Internal Rate of Return (IRR)

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Nathaniel D. Coley Jr.

User Costs in LCCA

User Costs in the LCCA are differential

Costs resulting from periods of construction,
preservation, and/or rehabilitation activities
between the alternates that generally
restrict the capacity of the facility and
disrupt normal traffic flow .

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Nathaniel D. Coley Jr.

User Cost Components

•Vehicle Operating Costs(VOC)

•Delay Costs
•Crash Costs

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

User Cost Components

• Vehicle Operating Costs (VOC)

additional costs incurred by the vehicle for the
additional speed changes, stops, miles for detours,
hours of idling, etc. that are incurred because of work
zone activities
• Delay Costs
Value($) of time for each vehicle classification used in the
LCCA
• Crash Costs
the dollar value of the additional crash types
attributed to the work-zone activities.
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Nathaniel D. Coley Jr.
Calculating User Costs

User costs are

…based on capacity flow analysis.
…a function of workzone impacts for
the M&R strategy that you select for
maintaining the alternate designs.
…are directly dependent on the volume
and operating characteristics of the
traffic on the facility.

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Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

Risk and Uncertainty

Boston Central Artery
1985-2007 $2.5 to $14+ Billion

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Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

Probabilistic Analysis
• Inputs are defined by their range of values and
probability of occurrence (probability distribution)
• Through simulation, outputs are expressed as ranges
of values with probabilities of occurrence

Inputs Output
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Nathaniel D. Coley Jr.

Simulation Results: Histogram

Most
Likely
Frequency

Best Worst
Case Case

2.8 2.9 3.0 3.1 3.2 3.3 3.4

Range = 0.4

Net Present Value (NPV), $Millions

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Nathaniel D. Coley Jr.

Results: Cumulative Distribution

1.0
90%

0.8
Probability

0.6
50%

0.4

0.2
10%

0
2.8 2.9 3.0 3.1 3.2 3.3 3.4
Net Present Value (NPV), $Millions
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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Comparing Alternatives

Alternative B
Frequency

Alternative A

2.8 2.9 3.0 3.1 3.2 3.3 3.4

Net Present Value (NPV), $Millions

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Comparing Alternatives
1.0 Alternative A
84%
0.8
Probability

64%
0.6

Alternative B
0.4

0.2

3.15
0
2.8 2.9 3.0 3.1 3.2 3.3 3.4

Net Present Value (NPV), $Millions

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

FHWA Economic Analysis Primer

• Benefit Cost and Life-Cycle Cost

Analysis Fundamentals and Steps
• Provides guidance, recommended
values for discount rates and sources
of indexes for inflation, values of
user time.
• Discusses the consideration of
forecasted traffic flows
• Provides guidance on BCA in NEPA

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Status of Economic Analysis – FHWA Guidance

• Grants for Transportation Investment Generating

Economic Recovery(T.I.G.E.R.) requirements (See
Handout)
• Interchange Access Approval Information Guide
• FHWA Federal Guidelines for Highway Feasibility
Studies: Economic Justifications are based on BCA
• Office of Secretary of Transportation(OST) Value of
time and value of life guidance
• Office of Management and Budget Circular A-94
Guidance on Discount Rates

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
BCA.net and BCA

• AASHTO Red Book

• Transit Cooperatice Research

Program(TCRP) Report 78
Environmental Impacts

• Highway Capacity Manual(HCM) 2000

Developing Traffic inputs

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
Economic Analysis Tools: BCA.net

•web-based benefit-cost analysis tool

•develop strategies for improving and managing
assets; evaluate & compare the
benefits and costs of the alternative strategies;
provide summary metrics for investment decisions.
•Calculates the traffic impacts and the present
values of agency and user costs and externalities
for the base case & alternative then compares them
to arrive at measures including the net present
value, benefit-cost ratio, and internal rate of return

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Nathaniel D. Coley Jr.

Economic Analysis Tools: BCA.net

• Allows for multi-phased, multi-year programs of preservation or
improvements enabling a lifecycle comparison of alternate
strategies.
• Enables the analysis of a range of capacity improvement strategies
including lane widening, adding lanes and reversible lanes for
roadways with skewed directional flows.
• Models traffic conditions for multiple “representative days” to
describe forecast facility use.
• Evaluates interchange/intersection improvements including the
replacement or introduction of traffic control devices and signals.
•Accounts for the effects of roadway conditions on trip cost
and, in turn, the impact of trip cost changes on travel demand.

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Economic Analysis Tools: BCA.net

• Has a full-featured risk analysis capability.

• Models and calculates the life-cycle impacts on the
environment
•Project Benefits Calculated by BCA.net include
–Time savings – the reduction in travel time by users of the
roadway
–Vehicle Costs reductions – the reduction in expenditures by
users on fuel, oil, tires, vehicle maintenance and depreciation
–Safety – the reduction in casualties and property damage
from roadway crashes.
–Emissions (CO, NOx)

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
Economic Analysis Tools: BCA.net

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

BCA.Net – User Interface

Format the data set that we How we plan to

will be analyzing meet the objective
of the project and
specify the effects
Define the base case values for Assign Values inputs
traffic stream, input forecasts
such as User costs,
and assign our available
strategies
Discount Rate, set risk
features of input values
Specify the Distribution of
traffic streams, delay times
for interchange/intersection
Parameters
Specify our sampling
routine and simulate the
effects of our strategy
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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
Economic Analysis Tools: BCA.net

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.

Life-Cycle Cost Analysis Definition

Life-Cycle Cost Analysis is a process for

evaluating the total economic worth of a usable
project segment by analyzing initial costs and
discounted future costs, such as maintenance,
user, reconstruction, rehabilitation, restoring,
and resurfacing costs, over the life of the
project segment.

Source: Transportation Equity Act for the 21st Century

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Nathaniel D. Coley Jr.

LCCA Process

1. Establish Alternatives
2. Determine Activity Timing
3. Estimate Agency & User Costs
4. Compute Life-Cycle Costs
5. Analyze the Results

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
Bridge LCCA Resources

•Bridge Life Cycle Cost Analysis(BLCCA)

NCHRP Project 12-43

•Bridge Life-Cycle Cost(BLCC)

National Institute of Technology(NIST)

•PONTIS and FHWA RealCost Software

•Webinar in February with example applications

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
BLCCA - NCHRP

•Defines the Bridge Using NBI Data

•Has costing models for bridge condition and load
capacity
•Includes many costs for various bridge items
•Performs a sensitivity analysis
•Can’t analyze individual elements

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Nathaniel D. Coley Jr.
BLCC NIST

•Performs the LCCA per individual Bridge

Components
•Can simulate randomness of variables through a
probabilistic analysis(Monte Carlo Simulation)
•Incorporates detailed costs of workzones
•Does not provide detailed models for various costs

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Nathaniel D. Coley Jr.

BridgeLCC(NIST)

• Analyzes preliminary design of highway bridges,

roadways, piers, and other civil infrastructure
–includes sensitivity analysis, Monte Carlo
simulations
–Includes FHWA CoRe Element System, user
costs, probabilistic events, probabilistic costs,
and exportable data and results.

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Nathaniel D. Coley Jr.

BridgeLCC: Cost Summary

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Nathaniel D. Coley Jr.

FHWA LCCA Software

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 Economic Analysis Tools: Benefit Cost Analysis
Nathaniel D. Coley Jr.
The LCCA Process in RealCost

Analyst Analyst
Function
REALCOST FUNCTIONS Function

Evaluate
Inputs Model Calculate Results
(Traffic Data, Outputs in the
Cost data, traffic Costs (NPV curves&
Discount (User & analysis graphs) Context of
Rate, etc)
conditions Agency) Project
Objectives

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Nathaniel D. Coley Jr.

Thank You

Nathaniel D. Coley Jr.

Evaluation and Economic
Investment Team
FHWA Office of Asset
Management
Washington, DC
[email protected]
202-366-2171

http://www.fhwa.dot.gov/infrastructure/asstmgmt/economic.cfm
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