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![Page 1: Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions - Office of Asset Management Federal Highway Administration Executive.](https://reader035.fdocuments.net/reader035/viewer/2022081513/5515715955034674578b4ff5/html5/thumbnails/1.jpg)
Life Cycle Cost Analysisin Pavement Design
- In Search of Better Investment Decisions -
Office of Asset Management
Federal Highway Administration
Executive Session
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Introduction Who are we
Jim Walls - Eastern Resource Center
Keith Herbold - Midwestern Resource Center
Tom Canick – Office of Asset Management
Why are we here: To deliver FHWA’s LCCA probabilistic software workshop
Why are we doing that: FHWA supports application of LCCA in pavement decisions Continuation of our prior efforts
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Presentation Agenda
1. Workshop Overview
2. Probabilistic Approach
3. RealCost Software
4. Why Use LCCA
5. Management’s Role
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1. Workshop Overview
LCCA review Software instruction Class exercises
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LCCA Review LCCA Process
Components and Issues
User Costs
Probability and Risk
Input Recommendations
Workshop Overview
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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
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Workshop Overview
Software Capabilities How to use Demonstration
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Class Exercises Hands-on Software Exercises Interpreting Results
Workshop Overview
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2. Probabilistic LCCA
What is it What does it add to the process How to interpret it
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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
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Probabilisticversus
Deterministic Approach
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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
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Deterministic Limitations
Doesn’t Address: Statistical Significance Variability
Subject to Manipulation
Lacks Credibility
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Deterministic ApproachProject cost estimate is $12 million
Probabilistic Approach 75 percent chance the project will cost $12 million or less.
LCCA Results
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$
%
Inputs
NetPresentValue
Results
M
O
D
E
L
Simulation Modeling
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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
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Agency NPV
B
A
Fre
quen
cy
Net Present Value
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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
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3. RealCost Software
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Benefits of Software
Performs LCCA as per FHWA best practice Requires same data inputs as manual
process Better, faster & cheaper analysis Automates user cost process
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Software Data Input
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Software Data Input
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Software Outputs
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Software Outputs
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4. Why Use LCCA
Requirements
FHWA’s Philosophy
Benefits of LCCA
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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.
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FHWA Philosophy
LCCA: Decision support tool Results are not decisions
Rigorous analytical process can be as important as the results
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Benefits of LCCA
Better information for decisions Improved rehabilitation strategies Consideration of user costs Support for overcoming the
“first cost” limitations
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FHWA LCCA Guidance
LCCA RealCost LCCA Technical LCCA Software Primer Bulletin Advanced
DP-115 Workshop
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5. Management’s Role
Management Support for Development and Application of LCCA.
Develop LCCA Guidelines including Recommendations on Input Values
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Management Support
Requires “buy-in” of risk management by senior executives
Technical Champion Top management support
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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
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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
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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
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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.
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Passenger Vehicle $10 - $13
Single Unit Truck $17 - $19
Combo Truck $21 - $24
Value of Time Recommendations...
Developing Guidelines
1996 Dollars
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Things to Remember
LCCA Decision Support Tool NHS LCCA Requirements Document Inputs Dispose of all Issues Provide Confidence Information
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The End
That’s All Folks!