Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions - Office of...
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Life Cycle Cost Analysisin Pavement Design
- In Search of Better Investment Decisions -
Office of Asset Management
Federal Highway Administration
Executive Session
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
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
Deterministic Limitations
Doesn’t Address: Statistical Significance Variability
Subject to Manipulation
Lacks Credibility
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
$
%
Inputs
NetPresentValue
Results
M
O
D
E
L
Simulation Modeling
Deterministic ApproachProject cost estimate is $12 million
Probabilistic Approach 75 percent chance the project will cost $12 million or less.
LCCA Results
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
Agency NPV
B
A
Fre
quen
cy
Net Present Value
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
Benefits of LCCA Software
Performs LCCA as per FHWA best practice Requires same data inputs as manual
process Better, faster & cheaper analysis Automates user cost process
Software Data Input
Software Data Input
Software Outputs
Software Outputs
4. Why Use LCCA
Requirements
FHWA’s Philosophy
Benefits of LCCA
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.
FHWA Philosophy
LCCA: Decision support tool Results are not decisions Rigorous analytical process can be as important as the results
Benefits of LCCA
Better information for decisions Improved rehabilitation strategies Consideration of user costs Support for overcoming the
“first cost” limitations
FHWA LCCA Guidance
LCCA Software LCCA Primer, Technical Bulletin
DP-115 http://www.fhwa.dot.gov/infrastructure/asstmgmt/lcca.htm
5. Management’s Role
Management Support for Development and Application of LCCA.
Develop LCCA Guidelines including Recommendations on Input Values
Management Support
Requires “buy-in” of risk management by senior executives
Technical Champion Top management support
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
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
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
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.
Passenger Vehicle $10 - $13
Single Unit Truck $17 - $19
Combo Truck $21 - $24
Value of Time Recommendations...
Developing Guidelines
1996 Dollars
Things to Remember
LCCA Decision Support Tool NHS LCCA Requirements Document Inputs Dispose of all Issues Provide Confidence Information