Life-Cycle Cost Analysis |
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Rodney E. Slater
Federal Highway Administration
11 July 1994
[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16719]
[[Page Unknown]]
[Federal Register: July 11, 1994]
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DEPARTMENT OF TRANSPORTATION
Federal Highway Administration
[FHWA Docket No. 94-15]
Life-Cycle Cost Analysis
AGENCY: Federal Highway Administration (FHWA), DOT.
ACTION: Interim policy statement; request for comments.
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SUMMARY: This FHWA policy statement on life-cycle cost analysis (LCCA)
helps fulfill Federal management responsibilities for analyzing life-
cycle cost aspects of infrastructure investment decisions under
Executive Order 12893, ``Principles of Federal Infrastructure
Investment.'' The policy statement establishes LCCA principles to be
applied by FHWA in infrastructure investment analyses, and in
evaluating the adequacy of State highway agency procedures used in
conducting required LCCA for investments funded through the Federal-aid
highway program. States and local agencies are expected to apply these
principles in evaluating program and project level investment decisions
involving Federal-aid highway funds as required under applicable FHWA
regulations. Comments are solicited on potential problems in
implementing provisions of this policy statement and specific needs for
training and technical assistance in LCCA.
DATES: This interim policy statement is effective on July 11, 1994.
Comments on the interim policy statement must be received on or before
October 11, 1994. A final LCCA policy statement will be published that
takes into consideration comments received on this interim statement.
ADDRESSES: Submit written, signed comments concerning this interim
policy statement to FHWA Docket No. 94-15, Federal Highway
Administration, room 4232, HCC-10, Office of the Chief Counsel, 400
Seventh Street, SW., Washington D.C. 20590. In addition to specific
comments on this policy statement, comments are requested on training
and technical assistance needed to implement LCCA. All comments
received will be available for examination at the above address between
8:30 a.m. and 3:30 p.m. e.t. Monday through Friday, except legal
Federal holidays.
FOR FURTHER INFORMATION CONTACT: Mr. James W. March, Chief, Systems
Analysis Branch, (202) 366-9237, or Mr. Steven M. Rochlis, Legislation
and Regulations Division, (202) 366-1395, Federal Highway
Administration, 400 Seventh Street SW., Washington D.C. 20590.
SUPPLEMENTARY INFORMATION:
Background
There is an increasing recognition that total life-cycle costs of
highway and transportation investments must be given greater
consideration in all phases of highway programs. Executive Order 12893,
``Principles of Federal Infrastructure Investment,'' requires that
benefits and costs of infrastructure investment be measured and
appropriately discounted over the full life cycle of each project.
Sections 1024 and 1025 of the Intermodal Surface Transportation
Efficiency Act of 1991 (ISTEA) (Pub. L. 102-240, 105 Stat. 1914, 1977)
also require consideration of ``the use of life-cycle cost in the
design and engineering of bridges, tunnels, or pavement.'' Subpart B of
the interim final rule on implementation of ISTEA management systems
(23 CFR 500.207) requires use of LCCA for pavement management systems
(PMS) and Subpart C (23 CFR 500.307) requires use of LCCA or comparable
techniques for bridge management systems (BMS).
Life-cycle cost analysis is an economic evaluation of all current
and future costs associated with investment alternatives. It is a
valuable economic analysis technique for evaluating highway and other
transportation programs and projects that require long-term capital and
maintenance expenditures over the extended lives of facilities. Future
costs are discounted using an appropriate discount rate to compare
costs incurred at different points in time.
Life-cycle cost analysis principles and techniques are used in many
types of economic analysis to compare benefits and costs arising at
different points in time. Benefit-cost analysis and cost effectiveness
analysis, for instance, use life-cycle cost analysis principles to
discount future benefits and costs of investment alternatives over the
lives of alternatives being evaluated.
Life-cycle cost analysis is used to evaluate programs of pavement
and bridge improvements as well as individual projects. It is an
important input to estimates of future funding requirements and to the
development of improvement programs, especially when there are budget
constraints.
The use of value engineering is receiving increased attention as a
technique for analyzing the functions of a program, project, system,
product, or service to identify opportunities to significantly lower
costs while still achieving the essential functions. Life-cycle costs
are often analyzed to ensure that unnecessary costs are avoided by
considering future operations, maintenance, and reconstruction
requirements.
Total life-cycle costs of specific facilities may be many times the
initial construction costs when user costs are considered. It is
essential that a long term perspective be taken in programming
improvements, selecting among alternative maintenance, rehabilitation,
and reconstruction strategies, and designing pavements, structures, and
other highway elements. Longer design lives may have to be considered,
and traditional strategies for programming maintenance and
rehabilitation activities may have to be reevaluated to determine
whether they adequately consider future costs, including user delay-
related costs.
Increasing congestion on important highways in urban areas and some
rural areas makes it critical to fully consider life-cycle costs of
investment decisions. Safety concerns and auxiliary construction costs
to maintain, rehabilitate, or reconstruct congested highways and
bridges under traffic are very high. User costs and delays around work
zones in congested areas may be even higher and represent significant
inefficiencies that may adversely affect economic productivity,
especially on the National Highway System (NHS). These delays can erode
productivity gains realized by the growing number of industries using
just-in-time and other advanced logistics strategies that depend on
efficient and predictable transportation.
Regardless of whether user costs are included in a formal LCCA,
most States already implicitly consider user costs when they choose to
pay premiums to maintain traffic through work zones or design more
durable pavements in congested urban areas. Including user costs in
LCCA makes these implicit considerations explicit, and may help
identify other opportunities to reduce overall agency and user costs.
Recognition of the high future costs to maintain and rehabilitate
highways, bridges and tunnels, and their associated traffic control,
safety, environmental, and hydraulic components has led to increased
interest in the potential for LCCA to improve investment productivity
and reduce public and private costs of highway and other transportation
programs. The FHWA and the American Association of State Highway and
Transportation Officials (AASHTO) jointly sponsored a symposium in
December 1993 to learn more about LCCA practices among the States and
to identify research, training, technical assistance, and policy-
related needs to improve LCCA application. An important input to that
symposium was an AASHTO survey of State LCCA practices.
Many specific LCCA issues and research needs were identified at the
symposium. Key technical issues included how to establish the
appropriate analysis period, how to value and properly consider user
costs, and how to choose the appropriate discount rate. Participants
also identified important research and data needed to predict pavement
and bridge performance and forecast future traffic.
An important policy issue raised at the symposium was the
recognition that results of LCCA may favor selection of improvements
with higher initial costs in order to achieve significant long term
savings in overall investment requirements. It may indicate, for
instance, that more projects warrant reconstruction rather than
rehabilitation strategies, that early intervention with preventive
maintenance is cost effective, or that somewhat higher designs or
levels of service may be appropriate for some facilities. The FHWA
recognizes that LCCA, thus, may result in proposals for greater
expenditures up front. At the same time virtually all transportation
agencies will continue to face budgetary limitations at least over the
short term. Life-cycle cost analysis will help agencies identify and
explain the real costs borne by transportation users of inadequate
infrastructure funding. Furthermore, LCCA can assist agencies that face
fiscal constraints in making the best use of available funds. Several
States already use LCCA in developing network improvement programs as
part of their pavement and bridge management systems. Eventually it is
desirable for all States to have such capabilities.
The following paragraphs highlight key principles of good LCCA
practice. Applying these principles generally will allow States and
local agencies to identify investment alternatives that will minimize
total life-cycle costs. While their use is not mandatory in all
instances, States are strongly encouraged to apply these principles in
conducting life-cycle cost analyses unless there are unique
characteristics of particular programs or projects that require
principles to be modified. Life-cycle cost analysis, of course, is only
one consideration in many investment decisions, but it certainly is one
of the most important for NHS routes and other high volume roads in
light of the costs and lost productivity associated with future
maintenance and rehabilitation actions.
In general there are no hard and fast rules concerning the
appropriate length of the analysis period. The analysis period will
vary depending on the type of improvement (bridge, versus tunnel,
versus pavement), the location (urban versus rural), the highway system
(NHS versus other), and the design lives of all appropriate
alternatives. In general, longer design lives should be considered for
improvements on the NHS and other high volume urban roadways because
future agency and user costs associated with maintenance and
rehabilitation activities may be so high. For pavement improvements on
the NHS, design lives of 50 years may be reasonable while bridge and
tunnel improvements may have design lives of 100 or more years. The
consideration of longer design lives will require longer analysis
periods in LCCA. Analysis periods for projects involving other modes
generally should be long enough to cover the full life-expectancy of
the investment--the time until facilities would have to be
reconstructed if initially constructed to an optimum design. These
lives would vary according to the modal alternative being examined.
Analysis periods for all project alternatives should be the same
length.
The inclusion of user costs in LCCA is particularly controversial
among some States. Part of the controversy over user costs is the fact
that they often are many times higher than agency costs and can
critically influence decisions. While all motorists do not value costs
of delays as highly as do commercial travelers, the costs and lost
productivity to businesses of delays around work zones are simply too
high to ignore. In fact, such delays arguably have a greater impact on
business than delays associated with inadequate capacity because
businesses factor normal congestion costs into their plans, but delays
around work zones generally cannot be foreseen and thus are more
disruptive. Technical advisories to be developed on estimating user
operating and delay costs will address this issue in greater detail.
In addition to increased delay and vehicle operating costs,
rehabilitation and maintenance activities may result in increased
accident costs around work zones. Technical advisories will be
developed to assist in estimating increases in accident rates
associated with different types of rehabilitation and maintenance
activities. The most comprehensive information on the costs of motor
vehicle accidents is contained in the National Highway Traffic Safety
Administration's publication, ``The Economic Cost of Motor Vehicle
Crashes, 1990.'' A copy of this document is available in the public
docket for this notice.
The proper use of the discount rate has been an issue for LCCA,
cost-benefit analysis and other types of economic analysis as well.
Among the issues are the relationship between the discount rate and
inflation, factors that affect the choice of rates, and how to
establish rates over a long analysis period. Office of Management and
Budget (OMB) Circular A-94, ``Guidelines and Discount Rate for Benefit-
Cost Analysis of Federal Programs,'' provides guidance on selecting
appropriate discount rates for economic analyses. Since the choice of
discount rate can affect relative life-cycle costs, sensitivity
analysis may be appropriate if two or more alternatives are close in
cost, if streams of costs and benefits among alternatives vary
significantly over time, or if the discount rate is outside the range
of discount rates recommended by OMB.
The FHWA will develop training and technical assistance materials
to address issues in LCCA. These materials should supplement guidance
on economic analysis techniques contained in AASHTO's 1977 publication,
``A Manual on User Benefit Analysis of Highway and Bus-Transit
Improvements,''1 the ``Red Book,'' in the forthcoming update to
that publication which was developed under National Cooperative Highway
Research Program Project 7-12, and in other guidance on LCCA issues.
While additional materials are being developed, this interim policy
statement provides guidance on LCCA principles applicable to highway
and structure design.
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\1\This document is available for inspection as prescribed at 49
CFR Part 7, Appendix D. It may be purchased from the American
Association of State Highway and Transportation Officials, 444 N.
Capitol Street, NW., Suite 225, Washington DC 20001. A copy also
will be available in the public docket for this notice.
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The FHWA is reviewing its policy on alternative bridge designs (53
FR 21637, June 9, 1988) for consistency with this interim life-cycle
cost analysis policy as well as with Executive Order 12893.
Policy
The following is FHWA's LCCA policy for infrastructure investment
analyses. It represents good practice that should be followed by States
and local transportation agencies in making program and project
investment decisions:
1. Life-cycle costs are an important consideration in all highway
investment decisions.
2. The level of detail in LCCA should be commensurate with the
level of investment involved and the types of alternatives being
analyzed. Investments on the NHS generally warrant more detailed
analysis than investments on non-NHS routes. Similarly, evaluation of
decisions whether to reconstruct or rehabilitate a facility warrants
more detailed analysis than consideration of alternative maintenance
strategies.
3. Typical life-cycle cost analysis profiles may be developed and
used as the basis for evaluating alternatives for general types of
improvements, such as, consideration of alternative pavement designs or
different types of bridges on various functional class highways. Major
programs and projects, however, often will require consideration of a
broad range of alternative rehabilitation and reconstruction options
and more detailed analysis of potential alternatives. The potential
applicability and use of LCCA profiles will be discussed in greater
detail in future technical advisories.
4. Other factors, including budgetary, environmental, and safety
considerations, legitimately influence highway investment decisions and
should be considered along with the results of LCCA in evaluating
investment alternatives. Life-cycle cost analysis principles should be
used in conjunction with other appropriate economic analysis techniques
in pavement and bridge management systems. Systemwide or network
objectives as well as project level concerns should be considered in
decisionmaking, and both levels of analysis should consider life-cycle
costs.
5. Analysis periods should be for the life of the facility or
system of facilities being evaluated and should account for costs of
foreseeable future actions. Analysis periods should not be less than 75
years for major bridge, tunnel, or hydraulic system investments, and
not less than 35 years for pavement investments. Longer design lives
may be appropriate for the NHS or other major routes or corridors.
6. All appropriate agency costs anticipated during the analysis
period should be considered in the analysis, including traffic control
costs during maintenance and rehabilitation, costs of special
construction procedures required to maintain traffic, and agency
operating costs for such things as tunnel lighting and ventilation. In
those cases where the agency required to operate a facility is not the
one making the investment decision, it is important for the funding
agency to include operating costs borne by other organizations
responsible for operating the facilities.
7. User costs including increased vehicle operating costs, accident
costs, and delay-related costs incurred throughout the analysis period
should be considered in LCCA. Increased costs due to deteriorated
riding surfaces, circuitous routings, and accidents and delays around
and through maintenance and construction work zones are all important.
8. Future agency and user costs should be discounted to net present
value or converted to equivalent uniform annual costs using appropriate
discount rates. Discount rates selected should be consistent with
guidance provided in OMB Circular A-94.
Technical advisories on these and other technical issues in the
application of LCCA will be issued by FHWA in the future.
Issued on: June 30, 1994.
Rodney E. Slater,
Federal Highway Administrator.
[FR Doc. 94-16719 Filed 7-8-94; 8:45 am]
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