Life-Cycle Cost Analysis

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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