1. Benefit Cost Analysis Nathaniel D. Coley Jr
Benefit Cost Analysis Nathaniel D. Coley Jr. Economic Analysis Program FHWA Office Of Asset Management
Workshop slides and notes.
Much more information about the concepts and tools provided in this workshop is available at the BCA.Net website and in the Economic Analysis Primer, FHWA IF at

2. Economic Analysis and Asset Management Benefit Cost Analysis
Agenda
Economic Analysis and Asset Management
Benefit Cost Analysis
Federal Activities
Guidance
Existing Tools
Let’s begin by providing some background about this workshop.

3. 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

4. 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.

5. Asset Management Principles1
POLICY DRIVEN – decisions reflect policy goals and objectives that define desired system condition and service levels 2
PERFORMANCE BASED – clear measures of performance and target service levels are established 3
OPTIONS EVALUATED – comprehensive choices and tradeoffs are examined at each level of decision-making
Understanding these 5 principles is key to understanding asset management. All of these ideas work together to help an agency make decisions to better address the needs of its infrastructure. 4
DECISIONS BASED ON QUALITY INFORMATION – management systems and tools are used 5
CLEAR ACCOUNTABILITY – performance results are monitored and reported

6. Leveraging BCA to Support Policies
Transportation Asset Management Guide:Vol.2 A Focus on Implementation (Chapter 5)

7. 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;”

8. 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. “
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

9. FHWA Economic Analysis Activities
Section 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
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

10. FHWA Economic Analysis Activities
US Code Title 23 Section §101 –Projects of National and Regional Significance: COMPETITIVE GRANT SELECTION AND CRITERIA FOR GRANTS.
to reduce congestion, including impacts in the State, region, and Nation;
to improve transportation safety, including reducing transportation accidents, injuries, and fatalities
Grants for Transportation Investment Generating Economic Recovery(T.I.G.E.R.) requirements
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

11. 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
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

12. FHWA Procedural Guidelines for Highway Feasibility Studies
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

13. Status of Economic Analysis – FHWA Guidance
Typical Life-Cycle Profile 16 17 18 19 20
Initial Capital
Cost
Year
Dollars
Benefits
Costs 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
The above graph is a fairly typical profile of the monetized cost and benefit flows of a transportation project. The initial cost spike in year 0 represents the capital cost of building the project. Subsequent costs are attributable to maintenance (smaller bars) and periodic rehabilitations (medium height bars). Benefits build over time as traffic grows, due to the effect of the project in reducing future congestion and delay or increased reactionary maintenance costs that would have occurred without the project.
Example Direct Benefits
Reduced Accident Costs
Reductions in Delay Costs
Reduced noise or emissions
Example Indirect Benefits
Land use impacts
Employment
Non-user benefits

14. Calculate Present Values of Costs and Benefits
Initial
Activity
Major Activity $
Activities
Costs
Time
We recommend that you remove the triangular area for both of these cost types because they're similar across alternatives and the fact is that they're generally very small values compared to the agency costs and user costs associated with the major activities.
This leaves discreet costs at certain times to be evaluated. $
Benefits
Time
What is the present value of future sums? 14 14

15. Identify base case and alternatives Set analysis period
Method BCA Process
Define objectives
Specify assumptions
Identify base case and alternatives
Set analysis period
Define level of effort
Analyze traffic
Estimate benefits and costs
Evaluate risk
Compare net benefits and rank alternatives
Make recommendations
The BCA process should generally follow the steps summarized here. Critical to the process is the careful definition of the objectives of a project, the assumptions about future conditions and demand, and the identification of a comprehensive range of actions, including the continued operation of the facility under good management but without major investments—known as the base case or no build case. All alternatives are compared against the base case.

16. Recommended BCA Measures
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)
Once the analyst has calculated all benefits and costs of the project alternatives and discounted them, there are several measures to compare benefits to costs in BCA. The FHWA recommends the use of either the NPV or BCR measures for most economic evaluations (see next slides).

17. 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 .

18. Vehicle Operating Costs(VOC) Delay Costs Crash Costs
User Cost Components
Vehicle Operating Costs(VOC)
Delay Costs
Crash Costs

19. 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.

20. 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.

21. Status of Economic Analysis – FHWA Guidance
Risk and Uncertainty
Boston Central Artery
$2.5 to $14+ Billion

22. 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
With the probabilistic approach, we have different methods. We can evaluate the uncertainty using statistical analysis and not rely on graphing point data. Inputs are defined by the range of values and likelihoods instead of a single number. We'll show this in a few slides here. Through simulation, by using a multitude of iterations of deterministic calculations using these range of values, outputs are expressed as a range of possible values and the probability of occurrence.
Just like deterministic inputs, probabilistic inputs are based upon historical data, expert opinion, and research.
Probabilistic analysis allows for simultaneous variability among inputs with the probabilistic outputs expressed as ranges of values with calculated likelihoods of occurrence through basic statistical analysis.
In simulation modeling, you can vary all the inputs at one time and come up with a potential output or the present value curve of the outputs. So, you can have multiple inputs that you change within your model as opposed to being able to change only a single input to get a sensitivity analysis.
This method is defined as a Monte Carlo simulation. The Monte Carlo approach allows all the range of inputs to be included in the model to get the present value which is represented as a potential range of values. Probabilistic analysis results are obtained by using simulation software. We will perform a Monte-Carlo simulation later in this course.
The LCCA outputs are a function of several inputs, such as agency costs, user costs and discount rates, which we believe all may vary independently.
Probabilistic analysis allows for simultaneous variation of inputs.
An entire probability distribution of LCCs is generated for the project alternative along with the mean or average LCC for that alternative.
By including all possible values for the analysis inputs in relation to their probability of occurrence, risk analysis elevates the LCCA debate from contesting the validity of results to deciding best public policy.
Inputs
Output 22 22

23. Simulation Results: Histogram Net Present Value (NPV), $Millions
Best
Case
Worst
Most
Likely
Frequency
Having completed a simulation of our probabilistic inputs, let’s look at our outputs (or more correctly, our output distribution). Let’s assume that we are looking at total project cost and describe our outputs through some of the mechanisms that we have reviewed in this module. Note that we have bounded the range of possible costs:
The range is 3.3 – 2.9 = We have identified likelihoods of occurrence. Our best case scenario is 2.9, the worst case scenario is 3.3, and the most likely outcome is about 3.1.
2.8
2.9
3.0
3.1
3.2
3.3
3.4
Range = 0.4
Net Present Value (NPV), $Millions 23

24. Results: Cumulative Distribution Net Present Value (NPV), $Millions
1.0
90%
0.8
0.6
Probability
50%
0.4
Summing the area under the frequency distribution, we can form a cumulative distribution of project costs as shown on the slide. The cumulative distribution function shows the likelihood of occurrence of values less than or equal to the derived project cost. Using our cumulative distribution function we can now investigate the likelihood of meeting specific outputs. While the output can range from 2.9 to 3.3, the likelihood of the project costing exactly either of these amounts is extremely small because these values are at the tails of the distribution. Using the cumulative distribution function we can now align reliability estimates with project cost. For example, there is a 90% chance that the project cost will be 3.2 or less. There is even an 50% chance that the project cost will be about 3.1 or less. However, there is only a 10% chance that the project cost can be brought in for 3.0 or less.
0.2
10%
2.8
2.9
3.0
3.1
3.2
3.3
3.4
Net Present Value (NPV), $Millions 24

25. Comparing Alternatives Net Present Value (NPV), $Millions
Alternative B
Frequency
Alternative A
Let’s see how we might compare the distributions of total project cost for two competing alternatives A and B keeping in mind their variability and most likely values. As we examine the two distributions we can easily see that there is greater uncertainty associated with Alternative A because it is more spread out than Alternative B which is narrow. The range of costs for alternative A is 0.4 (i.e ) which is greater than that for Alternative B which is 0.1 (i.e ). However, the most likely values for Alternative A are less than that for Alternative B (about 3.15 compared to 3.1). Let’s evaluate these alternatives using a cumulative distribution function (CDF).
2.8
2.9
3.0
3.1
3.2
3.3
3.4
Net Present Value (NPV), $Millions 25

26. Comparing Alternatives Net Present Value (NPV), $Millions
1.0
Alternative A
84%
0.8
64%
0.6
Probability
Alternative B
0.4
Let's compare alternatives A and B. 
This shows that 84% of the simulation outcomes for both alternatives are less than $3.15 million.
To determine the percentage of Alt A outcomes that are less than all outcomes for Alt B the simulation results can be sorted from low to high and the corresponding number of outcomes where Alt A is less than the minimum for Alt B converted into a percentage. 
This is shown on the graph as 64% which represents the percentage of simulation outcomes for Alt A that are less than all outcomes for Alt B.
0.2
3.15
2.8
2.9
3.0
3.1
3.2
3.3
3.4
Net Present Value (NPV), $Millions 26

27. 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
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

28. 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
The application of EA to highway investments is not new. It was well-developed by AASHTO by Much methodological progress has been made since then though.
Many State and local governments use EA tools in some capacity. Only a minority of agencies, however, regularly measure project net benefits in monetary terms, even for large projects. There remains a great potential for broader application of EA to highway investments. When I was in the division Office, our STIP and TIP included tables for the long term costs of projects which were always blank. When I asked our planner why, her response was, “The state never fills that in, how would they know that”

29. Highway Capacity Manual(HCM) 2000 Developing Traffic inputs
BCA.net and BCA
AASHTO Red Book
Transit Cooperatice Research Program(TCRP) Report Environmental Impacts
Highway Capacity Manual(HCM) Developing Traffic inputs
The most basic economic questions that people face in their day-to-day personal and business lives involve the tradeoffs between dollars earned, spent, or invested today and those dollars they hope to earn, spend, or invest in the future. Such tradeoffs must also be considered when evaluating highway and other transportation investments.

30. 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
The BCA.Net tool enables users to manage data for an analysis; select from a wide array of sample economic values; develop multi-segment cases corresponding to alternative strategies for managing highway facilities; evaluate and compare the benefits and costs of improvements; and provide summary indicators for supporting resource allocation decisions. It has flexible report writing capabilities and can accommodate risk analysis. 30

31. 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.

32. 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)

33. Economic Analysis Tools: BCA.net

34. BCA.Net – User Interface
Format the data set that we will be analyzing
How we plan to meet the objective of the project and specify the effects
Define the base case values for traffic stream, input forecasts and assign our available strategies
Assign Values inputs such as User costs, 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

35. Economic Analysis Tools: BCA.net

36. 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
Now lets talk about Life-Cycle Cost Analysis. Here we have the definition as written in TEA 21. Essentially we are using LCCA as an analytical tool to provide a cost comparison between two or more competing design alternatives that produce equivalent benefits for the project being analyzed.

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

38. Bridge Life Cycle Cost Analysis(BLCCA) NCHRP Project 12-43
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
There are two notable research studies in Bridge Life-Cycle Cost Analysis. The firs is a report and software package completed as part of NCHRP called Bridge Life Cycle Cost Analysis
The second is a software package developed by NIST called Bridge Life Cycle Cost(BLCC)

39. Defines the Bridge Using NBI Data
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

40. Performs the LCCA per individual Bridge Components
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
Each of these software packages gets into predicting deterioration rates for the bridges and timing the countermeasure activities

41. includes sensitivity analysis, Monte Carlo simulations
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.

42. BridgeLCC: Cost Summary

43. FHWA LCCA Software

44. The LCCA Process in RealCost
Analyst
Function
Analyst
Function
REALCOST FUNCTIONS
Inputs
(Traffic Data, Cost data, Discount Rate, etc)
Model
traffic
conditions
Calculate
Costs
(User &
Agency)
Outputs
(NPV curves&
analysis graphs)
Evaluate Results in the Context of Project Objectives
Here is a pictorial of how the FHWA RealCost Softwre performs the Life-Cycle Cost Analysis. The user inputs the project parameters such as traffic growth and characteristic data, discount rate, timing for activities, and costs etc.. The RealCost software models the traffic conditions as far as how the workzones will impact traffic. It then calculates the present value of the life cycle costs for the project and displays the outputs in various forms for the user to evaluate.

45. Nathaniel D. Coley Jr. Evaluation and Economic Investment Team
Thank You
Nathaniel D. Coley Jr.
Evaluation and Economic Investment Team
FHWA Office of Asset Management
Washington, DC