1. BLOCK 4 SELECTION OF THE PREFERRED ALTERNATIVE Pavement Data Collection Project evaluation Select feasible alternatives Reconstruction Restoration Recycling Resurfacing Life-cycle costs Non- monetary factors Select preferred alternative Detailed PS & E Construction Monitor Performance

2. Module 4-1 Selection of the Preferred Rehabilitation Alternative

3. Learning Objectives Define life-cycle cost analysis and some of the key computational variables. List major LCCA cost items for agency and user. Differentiate between probabilistic and deterministic LCCA. Identify treatment selection factors other than costs. Describe a process to evaluate multiple alternatives.

4. What Is Life Cycle Costing? An economic analysis –Compares design or rehabilitation alternatives –Considers all significant costs –Evaluates the alternatives over the same analysis period Analysis approaches –Deterministic –Probabilistic

5. Importance of LCCA All costs can be taken into account –Agency costs –User costs –Salvage value Alternate strategies can be compared –On an equivalent basis –Based on assumptions made

6. Significance of LCCA Time Rehabilitation Salvage Construction Maintenance Time Rehabilitation Preventive Maintenance Salvage Construction Routine Maintenance

7. Present Worth Method Takes a series of costs: And converts costs to one point in time: $

8. Equivalent Uniform Annual Cost Method Takes a series of costs: And converts costs to an equivalent series of payments: $ $ $ $ $

9. Inputs to the LCCA Process Agency costs –Initial –Future M & R Analysis Period Performance Period Nominal vs. Constant Dollars Discount Rate Salvage Value User Costs

10. Agency Costs Initial Construction Costs –Overhead –Design Future Maintenance and Rehab Where do these costs come from?

11. Analysis Period Time period over which future costs are evaluated Length of analysis period –Long enough to reflect cost differences –Force use of each rehabilitation alternative

12. Analysis Period vs. Performance Period Condition Time Analysis Period 2 nd Rehab Performance Period 1 st Rehab Performance Period

13. Nominal vs. Constant Dollars Nominal (inflated) dollars –Future costs are inflated Real (constant) dollars –Future costs are the same as current costs Use consistent dollars and discount rates in LCCA

14. Discount Rate Time value of money –$1 today is not worth $1 a year from now due to interest and inflation Significant effect on LCCA Should reflect long-term historical trends Discount Rate = (Int. – Infl.) / (1 + Infl.) ~ (Int – Infl.) Int.= Interest Rate (Treasury note) Infl.= Inflation Rate (Consumer Price Index) FHWA suggests values in 3 to 5% range

15. Real Discount Rate Amount Lost to Inflation

16. Real Discount Rates Source: OMB Circular A-94 Investment Maturity YEAR 35 71030 Feb 933.13.64.04.34.5 Feb 942.12.32.52.72.8 Feb 954.24.54.64.84.9 Feb 962.72.72.82.83.0 Feb 973.23.33.43.53.6 20013.23.23.23.23.2 Avg3.13.33.43.53.7 (No Inflation Premium)

17. Effect of Discount Rate Costs occurring earlier are valued more Future costs are valued less Thus: –Low rates favor high initial costs and lower future costs –High rates favor lower initial costs and higher future costs

18. Salvage Value Residual Value –Actual generated value –e.g. recycling Serviceable Life –Ratio of remaining years to life, times cost

19. 0 10 20 30 40 50 60 70 80 90 100 51015202530354045 Salvage Value Analysis Period Time Condition Residual Value Illustrated

20. User Costs: A Closer Look Traffic delay costs Vehicle operating costs Crash costs Damage to freight

21. User Costs Costs incurred by user over analysis period Types: –User delay costs –Vehicle operating costs –Crash costs Models available for calculation (MicroBenCost, QueWZ, HDM-IV) May overwhelm overall LCC (particularly on high volume roadways) –Should keep separate from other costs

22. Measures of User Costs Hours Stuck in Traffic Jams Driving the Open Road Source: TTI Least Congested Cities, Annual

23. An Indication of Crash Costs Median Jury Awards for all Traffic Crash Fatalities Rose 102% from $288,000 in 92 to $ 581,000 in 95. Higher Traffic Fatality Awards Source: Jury Verdict Research

24. Probabilistic LCCA “Risk-based” analysis Addresses variability of inputs Inputs needed –Mean or expected value –Standard deviation or range –Type of distribution (typically normal distribution assumed)

25. Probabilistic LCC Results 0% 10% 20% 30% $ Millions Frequency A B 22 23 PW Cost Distribution of Two Alternatives

26. FHWA Recommendations LCCA encouraged As noted in TEA-21... –LCCA not required –Recommendations on LCCA to be developed for States –In conjunction with Executive and AASHTO guidelines

27. Treatment Selection Factors Available Funds Staged Construction Traffic Control Lane Closure Minimum Desired Life Future Maintenance Geometric Issues

28. Treatment Selection Factors (continued) Present and Future Utilities Right-of-Way Restrictions Regulatory Restrictions Available Materials and Equipment Contractor Expertise and Manpower Agency Policies

29. Selection Process Develop feasible alternatives for evaluation Identify key decision factors important to agency (e.g., cost, service life, traffic control, duration of construction, etc.) Assign weighting values for each decision factor Assign scoring values for each alternative Add scores and rank alternatives

30. Selection Worksheet Decision Factor 1 Decision Factor 2 Decision Factor 3 Decision Factor 4 TOTAL SCORE WeightWeight 1Weight 2Weight 3Weight 4 Alt 1 Alt 2 Alt 3 Alt 4

31. Weighting Factors Relative (weighted) importance of factors considered in selection process Number and types of factors will vary Should reflect an agency’s decision process Sum of all weighting factors must equal 100

32. Scoring Factors Feasible treatments scored comparatively against weighting factors –e.g., lowest cost gets highest rating Somewhat subjective process Based on agency’s own experience Use whatever scale is appropriate (1-5, 1-10, 1-100, etc.)

33. Computing Scores Product of rating factor and scoring factor Computed for each treatment Treatment with highest total score is considered the “best” treatment for the specific project

34. Example Selection Worksheet TOTAL SCORE Weight Alt 1 Alt 2 Alt 3 Alt 4 60 50 8050 50 75 7070 40 75 6080 30 100 5090 30 12.5 12 5 59.50 25 18.75 10.5 7 61.25 20 18.75 9 8 55.75 15 25 7.5 9 56.50 LCC Service Life Traffic Control Reliable Design 50%25%15%10%

35. Review What are some of the key computation variables in a life-cycle cost analysis? What are some major LCCA cost items for both the agency and the user? How does probabilistic LCCA differ from deterministic LCCA? What are some treatment selection factors other than costs?

36. Key References Peterson, D. E. 1985. Life-Cycle Cost Analysis of Pavements. NCHRP Synthesis of Highway Practice 122. Transportation Research Board, Washington, DC. Walls, J. and M.R. Smith. 1998. Life-Cycle Cost Analysis in Pavement Design—Interim Technical Bulletin. Federal Highway Administration, Washington, DC.