Transportation Asset Management Case Studies
LCCA: The Colorado Experience
3. How Did CDOT Get There?
3.1. CDOT's LCCA Program and Method
The State Materials Engineer, recognizing a need to evaluate the life-cycle costs of pavement design options, introduced a process policy memo into CDOT's Construction Manual in the late 1970s. The process was formalized in1990 when LCCA guidelines were included in the State's Pavement Design Manual. Although use of the processes set out in the Pavement Design Manual is mandated agency-wide, each of the six individual transportation Regions performs its own pavement design, cost analyses, and justifications, autonomously, without central review.
The guidelines originally required that an LCCA be completed for new pavement construction projects exceeding $1 million in initial costs. For reconstruction, LCCAs would be required for any pavement projects exceeding five million Equivalent Single Axle Loads (ESALs). The procedures have been updated three times since their inception—in 1994, 2000, and 2007—and currently require that an LCCA be completed for projects with more than $2 million in initial pavement costs.
For the LCCA, once the pavement designs for asphalt and concrete have been completed, the initial construction, annual maintenance, required rehabilitations, and user costs are calculated for each. These costs are then run through a 40-year Life-Cycle Cost Analysis to identify the alternative with the lowest overall price tag and best value for the traveling public.
CDOT increased its analysis period to 40 years in 2002 because FHWA's LCCA Policy Statement recommended an analysis period of at least 35 years for all pavement projects. CDOT planned to follow FHWA's recommendation, as well as to account for pavement rehabilitation cycles, in order to prevent having to use a salvage value. Unmodified hot mix asphalt (HMA) has a 10-year rehab life, which easily led to a 40-year analysis period.(3)
Table 1: CDOT Pavement Analysis Parameters(4)
|Pavement Type||Analysis Period (in years)||Initial Design Period (in years)||Default Rehabilitation Strategies|
|Portland Cement Concrete||40||30(5)||
Travel Lanes Only, No Shoulders:
|Restoration, Rehabilitation & Resurfacing Treatments||40||10, 20, or 30||Varies|
3.2. Computational Approaches and Tools
In 1998, CDOT recommended using probabilistic in lieu of deterministic inputs for their LCCA. The types of inputs differ in the way they address the variability associated with LCCA input values.
For both types, CDOT uses FHWA RealCost Software to analyze pavement construction and rehabilitation. The software accepts deterministic or probabilistic inputs from various sources and computes the present value of both agency and work zone user costs for each alternative being evaluated. In computing work zone user cost, RealCost compares traffic demand to roadway capacity on an hour-by-hour basis. This reveals the traffic conditions that will result and calculates the user costs of impacts caused by work zones.
In addition, CDOT complements RealCost with a custom developed external application called WorkZone. RealCost can compute work zone user cost internally using hourly demand-capacity considerations and user input traffic data (hourly traffic volume, vehicle mix, number and type of lane closures, work zone and normal speed limits, etc.). Alternatively, the user can input a work zone user cost for each activity as a lump sum amount calculated externally. CDOT adapted the second option by allowing a range of input variables, such as type of lane closure, work zone and standard speed limits, types of work to be completed, functional class, and percent of grade. With this information, WorkZone can calculate CDOT user costs per mile and per hour.
3.3. Deterministic Analysis
When using the deterministic approach, an analyst assigns each LCCA input variable a fixed, discrete value after determining the value most likely to occur for each parameter. Usually the determination is based on historical evidence or the judgment of a seasoned professional whose experience and training have contributed to a well-designed pavement management system. [See Table 2: FHWA Training Related to Pavement Management.]
Collectively, the input values are used to compute a single life-cycle cost estimate for the alternative under consideration.
Table 2: FHWA Training Related to Pavement Management
The FHWA Office of Asset Management offers a range of training opportunities to enhance pavement management practices. For further information on the courses listed, go to http://www.fhwa.dot.gov/infrastructure/asstmgmt/training.cfm
3.4. Probabilistic Analysis
Although, traditionally, applications of LCCA have relied on deterministic analysis, the approach fails to address simultaneous variation in multiple inputs and does not convey the degree of uncertainty associated with life-cycle cost estimates.
As a result, CDOT added probabilistic LCCA inputs to its process in order to account for these issues and to create a distribution curve showing costs associated with varying probabilities. With probabilistic inputs, CDOT can compute results that describe their likelihood of occurrence and simultaneously factor in differing assumptions for many variables.
CDOT uses RealCost's Monte Carlo simulation feature to randomly sample from probability distributions for each input. The agency runs the sampled input values through a present value formula to calculate a discrete output, and then repeats this process over and over again. The discrete outputs are arranged in the form of an LCCA result histogram, and a probability distribution covering all potential outcomes is developed.(6)
CDOT uses three types of distribution curves in its probabilistic LCCA process:
- A triangular distribution is used when evaluating initial construction costs for probabilistic LCCA. This is because historical data combined with quantity of scale provide a reasonable minimum, maximum, and average.
- A normal distribution is used for incorporating the discount rate into a probabilistic analysis. This is because a mean and standard deviation for the discount rate can be easily calculated from the 10-year moving average of real interest rates.
- Lognormal distribution is used for calculating the activity service life of initial construction and rehabilitation projects. This is because, although there is some variability, the number of years required for service life must be positive.(7)
3.5. The Discount Rate
Using the discount rate, or discounting, involves adjusting dollars for the opportunity value of time. When using the discount rate, which CDOT has currently set at 3.3 percent, future costs of projects are expressed in constant dollars and then discounted to the present rate. Using the real discount rate facilitates comparison of pavement alternatives in terms of reallocation of time (moving a project a few years forward or back without altering its real value) and allows a lump sum value to be transformed into a multiyear flow.(8)
CDOT's LCCA processes include a calculation of "present value" that uses the discount rate and the time a cost was—or will be—incurred to establish the present value of the cost in the base year of the analysis period. While there is no need to consider the present value for initial costs, the determination of future costs is time dependent.
The time period used is the difference between the point at which initial costs are incurred and the time future costs are likely to occur. Initial costs are set at the beginning of the study period at year zero, the base year. The present value calculation is the equalizer that allows the summation of initial and future costs. Along with time, the discount rate also dictates the present value of future costs. Because the current discount rate is a positive value, future expenses will have a present value less than their cost at the time they are incurred. If future costs of a project are provided in nominal dollars, conversion of these nominal dollars to constant dollars can be accomplished.(9)
Due to the shift in discount rate between the 2008 and 2009 versions of the CDOT Pavement Design Manual, any project that has not yet been to Field Inspection Review (FIR) will be reassessed to determine if the current pavement choice is still the most economical. In any situation in the future, if the new 10-year average discount rate varies by more than 0.5 percent from the original, a new LCCA is to be performed.(10)
3.6. Pavement Type Selection Committee
CDOT has adopted an interesting and effective process for resolving "close calls" between possible pavement options after the LCCA on each has been performed.
If, after comparing competing alternatives, it is determined that the present value of the life-cycle costs are within 10 percent of each other, the CDOT Region presents a report of its findings to a Pavement Type Selection Committee. There it is reviewed further and a recommended choice is selected for a final decision by the State's Chief Engineer. A suggested flow chart illustrating the selection process for new pavement construction is shown in Figure 3: Pavement Selection Process Flow Chart.
Figure 3: Pavement Selection Process Flow Chart
The Committee consists of nine members: the Region's Transportation Director, Program Engineer, Resident Engineer, Maintenance Superintendent, Materials Engineer, three participants from the CDOT Staff Branches—the Staff Construction Area Engineer, the Materials and Geotechnical Branch Manager, and a representative from Pavement Design—and an FHWA Pavements Engineer.
The purpose of the Committee is to:
- Ensure the pavement type decision aligns with the unique goals of the project,
- Provide industry with the opportunity to review the LCCA document,
- Ensure statewide consistency of decision-making,
- Formalize the decision process involved in the Region's pavement type selection,
- Create accountability for the decision at the level of Chief Engineer, and
- Improve the credibility of the decision by following a documented process and clearly communicating the reasons for the choice.(11)
While the Chief Engineer makes the final decision on pavement type, the involvement of Committee members helps ensure an independent review of the initial LCCA. Committee members may seek outside expert opinions from industry or other sources and make their own recommendations about the process. At times, this results in an adjustment of the LCCA.
It is interesting to note that, although CDOT's Regions operate individually, this Committee provides each with an opportunity to connect with State and National resources that can enhance the quality of the resulting LCCA.
3. Colorado Department of Transportation's Current Procedure for Life Cycle Cost Analysis and Discount Rate Calculations, January 2009, pp. 1-2.
4. Source: Colorado Department of Transportation, 2009 Pavement Design Manual.
5. Add ¼ inch to thickness for future diamond grinding.
6. FHWA-IF-03-032. Economic Analysis Primer, p. 31.
7. Colorado Department of Transportation's Current Procedure for Life Cycle Cost Analysis and Discount Rate Calculations, January 2009, p. 2.
8. Ibid. pp. 2-4.
9. Colorado Department of Transportation. Report No. CDOT-2006-17. Life Cycle Cost Analysis and Discount Rate on Pavements for The Colorado Department of Transportation. October 2006, pp. 9.
10. Colorado Department of Transportation, 2009 Pavement Design Manual, pp. 10-5.
11. Ibid, pp. 10-82.