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Federal Highway Administration > Publications > Focus > March 2004 > Putting Economic Analysis to Work for You
March 2004Publication Number: FHWA-HRT-04-023

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Putting Economic Analysis to Work for You

How do you know if a highway project is worth doing, or when it should be done, or what the most cost-effective means of accomplishing it are? Economic analysis tools can provide answers to these questions when coordinated with transportation planning, engineering, environmental review, and policymaking as part of the Transportation Asset Management (TAM) process.

Although the idea of comparing the benefits and costs of transportation projects on a dollar-to-dollar basis has long appealed to decisionmakers, applying economic analysis to such projects has often not been the reality. Agencies may believe that transportation benefits and costs are too hard to quantify and value, or too subject to uncertainty to provide meaningful guidance. However, increased research on economic methods and values, combined with improved modeling of traffic and uncertainty, has resulted in more States using economic analysis tools and made the widespread use of economic analysis for highway projects an attainable goal.

"The citizens and taxpayers that use our transportation systems expect excellence, integrity, reliability, and sustainability to be reflected in the decisions public officials implement on their behalf. Further development and more widespread use of technical tools to quantify the economic efficiency of proposed investment alternatives will help transportation executives meet these expectations," says New York State Transportation Commissioner Joseph H. Boardman.

Most, if not all, of the costs and benefits of a project can be quantified in dollars for each year of its life cycle. A project's costs usually include those associated with its planning, design, construction, and maintenance. These costs can be estimated through engineering methods and refined using value engineering techniques. Project benefits, meanwhile, usually include improvements in travel times, vehicle operating costs, and/or safety. Dollar values can be assigned to these benefits based on travelers' wages, actual costs, and/or the amount travelers would be willing to pay for the benefits. Reduced travel time often accounts for the greatest share of a project's benefits, potentially affecting traffic flows throughout the regional road network. Improvements in travel time also contribute to indirect effects such as changes in regional accessibility, land values, and economic development. The economic assessment should also address the cost of delay to travelers at project-related work zones.

The appropriate economic analysis tool to evaluate a specific project depends on what your needs are. For example, life-cycle cost analysis (LCCA) deals solely with project costs. LCCA is used when an agency has already decided to undertake a project (e.g., a bridge must be reconstructed), but there are two or more alternative means to accomplish the project. If each alternative would produce the same user benefits, then the economically superior alternative would be the one with the lowest life-cycle costs. The Federal Highway Administration (FHWA) has developed guidance on using LCCA for pavement design, including an interim technical bulletin, training, and software (see box below).

LCCA Resources

Life-cycle cost analysis (LCCA) resources available from FHWA include the LCCA software and an accompanying instructional workshop. The software identifies cost differences between design alternatives, accounting for both initial and future agency and user costs. Hands-on experience with the software can be gained at the new FHWA LCCA workshop, which presents the basics of how to conduct an LCCA and how to apply the results to pavement project design decisions. Other resources include a Life-Cycle Cost Analysis Technical Bulletin and Life-Cycle Cost Analysis Primer, which can be downloaded from www.fhwa.dot.gov/infrastructure/asstmgmt/lcca.htm.

For more information on LCCA, to obtain a copy of the software, or to schedule the workshop, contact Nathaniel Coley at FHWA, 202-366-2171 (email: nathaniel.coley@fhwa.dot.gov).

However, LCCA cannot be used to evaluate a project where benefits among possible alternatives are not identical, or where an agency's decision to pursue a project depends on the amount of benefits it generates. The appropriate economic tool to use in these instances is benefit-cost analysis (BCA), which considers life-cycle benefits as well as life-cycle costs.

Applying BCA requires planners, engineers, economists, and environmental and policy experts to work together. The analysis team must specify clear objectives for a potential improvement in the highway system and develop a full set of reasonable alternatives to meet the objectives. The team should then measure all benefits and costs that differ between each improvement alternative and a continuation of the status quo. The best alternative from an economic point of view will usually be the one where benefits most exceed costs. However, "factors such as policy issues, funding availability, and risk will also affect the ultimate ranking of alternatives and the decision as to which is the best one," says Eric Gabler of FHWA.

Agencies may apply economic analysis to highway assets on a case-by-case basis or at the program level. To optimize BCA at the program level, FHWA developed the Highway Economic Requirements System-State Version (HERS-ST) software program. HERS-ST enables agencies to evaluate the implications of alternative program budgets and policies on the conditions, performance, and user cost levels associated with their highway systems.

In addition, large highway projects often have significant impacts on regional traffic patterns and economic development. The information provided by BCA about such projects can be significantly enhanced if the BCA is performed in coordination with regional travel demand modeling, environmental assessment, and economic impact analysis. Travel demand models enable the analysis team to balance estimates of the future traffic demand and supply that will occur with and without the project, allowing more accurate forecasts of the project's effects on travel times. Environmental assessments often reveal significant costs or benefits for inclusion in the BCA. And economic impact analysis uses information from the BCA to measure how the direct transportation benefits and costs of the project would affect regional accessibility, jobs, tourism, land values, and economic development. It also provides important information on the distribution of benefits and costs among different demographic groups.

Ultimately, economic analysis informs decisionmakers and the public about the real-world effects of highway investments. In coordination with other analysis disciplines, it identifies and values the benefits, costs, and other user impacts of highway projects. It also allows highway agencies to target scarce resources to their best uses in terms of maximizing public welfare and to account publicly for those decisions. As a result, "FHWA strongly supports the incorporation of economic analysis into highway decisionmaking as part of the TAM process," says Dave Geiger of FHWA.

For more information on the use of economic analysis for highway decisionmaking, contact Eric Gabler at FHWA, 202-366-4036 (fax: 202-366-9981; email: eric.gabler@fhwa.dot.gov). More information on economic analysis can be found on the Web at www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm. The HERS-ST software program can also be downloaded from this site.

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Updated: 04/07/2011

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