|FHWA Policy Memorandums - Office of Engineering|
|ACTION : National Highway System Designation Act; Life-Cycle Cost Analysis Requirements||April 19, 1996|
|Executive Director||Reply to: HNG-40|
Federal Lands Highway Program Administrator
This memorandum provides supporting information and guidance to assist in implementing Life-Cycle Cost Analysis (LCCA) requirements contained in the National Highway System (NHS) Designation Act of 1995.
Section 303, "Quality Improvement," of the NHS Designation Act, amends Section 106 of Title 23, United States Code (U.S.C.), by adding a new Subsection (e) entitled "Life-Cycle Cost Analysis." Title 23, U.S.C., Subsection 106(e)(1) now directs the Secretary to establish a program that requires States to conduct a LCCA of each NHS high cost ($25,000,000 or more) usable project segment. This subsection further defines LCCA as "a process for evaluating the total economic worth of a usable project segment by analyzing initial costs and discounted future cost, such as maintenance, reconstruction, rehabilitation, restoring, and resurfacing costs, over the life of the project segment".
Both the House and Conference Committee reports on the act indicate that the basic intent of requiring LCCA on higher-cost Federal-aid NHS projects is to "reduce long-term costs and improve quality and performance." Although the House Committee report language indicates a desire for the Secretary to specify uniform analysis periods and to promote uniform use of discount rates as established by the Office of Management and Budget Circular A-94, the Conference Committee report language would prohibit the Secretary from prescribing the forms of LCCA that a State must undertake. Further, the Conference Committee report language specifically limits the Secretary's ability to require LCCA beyond high cost NHS usable project segments outlined in Section 303.
In accordance with the provisions of 23 U.S.C., 106(e)(1), States must now conduct LCCA of high cost NHS usable project segments for such projects to be eligible for Federal-aid highway funding. An LCCA conducted in support of high cost NHS usable project segments must, as a minimum, produce an indicator of the total economic worth of the usable project segment that is based on analysis of initial as well as discounted future costs over ~he life of the project segment.
As used in LCCA required by 23 U.S.C., 106(e), the following definitions apply:
" High Cost' refers to useable project segments estimated to cost $25 million or more.
"Usable e Project Segment' refers to a portion of a highway which a State proposes to construct, reconstruct or improve that when completed could be opened to traffic independent of some larger overall project. Such a "usable project segment" could be completed under a single contract or in multiple phases over several years.
The FHWA Division Offices should not prescribe the forms of LCCA that a State must undertake. The division offices should, however, assure that LCCA are consistent with the established fundamental principles of good/best practice. The LCCA that reflect good/best practices have sufficiently long analysis periods to reflect long term cost differences associated with reasonable investment altematives, employ accepted discount rates, and address the inherent variability in input parameters. They include evaluation of the significance of overall cost differences between competing altematives, particularly when the differences are relatively small. This improves the credibility of the analysis by quantifying, to the maximum extent possible, the probability that the predicted life-cycle costs will actually occur.
Overall, the FHWA policy on LCCA is reflected in our Interim Policy Statement on LCCA published in the July 11, 1994, Federal Register. Other sources of technical guidance on "good/best practice" include but are not limited to: NCHRP Synthesis Report 122, "Life-Cycle Cost Analysis of Pavements" (1985); NCHRP
Synthesis Report 142 "Methods of Cost-Effectiveness Analysis for Highway Projects" (1988); and the 1993 "AASHTO Guide for Design of Pavement Structures." The NCHRP has a project underway entitled, "Life-Cycle Cost Analysis of Bridges" which will be available in 1997. The FHWA is currently developing additional guidance and training on good/best LCCA practice including risk analysis of life-cycle cost projections. We anticipate such guidance and training will be available in early FY 1997. In the interim, LCCA technical assistance and support can be obtained through the Headquarters' Office of Engineering.
Although LCCA is only mandated on high cost NHS usable project segments, the NHS Designation Act did not rescind life-cycle cost considerations established by ISTEA and found in 23 U.S.C., Section 134(f)(12) and Section 135(c)(20). These sections specifically require consideration of "the use of life-cycle costs in the design and engineering of bridges, tunnels, or pavement." The potential benefits from conducting LCCA in support of lesser (under $25 million) but still significant highway investment decisions can be immense, and division offices should encourage States at the highest levels to conduct such analysis.
The FHWA Division Offices should encourage States to conduct LCCA early to prevent unnecessary delays at later stages of project development. The division offices should exercise flexibility on projects currently under development. As a general rule, the LCCA requirement need not apply to usable project segments which have already progressed beyond 60 percent plans, specifications, and estimates development.
In closing, everyone must recognize that LCCA is a decision support tool and the results of LCCA are not decisions in and of themselves. Often the resulting LCCA numbers themselves are less important than the logical analytical evaluation framework that LCCA fosters.
Anthony R Kane