Key Issues In Life-Cycle Cost Analysis For Pavements
Life-Cycle Cost Analysis (LCCA) is an economic analysis that is used to evaluate the total cost of an investment option over its entire life (Walls and Smith 1998). Using an economic analysis technique known as "discounting," all projected costs are converted into present dollars and summed to produce a net present value (NPV) or net present cost (NPC). If multiple alternatives with similar benefits are being considered over identical analysis periods, the net present values or costs can be compared to determine which alternative is the most cost effective.
LCCA is useful for determining the economic impact of potential changes in design, construction, materials, etc. that are intended to improve the environmental or societal impacts of a pavement project. NPV or NPC is also commonly used to select from among various design or rehabilitation alternatives that are believed to provide the same level of performance or benefits to the project's users during normal operations over the same analysis period.
If the benefits are the same but the analysis periods differ, then equivalent uniform annual cost (EUAC) analysis is useful in identifying the preferred alternative. Implicit in an EUAC analysis is the assumption that the strategies are repeated at the end of the analysis periods. An alternate approach (and the one that is recommended by FHWA) is to use the same analysis period (generally the shortest of those being considered) for all candidate alternatives and to include the remaining value of each alternative at the end of the analysis period (i.e., salvage value of materials or value of remaining service life) as a "benefit" or "negative cost" at the end of the analysis period.
If the benefits vary among the candidate alternatives (e.g., if they provide different levels of service), then the alternatives cannot be compared solely on the basis of cost and, consequently, LCCA alone may not be an appropriate means of comparison. If all benefits can be expressed monetarily, then the benefits can be considered in the same analysis as the costs, discounted similarly, and a decision can still be made based on the results of the analysis and the overall objective (e.g., to maximize net benefits or minimize net costs).
Another option for analyzing monetarily expressed costs and benefits that is sometimes favored by public agencies is benefit-cost analysis (BCA), in which the ratio of discounted benefits to discounted costs is computed. Unfortunately, simple BCA can lead to incorrect strategy selections in some cases, although incremental BCA, a more complex analysis, will yield consistently correct strategy selections (Riggs and West 1986). Because of its relative simplicity, NPV analysis is often preferred over BCA for economic analyses.
It must also be noted that, because there are usually other decision factors in the selection process that cannot be easily quantified monetarily (e.g., work zone safety, environmental impacts, impact of local development), LCCA alone is rarely sufficient for selecting from among competing alternatives. Utility theory and other forms of value engineering are sometimes useful in evaluating the preferred alternative when monetary and nonmonetary considerations must be balanced. In such cases, the option with the lowest LCC may not be implemented. Nevertheless, LCCA provides valuable information to the overall decision-making process.
Most State DOTs practice LCCA to some degree in selecting the preferred pavement alternative for major projects (Rangaraju, Amirkhanian, and Guven 2008), although LCCA is not practiced for all pavement projects. Various software tools are available to assist in the analysis, with the FHWA's RealCost (FHWA 2010) being most prevalent (Rangaraju, Amirkhanian, and Guven 2008).
Key Issues in LCCA
Like most analytical tools, LCCA is not without limitations and, if used incorrectly, can provide false support for poor choices. The accurate estimation of the timing and costs of life-cycle activities is the most important factor in conducting a good pavement LCCA (Hallin et al. . There are several additional considerations that are also important, as described below.
The discount rate, which represents the combined effects of interest and inflation rates, is used to estimate the present value of all future costs. It should be selected to reflect both historical trends over long time periods and near-term projections. FHWA recommends that highway agencies use OMB Circular A-94, Appendix C in selecting a discount rate.
The choice of discount rate is very important; thus it is useful to understand the impact of discount rate on LCCA. Higher discount rates reduce the present value of future costs by a greater amount than do lower discount rates; a zero discount rate values future costs the same as current costs; and negative discount rates increase the present value of future costs above those of current costs.
End-of-Analysis (Residual) Value: Salvage Value vs. Remaining Service Life Value
It is often necessary to assign a value (generally a benefit or negative cost) to the pavement at end of the LCC analysis period to capture either the value of the remaining pavement life (assuming that the pavement's service life has not been fully consumed at the end of the analysis period) or the "salvage" value of the materials that will be derived from the pavement structure if it will have no remaining service life (e.g., if the pavement is to be removed and replaced at the end of the analysis period). Alternatively, the "salvage value" may be computed as the value of the existing pavement as a support layer for an overlay at the end of the analysis period (i.e., recycling or "repurposing" the pavement in place). These options are mutually exclusive for any given LCCA; that is, no analysis should include both a salvage value and a remaining service life value. Whichever end-of-analysis value is selected (if any), it should reflect what the agency realistically expects will be done with the pavement structure at the end of the analysis period. ACPA (2011) and West et al. (2012) provide summaries of U.S. state highway agency practices concerning the inclusion of salvage and remaining service life values in their LCCAs.
Salvage values may be properly applied as either a positive cash flow (benefit) at the end of the current project analysis (e.g., when an agency retains the material for unspecified future use) or as a reduction in cost at the beginning of the next project analysis. If different materials from the same project are used in different ways, portions of the salvage value may be allocated to both places.
User Cost Estimates
User costs originate primarily from vehicle operating costs, delay costs, and crash costs (Walls and Smith 1998). The value of road users' time is a subject of great debate. User delay costs are generally computed in consideration of vehicle class, trip type (urban or rural), and trip purpose (business or personal). Details concerning the computation of user costs can be found in NCHRP (2004), and free software for computing these costs is a part of the FHWA RealCost LCCA program (FHWA 2010) or the CA4PRS software (Caltrans 2011).
While there is no doubt that user costs should be considered in pavement decision-making processes, it is widely recognized that these costs should not be included in the same LCCA cost stream as agency costs because: 1) their quantification is subject to debate and uncertainty, 2) user costs "do not debit agency budges as do agency costs (FHWA 2002), and 3) computed user costs on some projects can drive the decision process to options that the agency cannot afford. Current FHWA policy recommends that user costs be computed and analyzed separately from agency costs.
Deterministic LCCA vs. Probabilistic LCCA
The use of fixed values for all LCCA inputs (e.g., activity timing, costs, discount rate) to produce a single output value is referred to as the deterministic approach to LCCA. While this approach is relatively simple and requires few inputs, it fails to adequately account for either the variability in actual initial costs and discount rates over time or the uncertainty in the timing and costs of planned maintenance and rehabilitation activities. Furthermore, the output of a single value (i.e., NPV or NPC) without some statement to qualify that value may imply a degree of certainty in the conclusion that is inappropriate (FHWA 2010). Sensitivity analyses (i.e., varying input values, often one at a time, and rerunning the analysis to determine how sensitive the output value is to variations in specific inputs) can give the analyst a better sense of confidence in the accuracy of deterministic LCCA results.
The probabilistic approach to LCCA is more realistic in that it uses statistical descriptions of the probable distribution of values for each input (e.g., a mean and standard deviation for each normally distributed input value) to account for the input-associated variability that creates uncertainty in the outputs of the analysis, which helps quantify the risk in any decisions that are made on the basis of the outputs. A distribution of output values (often derived from numerical simulations involving input variables that have been randomly selected from populations of values that represent the input variable distributions) is produced to provide users with information for understanding the variability of the results and the confidence that can be placed in the analysis.See Chapter 10 (.pdf) of the Reference Document for more details.
American Concrete Pavement Association (ACPA). 2011. Life-Cycle Cost Analysis: A Tool for Better Pavement Investment and Engineering Decisions. Engineering Bulletin EB011. American Concrete Pavement Association, Rosemont, IL.
California Department of Transportation (Caltrans). 2011. Construction Analysis for Pavement Rehabilitation Strategies (CA4PRS): Caltrans "Rapid Rehab" Software. California Department of Transportation, Sacramento, CA.
Federal Highway Administration (FHWA). 2002. Life-Cycle Cost Analysis Primer (.pdf). FHWA-IF-02-047. Federal Highway Administration, Washington, DC.
Federal Highway Administration (FHWA). 2010. Life-Cycle Cost Analysis: RealCost User Manual. RealCost Version 2.5. Federal Highway Administration, Washington, DC.
Hallin, J. P., S. Sadaslvam, J. Mallela, D. K. Hein, M. I. Darter, and H. L. Von Quintus. 2011. Guide for Pavement Type Selection. NCHRP Report 703. Transportation Research Board, Washington, DC.
National Cooperative Highway Research Program (NCHRP). 2004. Guide for Mechanistic-Empirical Design of New and Rehabilitated Pavement Structures. Transportation Research Board, Washington, DC.
Rangaraju, P. R, S. Amirkhanian, and Z. Guven. 2008. Life Cycle Cost Analysis for Pavement Type Selection. FHWA-SC-08-01. South Carolina Department of Transportation, Columbia, SC.
Riggs, J. L. and T. M. West. 1986. Essentials of Engineering Economics. 3rd Edition. McGraw-Hill Publishing, New York, NY.
Walls, J. and M. R. Smith. 1998. Life-Cycle Cost Analysis in Pavement Design. Interim Technical Bulletin. FHWA-SA-98-079. Federal Highway Administration, Washington, DC.
West, R., N. Tran, M. Musselman, J. Skolnick, and M. Brooks. 2012. A Review of the Alabama Department of Transportation's Policies and Procedures for LCCA for Pavement Type Selection. NCAT Report 13-06. National Center for Asphalt Technology, Auburn, AL.