# Life Cycle Cost Analysis in Pavement Design

- In Search of Better Investment Decisions -

Executive Session
Office of Asset Management Federal Highway Administration

Introduction
 Who are we
 Jim Walls - Eastern Resource Center
 Keith Herbold - Midwestern Resource Center  Tom Canick – Office of Asset Management  To deliver FHWA’s LCCA probabilistic
software workshop

 Why are we here:

 Why are we doing that:

 FHWA supports application of LCCA in pavement
decisions  Continuation of our prior efforts

Presentation Agenda
Workshop Overview 2. Probabilistic Approach 3. RealCost Software 4. Why Use LCCA 5. Management’s Role
1.

1. Workshop Overview  LCCA review  Software instruction  Class exercises .

Workshop Overview LCCA Review  LCCA Process  Components and Issues  User Costs  Probability and Risk  Input Recommendations .

Determine Activity Timing 3.FHWA LCCA Methodology Steps 1. Compute Life-Cycle Costs 5. Analyze the Results . Estimate Agency and User Costs 4. Establish Design Alternatives 2.

Workshop Overview  Software Capabilities  How to use  Demonstration  .

Workshop Overview  Class Exercises  Hands-on Software Exercises  Interpreting Results .

2. Probabilistic LCCA    What is it What does it add to the process How to interpret it .

Probabilistic Approach  Captures the uncertainty in the inputs.  Carries that uncertainty through the computation process to generate a  Probability distribution of result (a range of possible outcomes along with their likely hood of occurrence). .

Probabilistic versus Deterministic Approach .

5M • Alternative “B” total cost = \$26.0M .Deterministic Approach Inputs are discrete or point values • Initial costs are \$11M • The discount rate is 4% Outputs are discrete • Alternative “A” total cost = \$20.

Deterministic Limitations  Doesn’t Address: Statistical Significance  Variability   Subject to Manipulation  Lacks Credibility .

LCCA Results Deterministic Approach Project cost estimate is \$12 million Probabilistic Approach 75 percent chance the project will cost \$12 million or less. .

Simulation Modeling Inputs M O D E L Results \$ % Net Present Value .

costs.Role of Probability in LCCA  Accounting for variability in inputs: •Activity timing. discount rate  Quantitatively determines risk in alternative strategy selection  Elevates the decision from questioning the inputs to discussing the merits of each alternative .

Agency NPV B Frequency A Net Present Value .

.Advantages  More Informed Decisions • Evaluate all possible outcomes • Expose areas of uncertainty..Quantify risk • Determine significance of difference between alternatives • Examine influence of underlying variables on final results • Provide those vested with appropriate authority the opportunity to make decisions about risk taking .

RealCost Software .3.

Benefits of Software  Performs LCCA as per FHWA best practice  Requires same data inputs as manual process  Better. faster & cheaper analysis  Automates user cost process .

Software Data Input .

Software Data Input .

Software Outputs .

Software Outputs .

4. Why Use LCCA    Requirements FHWA’s Philosophy Benefits of LCCA .

.LCCA Requirements NHS Designation Act (1995) Required States to conduct LCCA of each NHS high cost (\$25M or more) useable project segment. TEA-21 (1998) Eliminated this requirement.

FHWA Philosophy LCCA:  Decision support tool  Results are not decisions  Rigorous analytical process can be as important as the results .

Benefits of LCCA  Better information for decisions  Improved rehabilitation strategies  Consideration of user costs  Support for overcoming the “first cost” limitations .

FHWA LCCA Guidance LCCA Primer LCCA RealCost Technical LCCA Software Bulletin Advanced DP-115 Workshop .

Management’s Role  Management Support for Development and Application of LCCA.5.  Develop LCCA Guidelines including Recommendations on Input Values .

Management Support Requires “buy-in” of risk management by senior executives  Technical Champion  Top management support  .

Developing Guidelines Analysis Periods  Type of Dollars…Treatment of Inflation  Type and Value of Discount Rates  Treatment of User Cost  Value assigned to user delay time  Choice of Economic indicator  Remaining service Life  Ignore Sunk Cost  .

Developing Guidelines  Analysis Periods Type of Dollars…Treatment of Inflation  Type and Value of Discount Rates  Treatment of User Cost  Value assigned to user delay time     Choice of Economic indicator Remaining service Life Ignore Sunk Cost .

do not account for inflation • A real discount rate range of 3% to 5% • Never mix real and nominal (inflation adjusted) costs and discount rate .Developing Guidelines Discounting … a mechanism for quantifying the time value of money FHWA Recommends • Real dollars and a real discount rate .

Developing Guidelines User Costs are calculated through a capacity analysis. Observations:      Traffic grows over time Queuing cost dominate Hourly distributions key \$ Value of time has a major influence Normal VOC between alternatives negligible .

\$13 \$17 . Passenger Vehicle Single Unit Truck Combo Truck \$10 ..\$24 1996 Dollars .Developing Guidelines Value of Time Recommendations..\$19 \$21 .

Things to Remember      LCCA Decision Support Tool NHS LCCA Requirements Document Inputs Dispose of all Issues Provide Confidence Information .

The End That’s All Folks! .