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Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions -

Office of Asset Management Federal Highway Administration. Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions -. Executive Session. FHWA LCCA Methodology. Steps Establish Design Alternatives Determine Activity Timing Estimate Agency and User Costs

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Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions -

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  1. Office of Asset Management Federal Highway Administration Life Cycle Cost Analysisin Pavement Design- In Search of Better Investment Decisions - Executive Session

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

  3. Deterministic Approach • Inputs are discrete or point values • Initial costs are $11M • The discount rate is 4% • Outputs are discrete • Alternative “A” total cost = $20.5M • Alternative “B” total cost = $26.0M

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

  5. 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).

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

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

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

  9. Agency NPV B A Frequency Net Present Value

  10. 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 Advantages

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

  12. Software Data Input

  13. Software Data Input

  14. Software Outputs

  15. Software Outputs

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

  17. 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. LCCA Requirements

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

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

  20. FHWA LCCA Guidance LCCA Software LCCA Primer, Technical Bulletin DP-115 http://www.fhwa.dot.gov/infrastructure/asstmgmt/lcca.htm

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

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

  23. 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

  24. 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

  25. Developing Guidelines Discounting …a mechanism for quantifying the time value of money • FHWA Recommends • Real dollars and a real discount rate - 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

  26. 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

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

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

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