Modeling Financial Achievability of Transportation Research Projects

1. Modeling Financial Achievability of Transportation Research Projects Patricia H. Born, Ph.D. and Randy E. Dumm, Ph.D. Center for Insurance Research, Florida State University Robert J. Eger III, Ph.D. RME Consulting, LLC.

2. Objectives • Develop a decision-making framework of the multi-stage research and development process • Illustrate the application of the framework • Identify areas in which data are not aligned with the framework

3. Framework • Goal: • Consider multi-stage process of R&D • Incorporate fundamental aspects of: • Cost-effectiveness analysis (CEA) • Cost benefit analysis (CBA) • Return on investment (ROI) • Quality/performance measurement • Managerial costs

4. Taxonomy

5. Uncertainty and Innovation • Common problem with innovation • Two general unknowns • Probability that the innovation will lead to a desired outcome is unknown to the decision maker(DM) • The DM does not know the number of possible payoffs or what those payoffs may be.

6. Addressing Uncertainty • DM assigns a subjective probability to each possible outcome. • A subjective expected profit (benefits minus costs) for each outcome is derived. • Benefits and costs are a function of implementation • Optimal level of implementation satisfies the economic concept of marginal costs = marginal benefits

7. Intermediate Versus Final Profit • Define final profit as the benefits of the research minus the costs of implementation plus the costs of pursuing the research • Define intermediate profit as the subjective expected profit as weighted expected net benefit minus the costs of continuing toward implementation

8. Decision Framework

9. Decision Points in Framework • 2nd Stage • Decision • Pursue RFP - incur additional costs of requesting and reviewing proposals. • Do not pursue RFP - incur cost of identifying the problem. • Decision • Accept RFP – incur identification, requesting, reviewing, and selected RFP costs. • Reject RFPs – incur identification, requesting, and reviewing costs. • 3rd Stage • DM breaks the research costs (identified in RFP) into multiple tasks • Decisions • Determine if sufficient progress has been made and/or if new information regarding the project’s costs and benefits are favorable/unfavorable. • DM does not let prior spending influence the propensity to pursue the next task (sunk costs fallacy) • 4th Stage • Approved research completed. • Final decision is to select the optimal level of implementation thereby maximizing profit.

10. Application • Multipurpose Survey Vehicle (MPSV) • Group of projects (4) required for all capital accumulation. • Innovation to reduce: • Roadway assessment times • Enhance evaluation methods • Potential harm associated with SC’s exposed to highway traffic • Generate MPSV per lane mile costs and benefits • Generate Survey Crew and Coring (SC) per lane mile costs and benefits • Use a survey instrument of project managers to assess 1st and 2nd Stage costs

11. Proxies • Proxy level of implementation by using the number of lane miles the MPSV will survey. • Assume costs for call for proposals, employee morale, and employee training are insignificant (lack of data) • Assume number of projects managed by PM understates number of proposals received • Given the capital asset nature of the MPSV • Use the average yield average for the 10 year US Treasury • Based on the period of the RFPs and the life-cycle of the asset • Assume the on-board technology has identical life-cycle as the capital asset

12. Framework Results • MPSV costs about $215 per lane mile while SC costs about $11,750 per lane mile. • Requires MPSV to “work” about 55 miles before 1st and 2nd stage costs are recovered.

13. Data Collection Take-aways • 1st and 2nd stage costs need to be collected at time of decisions. • Marginal costs associated with data collection need to be included. • Data consistency and usability across various platforms (internal and external) are important if the goal is to capture relevant existing cost and benefit information efficiently and timely. • Funded RFPs need benefits estimates by PIs.

14. Lessons Learned • Benefits need to be collected throughout 3rd stage • Benefits clearly articulated. • Serendipity is an important aspect of R&D. • Although workforce and innovation psychic costs are critical, information regarding these costs or benefits is either difficult to retrieve or remains uncollected. • DM’s judgment need to be gathered and included • Extent to which the costs of prior research projects should be included in the model. • Expected duration of costs and benefits. • Appropriate rate for discounting future costs and benefits.

15. Challenges • Framework depends on: • Ability project managers and staff to identify the appropriate data collection activities at each step of the research process. • Perform the relevant comparisons. • Our framework ‘s equations are relatively straightforward but: • Some technical expertise and judgment is required