Economic Analysis: Applications to Work Zones March 25, 2004

1. Economic Analysis: Applications to Work ZonesMarch 25, 2004

2. Economic AnalysisWhat Is It? • Benefits and/or costs of competing investment options are compared in common unit of the dollar • Makes non-like performance measures comparable

3. Economic AnalysisAddresses Key Project Questions • Why? Performance • What? Greatest net benefit • When? Optimal timing • Where? Best alignment • How? Best implementation strategy

4. Economic AnalysisIssues and Concepts • Costs and benefits can be valued in dollars • Project life cycle is basis for comparison • To be compared, dollars in different years must be “discounted” to their present value amounts

5. Benefits Costs Initial Capital Cost Dollars 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year Economic AnalysisTypical Life Cycle Profile

6. Economic AnalysisAdjusting for Present Value where PV = present value at time zero (base year) r = discount rate t = time (number of year) A = amount of benefit or cost in year t

7. Economic AnalysisExample of Discounting • What if we want to determine how much a $1,000 benefit in 30 years is worth to us today? • $1000 is in “real” dollars (i.e., in dollars with today’s purchasing power) • Discount rate is 3%

8. Economic AnalysisExample (continued) • Plug values into discounting formula: • Do calculations:

9. Economic AnalysisDiscount Rate Is Important • Higher the discount rate, the lower the present value of a future dollar • At 3%, $1,000 30 years from now is worth only $412 today • Worth $231 at 5% and $57 at 10% • Discount rate can influence project selection or design

10. EA Methods • Benefit-Cost Analysis • Life-Cycle Cost Analysis

11. EA MethodsBenefit Cost Analysis (BCA) • BCA compares discounted value of project’s benefits to discounted value of its costs • The blue and red bars on the life cycle profile • BCA is different from financial analysis, which focuses on how to fund a project

12. EA MethodsBCA Formula • BCA is done using the basic multi-year discounting formula:

13. EA MethodsApplications of BCA • Project-level analysis • Selecting ITS or operations technologies • Highway program-level analysis • Regulatory analysis

14. EA MethodsLife-Cycle Cost Analysis (LCCA) • Subset of BCA • The “blue bars” on the life cycle profile • LCCA reveals lowest life-cycle cost alternative for a project • Used only when all design alternatives yield same benefits

15. EA MethodsLCCA Formula • LCCA is done using the basic multi-year discounting formula: • where “Cost” equals the cost for design alternative in year t

16. EA MethodsApplications of LCCA • Evaluation of pavement preservation strategies • Project planning and implementation, especially the use and timing of work zones • Value Engineering

17. EA MethodsHow to Get Best LCCA Results • Evaluate all reasonable design alternatives for the project • Analyze alternatives over identical analysis periods • Evaluate all relevant costs that vary among the alternatives

18. Agency Costs Design and engineering Land acquisition Construction Reconstruction/Rehabilitation Preservation/Routine Maintenance User Costs At Work Zones Delay Crashes Vehicle Operating EA MethodsCost Items Used in LCCA

19. EA MethodsValuation of User Time • Business travel valued at wage plus benefits • Personal travel valued at what travelers are willing to pay to reduce travel time • Usually a percentage of wage • People do value their time

20. EA MethodsInclusion of User Costs in EA • Some agencies resist valuation of user delay caused by construction • However, agencies seeking to reduce work zone impacts without user cost data may overspend or underspend

21. Linking EA to Other Tools • Other tools increase the usefulness of BCA and LCCA • Traffic Forecasting • Risk Analysis • Economic Impact Analysis

22. Linking EA to Other ToolsTraffic Forecasting • Queuing models • Included in RealCost LCCA Software • Traffic simulation models • Corsim • QuickZone • Travel demand models

23. Linking EA to Other ToolsRisk Analysis • Uncertainty can be measured and mitigated • Sensitivity and probabilistic methods • Risk can be mitigated using alternative engineering, contractual methods, etc.

24. Linking EA to Other ToolsEconomic Impact Analysis • EA focuses on direct benefits and costs of highway projects • Time savings, safety, externalities • EIA “translates” EA results into indirect economic effects • Delays affect business and jobs • Not additive to value of direct benefits and costs

25. LCCA Applied to Work Zones • LCCA can be used to compare construction/work zone mitigation strategies • FHWA’s RealCost LCCA software can measure agency costs (construction, rehabilitation, maintenance) and user costs over multi-year periods

26. LCCA Applied To Work ZonesMitigation Strategies • There are many ways to mitigate construction impacts • TMP and work zone strategies • Innovative contracting • Design features and materials • Does value of mitigation justify costs?

27. LCCA Applied To Work ZonesComparing Strategies • Each construction/WZ strategy involves trade-offs • Agency vs. user costs • Initial vs. long-term costs • LCCA approach permits comparison of cost trade-offs

28. Application to Work Zones Example • Consider Stone Matrix Asphalt (SMA) vs. Superpave (SP), each with 24 hour vs. nighttime work zones • 5 mile, 4 lane road mill & fill • 25,000 vehicles Average Daily Traffic, rising to 60,000 ADT in 35 years • One lane closed each way

29. Application to Work Zones Example (Continued) • ADT is allocated by RealCost model to peak/off-peak times • RealCost model calculates user delay caused by work zones • 35 year analysis period • 4 percent real discount rate

30. Application to Work Zones Example (Continued) • SMA costs 20 percent more than SP per overlay but lasts longer 20 percent longer between rehabilitations • Nighttime work zones increase agency cost by 10 percent

31. LCCA Applied To Work ZonesExample Results

32. LCCA Applied To Work ZonesExample Results (Continued) • Least cost option for the agency (SP/24 hours) is highest cost for travelers • Using SMA reduces traveler cost due to fewer rehabs • Nighttime work zones eliminate most of delay for SP and SMA at little additional cost to the agency

33. For Further Information Economic Analysis Primer FHWA IF-03-032, August 2003 • Contents: • Economic Fundamentals • Life-Cycle Cost Analysis • Benefit-Cost Analysis • Forecasting Traffic • Risk Analysis • Economic Impact Analysis

34. Life-Cycle Cost Analysis Primer For Further InformationLife-Cycle Cost Analysis Materials RealCost Software and workshops– call your Division Office

35. For Further InformationOther Economic Materials • FHWA’s Office of Asset Management, Evaluation and Economic Investment Team: • www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm