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

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Presentation on theme: "Life Cycle Cost Analysis in Pavement Design - In Search of Better Investment Decisions - Office of Asset Management Federal Highway Administration Executive."— Presentation transcript:

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

2 Introduction Who are we Jim Walls - Eastern Resource Center Keith Herbold - Midwestern Resource Center Tom Canick – Office of Asset Management Why are we here: To deliver FHWAs LCCA probabilistic software workshop Why are we doing that: FHWA supports application of LCCA in pavement decisions Continuation of our prior efforts

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

4 1. Workshop Overview LCCA review Software instruction Class exercises

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

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

7 Workshop Overview n Software l Capabilities l How to use l Demonstration

8 n Class Exercises l Hands-on Software Exercises l Interpreting Results Workshop Overview

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

10 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 Approach

11 Probabilistic versus Deterministic Approach

12 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 Deterministic Approach

13 Deterministic Limitations n Doesnt Address: l Statistical Significance l Variability n Subject to Manipulation n Lacks Credibility

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

15 $ % Inputs Net Present Value Results MODELMODEL Simulation Modeling

16 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 Role of Probability in LCCA

17 Agency NPV B A Frequency Net Present Value

18 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

19 3. RealCost Software

20 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

21 Software Data Input

22

23 Software Outputs

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25 4. Why Use LCCA Requirements FHWAs Philosophy Benefits of LCCA

26 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.

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

28 Benefits of LCCA Better information for decisions Improved rehabilitation strategies Consideration of user costs Support for overcoming the first cost limitations

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

30 5. Managements Role Management Support for Development and Application of LCCA. Develop LCCA Guidelines including Recommendations on Input Values

31 Management Support n Requires buy-in of risk management by senior executives n Technical Champion n Top management support

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

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

34 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 Discounting … a mechanism for quantifying the time value of money Developing Guidelines

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

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

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

38 The End Thats All Folks!

39 Inputs are defined by probability distributions (their range of values and likelihoods of occurrence) Outputs are expressed as ranges of values with probability of occurrence


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