Economic Analysis: Applications to Work Zones March 25, 2004

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

Why? Performance What? Greatest net benefit When? Optimal timing Where? Best alignment How? Best implementation strategy Economic Analysis Addresses Key Project Questions

Economic Analysis Issues 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

Economic Analysis Typical Life Cycle Profile Year Initial Capital Dollars Benefits Costs Cost

Economic Analysis Adjusting 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

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% Economic Analysis Example of Discounting

Plug values into discounting formula: Do calculations: Economic Analysis Example (continued)

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

EA Methods Benefit-Cost Analysis Life-Cycle Cost Analysis

EA Methods Benefit 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

EA Methods BCA Formula BCA is done using the basic multi- year discounting formula:

EA Methods Applications of BCA Project-level analysis Selecting ITS or operations technologies Highway program-level analysis Regulatory analysis

EA Methods Life-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

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

EA Methods Applications of LCCA Evaluation of pavement preservation strategies Project planning and implementation, especially the use and timing of work zones Value Engineering

EA Methods How 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

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

EA Methods Valuation 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

EA Methods Inclusion 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

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

Linking EA to Other Tools Traffic Forecasting Queuing models Included in RealCost LCCA Software Traffic simulation models Corsim QuickZone Travel demand models

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

Linking EA to Other Tools Economic 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

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

LCCA Applied To Work Zones Mitigation 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?

LCCA Applied To Work Zones Comparing 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

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

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

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

LCCA Applied To Work Zones Example Results

LCCA Applied To Work Zones Example 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

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

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

For Further Information Other Economic Materials FHWA’s Office of Asset Management, Evaluation and Economic Investment Team: asstmgmt/invest.htm