Economic Analysis: Applications to Work Zones

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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


0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

Year

Initial Capital


Dollars

Benefits

Costs

Cost

Economic Analysis

Adjusting for Present Value

t
t
A
r
PV










)
1
(
1
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:

$412


0.41199
x
000
,
1
$







PV
Economic Analysis

Example (continued)

30

30
000
,
1
$
)
03
.
1
(
1
year
PV










Economic Analysis

Discount 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


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:






)
(
)
1
(
1
0
t
t
N
t
t
Cost
Benefit
r
PV













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

t
N
t
t
Cost
r
PV












0
)
1
(
1
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

Agency
User
Agency
User
Present Value
$2,605
$4,969
$2,865
$1,226
Present Value
$2,721
$3,715
$2,987
$1,055
Costs Over 35 Years in $1000
SP - 24 Hr WZ
SP - Night Only
SMA - 24 Hr WZ
SMA - Night Only
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
-
03
-
032, 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:


www.fhwa.dot.gov/infrastructure/
asstmgmt/invest.htm