Economic Analysis: Applications to Work Zones
March 25, 2004
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
Why? Performance What? Greatest net benefit When? Optimal timing Where? Best alignment How? Best implementation
strategy
Economic AnalysisAddresses Key Project Questions
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
Economic AnalysisTypical 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
BenefitsCosts
Cost
Economic AnalysisAdjusting for Present Value
tt ArPV
)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 AnalysisExample of Discounting
Plug values into discounting formula:
Do calculations:$412 0.41199x 000,1$ PV
Economic AnalysisExample (continued)
30 30 000,1$)03.1(
1yearPV
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
EA Methods
Benefit-Cost Analysis Life-Cycle Cost Analysis
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
EA MethodsBCA Formula BCA is done using the basic multi-
year discounting formula:
)()1(
10
tt
N
tt CostBenefit
rPV
EA MethodsApplications of BCA Project-level analysis Selecting ITS or operations
technologies Highway program-level analysis Regulatory analysis
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
EA MethodsLCCA Formula LCCA is done using the basic
multi-year discounting formula:
where “Cost” equals the cost for design alternative in year t
t
N
tt Costr
PV
0 )1(
1
EA MethodsApplications of LCCA Evaluation of pavement
preservation strategies Project planning and
implementation, especially the use and timing of work zones
Value Engineering
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
EA MethodsCost Items Used in LCCAAgency Costs
Design and engineeringLand acquisitionConstructionReconstruction/RehabilitationPreservation/Routine Maintenance
User Costs At Work ZonesDelayCrashesVehicle Operating
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
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
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 ToolsTraffic Forecasting Queuing models
Included in RealCost LCCA Software
Traffic simulation models Corsim QuickZone
Travel demand models
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.
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
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 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?
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
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 ZonesExample 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 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
For Further InformationEconomic Analysis PrimerFHWA IF-03-032, August 2003
Contents:
• Economic Fundamentals
• Life-Cycle Cost Analysis
• Benefit-Cost Analysis
• Forecasting Traffic
• Risk Analysis
• Economic Impact Analysis
For Further InformationLife-Cycle Cost Analysis Materials
Life-CycleCost AnalysisPrimer
RealCost Software and workshops– call your Division Office
For Further InformationOther Economic Materials FHWA’s Office of Asset
Management, Evaluation and Economic Investment Team:www.fhwa.dot.gov/infrastructure/asstmgmt/invest.htm
