Enclosure to : APTA Comments Docket No. 2006-23636
FTA Cost-Effectiveness Breakpoint Paper
In its evaluation of cost effectiveness of a proposed project, FTA considers the incremental cost
per hour of transportation system user benefits in the forecast year. This measure, expressed
in constant base-year dollars, is based on the annualized total capital and annual operating
costs divided by the forecast change in annual user benefits, comparing the proposed project to
the New Starts baseline alternative. The current Cost-Effectiveness (CE) thresholds used by
FTA for assigning High, Medium-High, Medium, Medium-Low and Low cost-effectiveness
ratings is shown below:
Rating
High
Medium-High
Medium
Medium-Low
Low
CE Threshold
$10.99 and under
$11.00 - $13.99
$14.00 - $21.99
$22.00 - $27.99
$28.00 and over
FTA has proposed adjusting these threshold figures in future years by applying an adjustment
factor based on changes in Gross Domestic Product (GDP). The problem with this proposed
approach is that the cost of construction, which is a major component of the annualized total
capital cost, has recently been rising (from 2002 – 2005) at a much higher rate than the rate of
growth of GDP. The attached chart shows the trends in GDP, the Consumer Price Index (CPI),
ENR Materials Price and Skilled Labor Indices, and a curve representing 70% of the composite
construction cost increases from 2002 through 2005 1 .
Between 2002 and 2005, construction costs rose by 21.92% 2 , whereas the GDP rose by only
4.43% and the CPI increased by 15.4%. Assuming annualized construction cost contributes
70% of the total of the annualized capital and annual operating cost, seven-tenths of the
construction cost increase equates to 15.34% during this 3-year period, which is virtually the
same as the growth in the CPI. So adjusting the Cost-Effectiveness threshold by the rate of
growth of the CPI appears to be a more appropriate adjustment factor than using GDP as the
basis for adjusting the threshold figures.
The second attachment is a table of current New Starts projects showing the Cost-Effectiveness
figure for each project and illustrating how these projects would fare based on how the CE
Threshold figures are adjusted. If the current $21.99 upper limit for a Medium rating is not
adjusted at all through 2009, all but three projects would become ineligible assuming the recent
construction cost trends continue. If the CE Medium Threshold figure were adjusted by the
current average annual growth in GDP, all but five of these projects would become ineligible by
2009 (assuming current construction cost trends continue). If the CE Medium Threshold figure
were adjusted to the CPI rate of growth, all of the currently eligible projects (i.e., those with a CE
of $21.99 or less) would still be eligible in 2009 (again assuming current construction cost trends
continue). Unless the FTA is seeking to raise the eligibility bar, it should adjust the CE
Threshold by at least the CPI percentage annually.
1
The reason we use 70% of the construction cost growth rate is that this is roughly the percentage
contribution of annualized construction cost of the total annualized capital plus O&M cost of each project.
This ignores any growth in annualized O&M costs over this period.
2
ENR composite Materials and Labor Price Index rose 21.92% between 2002 and 2005.
fta_cost_effectivenessbreakpointpaper.doc
3/13/2006