EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
: WASHINGTON , D. C . 20503
September 20, 201 2
MEMORANDUM FOR CHIEF FINANC; OFFICERS AND AGENCY BUDGET
DIRECTORS ~
FROM: V L
SUBJECT: r
Danny werfP/.l
Controller
Interpretation of OMB Circul ar A-94
In 1992, the Office of Management and Budget (OMB) issued a revision to OMB
Circular A-94, "Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs,"
to supply guidance on the conduct of benefit-cost analysis and life-cycle cost analysis of Federal
investments and other po licies. In conducting a review of the Circular we have learned about
certain issues regarding its proper interpretation, which this memorandum is intended to clarify.
In particular. this memorandum addresses (1) the interpretation of constant do llar or constant
costs in treatment of inflation, and (2) the appropriate choice of a horizon for life-cycle cost
analysis.
1. Constant-Dollar Analysis in Treatment of Inflation.
Economic analysis, including both benefit-cost analysis and life-cycle cost analysis, is
frequently conducted using constant-dollar estimates of benefits and costs, where benefits and
costs are measured in terms of constant purchasing power not grown by an overall inflation rate.
Constant-dollar analysis is especially appropriate for long- lived projects where the costs or
benefits may stretch out for decades. In Section 7, Circular A-94 states : " Future inflation is
highly uncertain. Analys ts should avoid having to make an assumption abo ut the general rate of
inflation whenever possible."
Economists distinguish between general inflation and changes in individual prices or
cos ts. Although the Circular recommends against making a general inflation assumption,
constant-dollar analysis permits analysts to project changes in relative prices. In Section 7, the
Circular points out: "Such estimates may refl ect ex pected future changes in relative prices,
however, where there is a reaso nable basis for estimating such changes." In the case of
materials, the Circular permits analysts to assume different patterns of future costs , when there is
evidence to support such an assumption. Agencies should decide, based on their own
professional j udgment, if there is a reliable basis to assume changes in relative prices and when
such assumptions wo uld improve their analysis. Regardl ess of any ass umptions abo ut relative
prices and costs, all alternatives being compared should be discounted with the same discount
rate following the guidelines in Section 8 of Circular A-94 .
2. Time Horizon For Life-Cycle Analysis
Circular A-94 does not specify the length of time over which analysis is to be conducted.
In defining life-cycle costs, the Circular states in Appendix A that life-cycle costs consist of:
"The overall estimated cost for a patticular program alternative over the time period
conesponding to the life of the program, including direct and indirect initial costs plus any
periodic or continuing costs of operation and maintenance. " The time horizon for life-cycle
analysis is project specific, but should normally be long enough to encompass the likely lifespan
of the most durable alternative being compared. The Circular allows agencies to set their own
guidelines for the length of analysis to produce the most useful and meaningful comparisons
between alternative uses of resources in their programs.
With respect to materials , it may be appropriate for the agency to consider the relative
durability of materials in assessing lifecycle costs by extending the time frame for analysis. For
example, if the durability of one form of a material would extend the useful life of a constructed
asset as compared to an alternative material , the agency could, consistent with Circular A-94,
extend the time frame used for analysis in comparing all of the relevant alternatives . The agency
should use its best j udgment in terms of whether there is adequately reli able information
available on the durability of materials and its associated impact on lifecycle costs when
choosing the appropriate time frame for analysis.
For questions regarding interpretation of Circular A-94 or the clarifications contained in
this memorandum, please contact Michael Falkenheim (mfalkenheim@omb.eop.gov), OMB
Deputy Associate Director for Economic Policy.
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