Life Cycle Cost Analysis
in Pavement Design
- In Search of Better Investment Decisions -
Executive Session
Office of Asset Management
Federal Highway Administration
FHWA LCCA Methodology
Steps
1. Establish Design Alternatives
2. Determine Activity Timing
3. Estimate Agency and User Costs
4. Compute Life-Cycle Costs
5. Analyze the Results
Deterministic Approach
Inputs are discrete or point values
• Initial costs are $11M
• The discount rate is 4%
Outputs are discrete
• Alternative “A” total cost = $20.5M
• Alternative “B” total cost = $26.0M
Deterministic Limitations

Doesn’t Address:
Statistical Significance
 Variability
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Subject to Manipulation
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Lacks Credibility
Probabilistic Approach
 Captures the uncertainty in the inputs,
 Carries that uncertainty through the
computation process to generate a
 Probability distribution of result
(a range of possible outcomes along
with their likely hood of occurrence).
Simulation Modeling
Inputs
$
%
Results
M
O
D
E
L
Net
Present
Value
LCCA Results
Deterministic Approach
Project cost estimate is $12 million
Probabilistic Approach
75 percent chance the project
will cost $12 million or less.
Role of Probability in LCCA
 Accounting for variability in inputs:
•Activity timing, costs, discount rate
 Quantitatively determines risk in alternative
strategy selection
 Elevates the decision from questioning the
inputs to discussing the merits of each
alternative
Agency NPV
Frequency
B
A
Net Present Value
Advantages
 More Informed Decisions
• Evaluate all possible outcomes
• Expose areas of uncertainty...Quantify risk
• Determine significance of difference between
alternatives
• Examine influence of underlying variables on
final results
• Provide those vested with appropriate authority
the opportunity to make decisions about risk
taking
Benefits of LCCA Software
 Performs LCCA as per FHWA best practice
 Requires same data inputs as manual
process
 Better, faster & cheaper analysis
 Automates user cost process
Software Data Input
Software Data Input
Software Outputs
Software Outputs
4. Why Use LCCA

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Requirements
FHWA’s Philosophy
Benefits of LCCA
LCCA Requirements
NHS Designation Act (1995)
Required States to conduct LCCA of
each NHS high cost ($25M or more)
useable project segment.
TEA-21 (1998)
Eliminated this requirement.
FHWA Philosophy
LCCA:
 Decision support tool
 Results are not decisions
 Rigorous analytical process can
be as important as the results
Benefits of LCCA
 Better information for decisions
 Improved rehabilitation strategies
 Consideration of user costs
 Support for overcoming the
“first cost” limitations
FHWA LCCA Guidance
 LCCA Software
 LCCA Primer,
Technical Bulletin
DP-115

http://www.fhwa.dot.gov/infrastructure/asstmgmt/lcca.htm
5. Management’s Role
 Management Support for
Development and Application
of LCCA.
 Develop LCCA Guidelines
including Recommendations
on Input Values
Management Support
Requires “buy-in” of risk
management by senior
executives
 Technical Champion
 Top management support

Developing Guidelines
Analysis Periods
 Type of Dollars…Treatment of Inflation
 Type and Value of Discount Rates
 Treatment of User Cost
 Value assigned to user delay time
 Choice of Economic indicator
 Remaining service Life
 Ignore Sunk Cost

Developing Guidelines

Analysis Periods
Type of Dollars…Treatment of Inflation
 Type and Value of Discount Rates
 Treatment of User Cost
 Value assigned to user delay time

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Choice of Economic indicator
Remaining service Life
Ignore Sunk Cost
Developing Guidelines
Discounting … a mechanism for
quantifying the time value of money
FHWA Recommends
• Real dollars and a real discount rate - do not
account for inflation
• A real discount rate range of 3% to 5%
• Never mix real and nominal (inflation adjusted)
costs and discount rate
Developing Guidelines
User Costs are calculated
through a capacity analysis.
Observations:
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Traffic grows over time
Queuing cost dominate
Hourly distributions key
$ Value of time has a major influence
Normal VOC between alternatives
negligible
Developing Guidelines
Value of Time Recommendations...
Passenger Vehicle
Single Unit Truck
Combo Truck
$10 - $13
$17 - $19
$21 - $24
1996 Dollars
Things to Remember
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LCCA Decision Support Tool
NHS LCCA Requirements
Document Inputs
Dispose of all Issues
Provide Confidence Information