[Federal Register Volume 61, Number 182 (Wednesday, September 18, 1996)]
[Notices]
[Pages 49187-49191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23870]
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DEPARTMENT OF TRANSPORTATION
[FHWA Docket No. 94-15]
Life-Cycle Cost Analysis
AGENCY: Federal Highway Administration (FHWA), Department of
Transportation.
ACTION: Final policy statement.
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SUMMARY: This FHWA policy statement on life-cycle cost analysis (LCCA)
helps fulfill Federal management responsibilities for analyzing life-
cycle cost aspects of infrastructure investment decisions under
Executive Order 12893, ``Principles of Federal Infrastructure
Investment.'' The policy statement
[[Page 49188]]
establishes LCCA principles to be applied by FHWA in infrastructure
investment analyses, and provides a framework that States may use in
conducting LCCA as required in Section 303 of the National Highway
System (NHS) Designation Act of 1995 (P.L. 104-59) or as appropriate
for other investment decisions. The importance of considering life
cycle costs in various phases of project development, construction,
maintenance, and operation is emphasized.
DATES: This policy statement is effective on September 18, 1996.
FOR FURTHER INFORMATION CONTACT: Mr. James W. March, Team Leader,
Systems Analysis Team, (202) 366-9237, or Mr. Steven M. Rochlis,
Program Legal Services Division, (202) 366-0780, FHWA, 400 Seventh
Street SW., Washington, D.C. 20590.
SUPPLEMENTARY INFORMATION:
Background
Executive Order 12893, ``Principles for Federal Infrastructure
Investment,'' issued on January 26, 1994, notes that ``[a] well-
functioning infrastructure is vital to sustained economic growth, to
the quality of life in our communities, and to the protection of our
environment and natural resources.'' The Executive Order goes on to
state that ``[o]ur Nation will achieve the greatest benefits from its
infrastructure facilities if it invests wisely and continually improves
the quality and performance of its infrastructure programs.'' The first
step recommended in the Executive Order is ``Systematic Analysis of
Expected Benefits and Cost.'' The Executive Order advises that in
performing this systematic analysis, ``benefits and costs should be
measured and appropriately discounted over the full life cycle of each
project. Such analysis will enable informed tradeoffs among capital
outlays, operating and maintenance costs, and nonmonetary costs borne
by the public.''
On July 11, 1994, FHWA published an interim policy statement on
LCCA in the Federal Register (59 FR 35404). An important objective of
that policy statement was to implement life cycle cost provisions of
Executive Order 12893. The FHWA also requested comments on potential
problems in implementing provisions of the policy and specific needs
for training and technical assistance to apply LCCA.
Discussion of Comments
The FHWA received a total of 40 comments on the interim LCCA policy
statement. Twenty-two were submitted by or on behalf of State
departments of transportation and 18 were submitted by industry groups,
consultants, and other private sector organizations. The overwhelming
majority of comments expressed the sentiment that LCCA has the
potential to contribute to improved investment decisions.
Comments on the interim LCCA policy statement primarily discussed
two broad areas: implementation of the policy and technical issues in
applying LCCA. The comments are summarized below.
Implementation Issues
Several comments questioned whether a LCCA should be mandated for
some or all projects and whether sanctions would be applied for failure
to conduct required LCCAs according to the principles set forth in the
policy statement. Some commenters, however, supported making LCCA
mandatory. Advocates for Auto and Highway Safety, for instance,
asserted that ``[o]nly if LCCA is made a condition of funding approval,
especially at the individual project level, particularly on the NHS,
will this decisionmaking approach gain credibility and also produce the
long-term safety and mobility benefits that are naturally generated by
selection of high-quality, durable highway and bridge designs.'' The
National Asphalt Paving Association declared that ``the Federal
Government needs...to take a leadership role in clearly defining a
standardized format in which all users apply a uniform solution
approach to solve LCCA problems. Unless this is accomplished,
analytical LCCA chaos will reign.''
Most comments that addressed the issue, however, were opposed to an
LCCA requirement. Many State highway agencies expressed concerns about
the potential burden associated with LCCA requirements, especially if
detailed analyses were required for all improvements. Several States
suggested that thresholds be established below which an LCCA would be
optional. Recommended thresholds ranged from $1 million to $10 million.
Other suggestions included requiring an LCCA only on NHS projects or
requiring LCCA only for certain elements of a project. Some commenters
recommended that the policy statement not establish new LCCA
requirements, but rather provide broad policy guidance on principles of
good practice. ``FHWA should act in the LCCA area as a valued technical
advisor to the States, * * * but FHWA should not force solutions and
approaches upon the states * * * no sanctions should be imposed on a
state by virtue of not undertaking LCCA in the form set forth by
FHWA.''
One industry organization and approximately half the States
commenting on the interim LCCA policy statement cautioned that an LCCA
should be only one factor in the decisionmaking process. For instance,
the North Dakota Department of Transportation pointed out that an
``[e]conomic analysis of alternatives has long been a tool for the
administrator and engineer to use in project level decisions. However,
it is an inexact science. The process is rife with assumptions on
discount rates and future costs. Managers know that it is only one
tool, among many, that can be used to narrow down alternatives to
consider and decisions to make * * * . It shouldn't be given any
greater consideration than other factors.'' The FHWA understands that
whether or not a State uses formal LCCA or less-formal methods for
deciding among investment alternatives, uncertainties about future
costs and performance remain and must be factored into the
decisionmaking process. To ignore them is worse than to acknowledge the
uncertainties and attempt to understand their influence on long term
costs.
Suggestions were made that LCCA implementation should be phased in,
to provide sufficient time for technical assistance in estimating user
costs, discount rates, maintenance costs, etc. States with adequate
cost and performance data could apply the technique and show other
States how it can be used in the decisionmaking processes.
Several comments suggested that LCCA may be appropriate for project
level decisions, but that it is not suited for network level decisions.
Some suggested that other types of economic analysis such as multi-
objective programming and benefit-cost analysis may be more appropriate
for some decisions. When discussing other economic analysis techniques,
these comments generally failed to recognize that each of these
economic analysis methods usually requires consideration of future
benefits and costs, which is at the heart of an LCCA.
Technical LCCA Concerns
A number of comments recommended clarifying the relationship
between the design life and the analysis period in the final policy
statement. Definitions of these two terms vary slightly from reference
to reference, but design life is generally understood to reflect the
expected service life of an improvement. The analysis period for an
LCCA generally should extend through the time when reconstruction of
the facility would be required. Relatively long
[[Page 49189]]
analysis periods help to assure that life cycle costs for the full
range of reasonable investment alternatives, including eventual
reconstruction of the facility, are considered.
Several comments expressed the concern that the analysis periods
discussed in the interim LCCA policy statement were too long. For
instance, one State questioned whether 30 years was too long for a
simple overlay project, and a construction firm commented that a design
life of 75 years was too long for most hydraulic structures and could
result in the construction of obsolete facilities. The interim policy
statement suggested these periods as minimum analysis periods, not
minimum design lives. As noted above, the analysis period is generally
longer than the design life of an improvement and should extend through
the time when facility reconstruction would be required. Thus for
pavements, the analysis period may extend through several overlay and
rehabilitation cycles and include reconstruction as one investment
alternative, depending on the age and condition of the facility.
Discount Rates
Several comments discussed the use of discount rates in LCCA. Some
supported relying on Office of Management and Budget (OMB) Circular A-
94 as the basis for setting discount rates, but one comment indicated
that Circular A-94 is ambiguous about how to select the appropriate
discount rates. One comment recommended that FHWA's LCCA policy be more
prescriptive on the discount rate to be used and that explicit
procedures for determining the discount rate be part of the LCCA policy
rather than simply referencing OMB Circular A-94. Another comment
suggested that definitive guidance should be given to determine the
appropriate discount rate similar to guidance included in the interim
policy statement on analysis periods for different types of
improvements. One comment suggested that regional discount rates be
developed to reflect differences in regional economic conditions. Yet
another comment said that too much emphasis has been placed on the
discount rate and that many other uncertainties are more important.
User Costs
The inclusion of user costs in an LCCA generated many comments, the
most frequent of which were the difficulty in estimating user costs,
the need for technical assistance in this area, and suggestions that
user costs not be required in an LCCA until technical advisories are
available. A few comments raised concerns that user costs could
overwhelm other costs in the analysis. Several recommended that user
costs be excluded from LCCAs because of the difficulty of estimating
user costs and the fear that including user costs would favor urban
projects over rural projects. Regarding this latter point, inclusion of
user costs in benefit-cost or other types of economic analysis used in
developing annual or multiyear transportation improvement programs
could favor urban projects, but at the project level, including user
costs in an LCCA would only affect project design and related
decisions, not where the projects are located.
The FHWA believes that since user cost savings are the single most
important benefit in justification of most highway improvements, then,
it follows, that user costs should be included in any LCCA.
Training and Technical Assistance
There were many comments concerning the need for technical
assistance, not only in the selection of discount rates and the
estimation of user costs, but also in estimating the service life of
improvements and future maintenance and rehabilitation costs. The FHWA
has included an LCCA module in its course on value engineering, and is
developing additional training and technical advisories that should be
available.
Discussion of Comments
Since the interim LCCA policy statement was published in July 1994
and comments submitted to the docket, several legislative and
programmatic changes have occurred that affect LCCA requirements. On
November 28, 1995, the NHS Designation Act of 1995 (Pub. L. 104-59, 109
Stat. 568 (1995)) was enacted. Section 303 of that Act entitled,
``Quality Improvement,'' modified section 106 of title 23, United
States Code (U.S.C.), by adding a new subsection (e) entitled ``Life-
Cycle Cost Analysis.'' Subsection 106(e)(1) of title 23, U.S.C. now
directs the Secretary to establish a program that requires States to
conduct an LCCA for each NHS project having a usable project segment
costing $25,000,000 or more. This subsection further defines LCCA as
``a process for evaluating the total economic worth of a usable project
segment by analyzing initial costs and discounted future cost, such as
maintenance, reconstruction, rehabilitation, restoring, and resurfacing
costs, over the life of the project segment.''
Both the House and Conference Committee reports on the Act indicate
that the basic intent of requiring an LCCA on higher-cost Federal-aid
NHS projects is to, ``reduce long-term costs and improve quality and
performance.'' Although the House Committee report language indicates a
desire for the Secretary to specify uniform analysis periods and to
promote uniform use of discount rates as established by the OMB
Circular A-94, the Conference Committee report language suggests that
the Secretary should not prescribe the forms of life cycle cost
analysis that a State must undertake. Further, the Conference Committee
report states that the intent of section 303 is to limit the
Secretary's ability to require life-cycle cost analysis to high cost
NHS usable project segments.
The NHS Act did not rescind life-cycle cost requirements
established by the Intermodal Surface Transportation Efficiency Act of
1991 (ISTEA) (Pub. L. 102-240, 105 Stat. 1958, 1964) and found in 23
U.S.C. Sec. 134(f)(12) and Sec. 135(c)(20). These sections specifically
require consideration of ``the use of life-cycle costs in the design
and engineering of bridges, tunnels, or pavement.'' The potential
benefits of conducting LCCA in support of decisions on significant
highway investments that fall below the $25 million threshold
established by the NHS Act could be significant.
The FHWA has issued guidance advising its field offices to
encourage States, at the highest levels, to consider life cycle costs
in making major investment decisions. This guidance suggests several
sources of technical information on performing an LCCA, and indicates
additional LCCA work that is underway including a National Cooperative
Highway Research Program (NCHRP) Project entitled Life-Cycle Cost
Analysis of Bridges which will be available in 1998, technical
guidelines for the application of LCCA to pavement design, and a
demonstration project on the use of probabilistic life-cycle cost
analysis in pavement design that will be available in early 1997.
Section 205 of the NHS Act, ``Relief From Mandates,'' suspended the
requirement that States implement the pavement, bridge, and other
management systems established by ISTEA and stipulated that ``[a] State
may elect, at any time, not to implement, in whole or in part, 1 or
more of the management systems.'' Section 205 also states that ``[t]he
Secretary may not impose any sanction on, or withhold any benefit from,
a State on the basis of such an election.'' With implementation of
pavement and bridge
[[Page 49190]]
management systems rendered optional, use of LCCA in connection with
those systems will be at the State's election, except for those
projects on the NHS costing $25,000,000 or more.
Provisions of the NHS Act pertaining to LCCA generally are
consistent with the majority of comments received on FHWA's interim
LCCA policy. The Act and accompanying Committee report language
recognize the importance of conducting LCCAs for the highest cost NHS
projects. The $25 million threshold at which LCCA becomes mandatory for
Federal-aid funding is higher than thresholds suggested in docket
comments which ranged from $1 million to $10 million, but States will
be encouraged to consider life cycle costs for other high cost NHS
projects that do not meet this threshold. Language in the Conference
Committee report stipulating that no particular form of LCCA is to be
prescribed also is consistent with most of the docket comments and with
the intent of the interim policy statement as well. Principles
enunciated in the interim policy statement were intended to reflect
good practice. These principles recognize that flexibility in approach
may be necessary to account for unique project characteristics.
Guidance issued to FHWA field offices following passage of the NHS Act
states that ``[t]he FHWA Division Offices should not prescribe the
forms of LCCA that a State undertakes. The division offices should,
however, assure that LCCA are consistent with the established
fundamental principles of good/best practice * * * [T]o reflect good/
best practice, an LCCA should have sufficiently long analysis periods
to reflect long term cost differences associated with reasonable
investment alternatives, employ accepted discount rates, and address
the inherent variability in input parameters.''
Because of the large potential benefits of LCCA, which were
recognized in comments to the docket and in Committee reports on the
LCCA provisions of the NHS Act, the FHWA continues to develop technical
guidance on the application of LCCA to pavements, bridges, and other
types of highway improvements. An overall reference document on LCCA,
along with examples of the application of LCCA for different types of
improvements, is being developed and will be available by the end of
1996. As noted above, guidelines and a demonstration project on the
application of LCCA to pavement design are being developed and an NCHRP
project on the application of LCCA to bridges is underway as well. As
additional training and technical assistance needs are recognized, the
FHWA will fill them.
Policy
This policy statement sets forth principles of good practice for
the application of life-cycle cost analysis to highway and related
infrastructure investment decisions. The FHWA fully supports and
promotes sound economic analyses of highway investment alternatives
that consider relevant costs and benefits over the full life of the
facility. States and local agencies are encouraged to follow these
principles in evaluating highway investment alternatives. Alternative
forms of LCCA are acceptable if they are consistent with principles of
good practice contained in this statement.
1. Life-cycle costs are important considerations along with
budgetary, environmental, safety, and other factors in highway
investment decisions. Investment alternatives having the least net cost
(or the greatest net benefit) cannot be identified without considering
streams of discounted benefits and costs over the entire life of the
investment. Especially in periods of tight budgets, it is important to
use life cycle cost analysis, value engineering, and other appropriate
techniques to maximize the return from investments of scarce highway
resources. The importance of considering life cycle costs in
infrastructure investment decisions was emphasized in the President's
Executive Order 12893, ``Principles for Federal Infrastructure
Investments.''
2. Life-cycle cost analysis principles involving the systematic
evaluation of costs and benefits over the life of highway improvements
have been utilized in benefit-cost analysis, cost-effectiveness
analysis, and other economic analysis techniques for many years.
Continued use of these principles can help reduce costs of providing
essential highway services that stimulate our economy and enhance our
quality of life.
3. Life cycle costs should be considered in all phases of
construction, maintenance, and operation. A project's design will
affect its initial construction cost as well as future maintenance and
rehabilitation costs. The initial design can affect not only the
frequency of required maintenance, but costs of performing maintenance
as well. Whether as the result of formal value engineering studies or
less formal evaluation of design alternatives, small changes in design
that facilitate maintenance and operations may pay for themselves in
long-term cost savings.
4. Analysis periods used in LCCAs should be long enough to capture
long-term differences in discounted life-cycle costs among competing
alternatives and rehabilitation strategies. The analysis periods should
cover several maintenance and rehabilitation cycles and, depending on
the condition and age of the facility, may cover reconstruction of the
facility as well. Analysis periods for improvements on Interstate and
other NHS highways generally should be longer than for improvements on
lower order roads, reflecting the NHS's greater importance.
5. All significant differences in agency and user costs anticipated
during the analysis period should be considered in the analysis. Agency
costs should consist of initial construction costs, future maintenance
and rehabilitation costs including traffic control costs and costs of
special construction procedures to maintain traffic, and agency
operating costs for such things as tunnel lighting and ventilation.
Where the agency operating a facility is not the one making the
investment decision, it is important for the funding agency to include
operating costs borne by all organizations responsible for operating
the facilities. User costs to be considered in an LCCA generally
include vehicle operating costs, accident costs, and delay-related
costs incurred throughout the analysis period. Increased costs due to
deteriorated riding surfaces, circuitous routings, and accidents and
delays around and through work zones are important cost considerations.
6. While there may be considerable uncertainty about the life of an
improvement, future traffic using the facility, future maintenance and
rehabilitation costs, user operating and delay costs, the appropriate
discount rate to use, and other elements of LCCA, these factors should
all be considered in the analysis. Regarding uncertainty, Executive
Order 12893 indicates that ``[w]hen the amount and timing of important
benefits and costs are uncertain, analyses shall recognize the
uncertainty and address it through appropriate quantitative and
qualitative assessments.'' These assessments may include sensitivity
analysis, probabilistic or risk analysis techniques, expert panels, or
other methods for estimating the degree of uncertainty underlying key
LCCA factors and the influence of that uncertainty on the choice of
investment alternatives. Even if there is a relatively high degree of
uncertainty about key LCCA factors, it is better to try to evaluate
that uncertainty than to ignore it.
[[Page 49191]]
7. Future agency and user costs should be discounted to net present
value or converted to equivalent uniform annual costs using appropriate
discount rates. Discount rates selected should be consistent with
guidance provided in OMB Circular A-94.
Technical advisories on these and other technical issues in the
application of LCCA will be issued by FHWA in the future.
Authority: 23 U.S.C. 315; Pub. L. 102-240, sections 1024 and
1025 (December 18, 1991); Pub. L. 104-59, section 303 (November 28,
1995); 49 C.F.R. 1.48.
Issued on: August 29, 1996.
Rodney E. Slater,
Federal Highway Administrator.
[FR Doc. 96-23870 Filed 9-17-96; 8:45 am]
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