[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16719]


[[Page Unknown]]

[Federal Register: July 11, 1994]


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DEPARTMENT OF TRANSPORTATION
Federal Highway Administration
[FHWA Docket No. 94-15]

 

Life-Cycle Cost Analysis

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Interim policy statement; request for comments.

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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 establishes LCCA principles to be 
applied by FHWA in infrastructure investment analyses, and in 
evaluating the adequacy of State highway agency procedures used in 
conducting required LCCA for investments funded through the Federal-aid 
highway program. States and local agencies are expected to apply these 
principles in evaluating program and project level investment decisions 
involving Federal-aid highway funds as required under applicable FHWA 
regulations. Comments are solicited on potential problems in 
implementing provisions of this policy statement and specific needs for 
training and technical assistance in LCCA.

DATES: This interim policy statement is effective on July 11, 1994. 
Comments on the interim policy statement must be received on or before 
October 11, 1994. A final LCCA policy statement will be published that 
takes into consideration comments received on this interim statement.

ADDRESSES: Submit written, signed comments concerning this interim 
policy statement to FHWA Docket No. 94-15, Federal Highway 
Administration, room 4232, HCC-10, Office of the Chief Counsel, 400 
Seventh Street, SW., Washington D.C. 20590. In addition to specific 
comments on this policy statement, comments are requested on training 
and technical assistance needed to implement LCCA. All comments 
received will be available for examination at the above address between 
8:30 a.m. and 3:30 p.m. e.t. Monday through Friday, except legal 
Federal holidays.

FOR FURTHER INFORMATION CONTACT: Mr. James W. March, Chief, Systems 
Analysis Branch, (202) 366-9237, or Mr. Steven M. Rochlis, Legislation 
and Regulations Division, (202) 366-1395, Federal Highway 
Administration, 400 Seventh Street SW., Washington D.C. 20590.

SUPPLEMENTARY INFORMATION:

Background

    There is an increasing recognition that total life-cycle costs of 
highway and transportation investments must be given greater 
consideration in all phases of highway programs. Executive Order 12893, 
``Principles of Federal Infrastructure Investment,'' requires that 
benefits and costs of infrastructure investment be measured and 
appropriately discounted over the full life cycle of each project. 
Sections 1024 and 1025 of the Intermodal Surface Transportation 
Efficiency Act of 1991 (ISTEA) (Pub. L. 102-240, 105 Stat. 1914, 1977) 
also require consideration of ``the use of life-cycle cost in the 
design and engineering of bridges, tunnels, or pavement.'' Subpart B of 
the interim final rule on implementation of ISTEA management systems 
(23 CFR 500.207) requires use of LCCA for pavement management systems 
(PMS) and Subpart C (23 CFR 500.307) requires use of LCCA or comparable 
techniques for bridge management systems (BMS).
    Life-cycle cost analysis is an economic evaluation of all current 
and future costs associated with investment alternatives. It is a 
valuable economic analysis technique for evaluating highway and other 
transportation programs and projects that require long-term capital and 
maintenance expenditures over the extended lives of facilities. Future 
costs are discounted using an appropriate discount rate to compare 
costs incurred at different points in time.
    Life-cycle cost analysis principles and techniques are used in many 
types of economic analysis to compare benefits and costs arising at 
different points in time. Benefit-cost analysis and cost effectiveness 
analysis, for instance, use life-cycle cost analysis principles to 
discount future benefits and costs of investment alternatives over the 
lives of alternatives being evaluated.
    Life-cycle cost analysis is used to evaluate programs of pavement 
and bridge improvements as well as individual projects. It is an 
important input to estimates of future funding requirements and to the 
development of improvement programs, especially when there are budget 
constraints.
    The use of value engineering is receiving increased attention as a 
technique for analyzing the functions of a program, project, system, 
product, or service to identify opportunities to significantly lower 
costs while still achieving the essential functions. Life-cycle costs 
are often analyzed to ensure that unnecessary costs are avoided by 
considering future operations, maintenance, and reconstruction 
requirements.
    Total life-cycle costs of specific facilities may be many times the 
initial construction costs when user costs are considered. It is 
essential that a long term perspective be taken in programming 
improvements, selecting among alternative maintenance, rehabilitation, 
and reconstruction strategies, and designing pavements, structures, and 
other highway elements. Longer design lives may have to be considered, 
and traditional strategies for programming maintenance and 
rehabilitation activities may have to be reevaluated to determine 
whether they adequately consider future costs, including user delay-
related costs.
    Increasing congestion on important highways in urban areas and some 
rural areas makes it critical to fully consider life-cycle costs of 
investment decisions. Safety concerns and auxiliary construction costs 
to maintain, rehabilitate, or reconstruct congested highways and 
bridges under traffic are very high. User costs and delays around work 
zones in congested areas may be even higher and represent significant 
inefficiencies that may adversely affect economic productivity, 
especially on the National Highway System (NHS). These delays can erode 
productivity gains realized by the growing number of industries using 
just-in-time and other advanced logistics strategies that depend on 
efficient and predictable transportation.
    Regardless of whether user costs are included in a formal LCCA, 
most States already implicitly consider user costs when they choose to 
pay premiums to maintain traffic through work zones or design more 
durable pavements in congested urban areas. Including user costs in 
LCCA makes these implicit considerations explicit, and may help 
identify other opportunities to reduce overall agency and user costs.
    Recognition of the high future costs to maintain and rehabilitate 
highways, bridges and tunnels, and their associated traffic control, 
safety, environmental, and hydraulic components has led to increased 
interest in the potential for LCCA to improve investment productivity 
and reduce public and private costs of highway and other transportation 
programs. The FHWA and the American Association of State Highway and 
Transportation Officials (AASHTO) jointly sponsored a symposium in 
December 1993 to learn more about LCCA practices among the States and 
to identify research, training, technical assistance, and policy-
related needs to improve LCCA application. An important input to that 
symposium was an AASHTO survey of State LCCA practices.
    Many specific LCCA issues and research needs were identified at the 
symposium. Key technical issues included how to establish the 
appropriate analysis period, how to value and properly consider user 
costs, and how to choose the appropriate discount rate. Participants 
also identified important research and data needed to predict pavement 
and bridge performance and forecast future traffic.
    An important policy issue raised at the symposium was the 
recognition that results of LCCA may favor selection of improvements 
with higher initial costs in order to achieve significant long term 
savings in overall investment requirements. It may indicate, for 
instance, that more projects warrant reconstruction rather than 
rehabilitation strategies, that early intervention with preventive 
maintenance is cost effective, or that somewhat higher designs or 
levels of service may be appropriate for some facilities. The FHWA 
recognizes that LCCA, thus, may result in proposals for greater 
expenditures up front. At the same time virtually all transportation 
agencies will continue to face budgetary limitations at least over the 
short term. Life-cycle cost analysis will help agencies identify and 
explain the real costs borne by transportation users of inadequate 
infrastructure funding. Furthermore, LCCA can assist agencies that face 
fiscal constraints in making the best use of available funds. Several 
States already use LCCA in developing network improvement programs as 
part of their pavement and bridge management systems. Eventually it is 
desirable for all States to have such capabilities.
    The following paragraphs highlight key principles of good LCCA 
practice. Applying these principles generally will allow States and 
local agencies to identify investment alternatives that will minimize 
total life-cycle costs. While their use is not mandatory in all 
instances, States are strongly encouraged to apply these principles in 
conducting life-cycle cost analyses unless there are unique 
characteristics of particular programs or projects that require 
principles to be modified. Life-cycle cost analysis, of course, is only 
one consideration in many investment decisions, but it certainly is one 
of the most important for NHS routes and other high volume roads in 
light of the costs and lost productivity associated with future 
maintenance and rehabilitation actions.
    In general there are no hard and fast rules concerning the 
appropriate length of the analysis period. The analysis period will 
vary depending on the type of improvement (bridge, versus tunnel, 
versus pavement), the location (urban versus rural), the highway system 
(NHS versus other), and the design lives of all appropriate 
alternatives. In general, longer design lives should be considered for 
improvements on the NHS and other high volume urban roadways because 
future agency and user costs associated with maintenance and 
rehabilitation activities may be so high. For pavement improvements on 
the NHS, design lives of 50 years may be reasonable while bridge and 
tunnel improvements may have design lives of 100 or more years. The 
consideration of longer design lives will require longer analysis 
periods in LCCA. Analysis periods for projects involving other modes 
generally should be long enough to cover the full life-expectancy of 
the investment--the time until facilities would have to be 
reconstructed if initially constructed to an optimum design. These 
lives would vary according to the modal alternative being examined. 
Analysis periods for all project alternatives should be the same 
length.
    The inclusion of user costs in LCCA is particularly controversial 
among some States. Part of the controversy over user costs is the fact 
that they often are many times higher than agency costs and can 
critically influence decisions. While all motorists do not value costs 
of delays as highly as do commercial travelers, the costs and lost 
productivity to businesses of delays around work zones are simply too 
high to ignore. In fact, such delays arguably have a greater impact on 
business than delays associated with inadequate capacity because 
businesses factor normal congestion costs into their plans, but delays 
around work zones generally cannot be foreseen and thus are more 
disruptive. Technical advisories to be developed on estimating user 
operating and delay costs will address this issue in greater detail.
    In addition to increased delay and vehicle operating costs, 
rehabilitation and maintenance activities may result in increased 
accident costs around work zones. Technical advisories will be 
developed to assist in estimating increases in accident rates 
associated with different types of rehabilitation and maintenance 
activities. The most comprehensive information on the costs of motor 
vehicle accidents is contained in the National Highway Traffic Safety 
Administration's publication, ``The Economic Cost of Motor Vehicle 
Crashes, 1990.'' A copy of this document is available in the public 
docket for this notice.
    The proper use of the discount rate has been an issue for LCCA, 
cost-benefit analysis and other types of economic analysis as well. 
Among the issues are the relationship between the discount rate and 
inflation, factors that affect the choice of rates, and how to 
establish rates over a long analysis period. Office of Management and 
Budget (OMB) Circular A-94, ``Guidelines and Discount Rate for Benefit-
Cost Analysis of Federal Programs,'' provides guidance on selecting 
appropriate discount rates for economic analyses. Since the choice of 
discount rate can affect relative life-cycle costs, sensitivity 
analysis may be appropriate if two or more alternatives are close in 
cost, if streams of costs and benefits among alternatives vary 
significantly over time, or if the discount rate is outside the range 
of discount rates recommended by OMB.
    The FHWA will develop training and technical assistance materials 
to address issues in LCCA. These materials should supplement guidance 
on economic analysis techniques contained in AASHTO's 1977 publication, 
``A Manual on User Benefit Analysis of Highway and Bus-Transit 
Improvements,''1 the ``Red Book,'' in the forthcoming update to 
that publication which was developed under National Cooperative Highway 
Research Program Project 7-12, and in other guidance on LCCA issues. 
While additional materials are being developed, this interim policy 
statement provides guidance on LCCA principles applicable to highway 
and structure design.
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    \1\This document is available for inspection as prescribed at 49 
CFR Part 7, Appendix D. It may be purchased from the American 
Association of State Highway and Transportation Officials, 444 N. 
Capitol Street, NW., Suite 225, Washington DC 20001. A copy also 
will be available in the public docket for this notice.
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    The FHWA is reviewing its policy on alternative bridge designs (53 
FR 21637, June 9, 1988) for consistency with this interim life-cycle 
cost analysis policy as well as with Executive Order 12893.

Policy

    The following is FHWA's LCCA policy for infrastructure investment 
analyses. It represents good practice that should be followed by States 
and local transportation agencies in making program and project 
investment decisions:
    1. Life-cycle costs are an important consideration in all highway 
investment decisions.
    2. The level of detail in LCCA should be commensurate with the 
level of investment involved and the types of alternatives being 
analyzed. Investments on the NHS generally warrant more detailed 
analysis than investments on non-NHS routes. Similarly, evaluation of 
decisions whether to reconstruct or rehabilitate a facility warrants 
more detailed analysis than consideration of alternative maintenance 
strategies.
    3. Typical life-cycle cost analysis profiles may be developed and 
used as the basis for evaluating alternatives for general types of 
improvements, such as, consideration of alternative pavement designs or 
different types of bridges on various functional class highways. Major 
programs and projects, however, often will require consideration of a 
broad range of alternative rehabilitation and reconstruction options 
and more detailed analysis of potential alternatives. The potential 
applicability and use of LCCA profiles will be discussed in greater 
detail in future technical advisories.
    4. Other factors, including budgetary, environmental, and safety 
considerations, legitimately influence highway investment decisions and 
should be considered along with the results of LCCA in evaluating 
investment alternatives. Life-cycle cost analysis principles should be 
used in conjunction with other appropriate economic analysis techniques 
in pavement and bridge management systems. Systemwide or network 
objectives as well as project level concerns should be considered in 
decisionmaking, and both levels of analysis should consider life-cycle 
costs.
    5. Analysis periods should be for the life of the facility or 
system of facilities being evaluated and should account for costs of 
foreseeable future actions. Analysis periods should not be less than 75 
years for major bridge, tunnel, or hydraulic system investments, and 
not less than 35 years for pavement investments. Longer design lives 
may be appropriate for the NHS or other major routes or corridors.
    6. All appropriate agency costs anticipated during the analysis 
period should be considered in the analysis, including traffic control 
costs during maintenance and rehabilitation, costs of special 
construction procedures required to maintain traffic, and agency 
operating costs for such things as tunnel lighting and ventilation. In 
those cases where the agency required to operate a facility is not the 
one making the investment decision, it is important for the funding 
agency to include operating costs borne by other organizations 
responsible for operating the facilities.
    7. User costs including increased vehicle operating costs, accident 
costs, and delay-related costs incurred throughout the analysis period 
should be considered in LCCA. Increased costs due to deteriorated 
riding surfaces, circuitous routings, and accidents and delays around 
and through maintenance and construction work zones are all important.
    8. 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.

    Issued on: June 30, 1994.
Rodney E. Slater,
Federal Highway Administrator.
[FR Doc. 94-16719 Filed 7-8-94; 8:45 am]
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