[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]


-----------------------------------------------------------------------

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


Life-Cycle Cost Analysis

AGENCY: Federal Highway Administration (FHWA), Department of 
Transportation.

ACTION: Final policy statement.

-----------------------------------------------------------------------

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]
BILLING CODE 4910-22-P