2009 AACE International Transactions

RISK.05

Life Cycle Cost Analysis

for Transportation Projects

Robert H. Harbuck, PE CCE CEP

ABSTRACT— Life cycle cost analysis (LCCA) is an economic assessment technique that is
used to evaluate competing infrastructure alternatives based on the estimated total cost of
ownership. LCCA takes into account all of the costs associated with a particular facility
during its entire life span, including initial capital costs, operations and maintenance cost,
replacement cost, and salvage or disposal costs. The use of LCCA gained prominence in the
1960s in response to US government agencies desire to improve the cost effectiveness of
equipment procurement. Over the intervening years, LCCA has grown in its use throughout
a number of industries, particularly in the area of building construction. The application of
LCCA to transportation infrastructure projects is relatively new when compared to other
industries and has been primarily used on highway projects to evaluate pavement and bridge
construction and rehabilitation alternatives. This paper will present a look at the state of
practice for LCCA as it pertains to the transportation industry and will also highlight some
state of the art practices that are currently being considered.

Keywords: Benchmarks, budget, cost, infrastructure, life cycle, and transportation

L
ife cycle cost analysis (LCCA) is an economic assessment technique that is used to
evaluate competing infrastructure alternatives based on the estimated total cost of
ownership. LCCA takes into account all of the costs associated with a particular
facility during its entire life span, including initial capital costs, operations and maintenance
cost, replacement cost, and salvage or disposal costs. The use of LCCA gained prominence
in the 1960s in response to US government agencies desire to improve the cost effectiveness
of equipment procurement. Over the intervening years LCCA has grown in its use
throughout a number of industries, particularly in the area of building construction. The
application of LCCA to transportation infrastructure projects is relatively new when
compared to other industries and has been primarily used on highway projects to evaluate
pavement and bridge construction and rehabilitation alternatives. This paper will present a
look at the state of practice for LCCA as it pertains to the transportation industry and will
also highlight some state of the art practices that are currently being considered.

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Budget constraints, increasing costs for maintaining transportation infrastructure, and

increased public scrutiny of government-related spending has focused the attention of many
segments of our socioeconomic system on the importance of effective management of
resources and assets.
Transportation agencies, in particular, are concerned with this issue because of a number of
factors. Some of these factors include the fact that transportation agencies rank among the
top institutions in public spending, and the impacts of their investment decisions affect
almost every member of our society. Furthermore, with an asset inventory that is under the
constant influence of numerous uncontrollable natural and man-made dynamics, and
which has an estimated value of 3 trillion dollars, there are intense pressures to provide the
best oversight and management of our transportation system. Decision-making and
management of our transportation systems must be based on informed and conversant
support. One recognized techniques that can provide such informed support, when applied
properly, is life cycle cost analysis (LCCA).

LCCA Verses Benefit-Cost Analysis (BCA)

Life-cycle cost analysis (LCCA) is a tool used to compare the total user and agency costs of
competing project alternatives. LCCA is a subset of benefit-cost analysis (BCA), which is an
economic analysis tool which looks at both benefits as well as costs in selecting optimal
projects or implementation alternatives. Because the distinction between LCCA and BCA
can be confusing, the differences between LCCA and BCA need to be understood.
Transportation agencies that use LCCA typically have already made the decision to
undertake a particular project or facility improvement and are seeking to determine the
most cost-effective means to accomplish the project’s objectives. LCCA should be applied
only to compare project implementation alternatives that will yield the same level of service
and benefits to the project user at any specific volume of traffic. LCCA, for instance, is an
appropriate tool to use when comparing two alternatives to replace a bridge that has reached
the end of its service life, where each design alternative will result in the same level of
service to the user. Costs measured in LCCA typically include expenses to the state or local
agency, such as construction, operation, and maintenance costs. As a matter of best
practice, LCCA should also include costs impacting the users of the project facility;
especially costs associated with increased congestion and reduced safety experienced during
project construction and maintenance.
Unlike LCCA, BCA considers the benefits of an improvement, as well as its costs, and
therefore can be used to compare design alternatives that do not yield identical benefits
(e.g., bridge replacement alternatives that vary in the level of traffic they can accommodate),
as well as being used to compare projects that accomplish different objectives (e.g., a road
realignment versus a widening project). Moreover, BCA can be used to determine whether
or not a project should be undertaken at all (i.e., whether the project’s life-cycle benefits will
exceed its life-cycle costs).

Benefits measured in BCA are typically those associated with the desired results of the
project (i.e., the reasons for undertaking the project), and may include shorter travel
distance or time, reduced vehicle operating costs, improved safety, and other benefits to

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facility users. Other effects of a project that may be considered involve emissions and noise,
which affect project nonusers as well as users, and are often referred to as “externalities.”
In summary, LCCA is a cost-centric tool that can be used to select the most cost-effective
alternative for an approved project where the level of benefit is assumed equal among each
project alternative being considered. BCA is the appropriate tool to use when design
alternatives will not yield equal benefits, such as when unlike projects are being compared
or when a decision-maker is considering whether or not to undertake a project.

Historical Basis for LCCA for Transportation Projects

LCCA was first articulated during the 1930s as part of federal legislation related to flood
control projects. LCCA as a concept was first introduced in highway projects beginning in
the 1950s. The works of the economist Robley Winfrey in the ‘60s and the American
Association of State Highway Officials (AASHO’S) “Red Book” of 1960 ushered in the
concept of life cycle cost analysis to the transportation industry. At the time, there was not
enough sufficient information available to perform comprehensive and reliable LCCA.
Extensive research started as a result. The research focused on issues like information
gathering and integration, but for the most part, aimed at quantifying the user cost and
vehicle operating cost by conducting field experiments.

In 1984 the National Cooperative Highway Research (NCHRP) commenced project

number 20-5 FY 1983 with the aim of promoting LCCA. This project investigated the state
of the practice of LCCA in transportation agencies at the time and examined the different
criteria and parameters of the process. The American Association of State Highways and
Transportation Officials (AASHTO), in their Pavement Design Guides of 1983 and 1993,
endorsed the use of LCCA as a means for economic evaluation and as a decision support
tool.

The Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991, called for “the use
of life cycle costs in the design and engineering of bridges, tunnels, or pavement,”, both for
metropolitan and statewide planning. Subsequently, the National Highway System (NHS)
Designation Act of 1995 mandated the states to perform LCCA on NHS projects costing
$25 million or more. In 1996, the Federal Highway Agency released its Final Policy
statement on LCCA.

The Transportation Equity Act for the 21st Century (TEA-21) of 1998, which replaced the
ISTEA 1991, removed the requirement for State Highway Agencies to perform LCCA on
NHS projects of $25 million or more, however, the same act continued the endorsement of
LCCA by requiring the Secretary of Transportation to authorize research and development
for LCCA enhanced implementation. Demonstration Project 115 “Life-Cycle Cost
Analysis in Pavement Design”, carried out by FHWA in 1998, developed an instructional
LCCA workshop that has since been presented in various states many times. In the year
2000, within FHWA, LCCA came under the charge of the Office of Asset Management.
Research commissioned by State Highway Agencies and other interested partners continues
to be conducted on a broad scale and covers LCCA in the context of planning and

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management for transportation projects, as well as other aspects, such as data collection and
integration, the element of uncertainty, and the boundless topic of related user costs.

GENERAL LCCA METHODOLOGY

Life cycle cost analysis is a systematic process used for evaluating projects involving various
impacts that stretch over long periods of time. The process is performed by summing up the
monetary equivalency of all benefits and costs at their respective time of occurrence
throughout the analysis period. These costs are then converted into a common time
dimension so that different alternatives may be compared properly.
Economic Benchmarks
In the economic evaluation of projects, there are several types of economic benchmarks that
can be used for the analysis results. The most common of these are Net Present Value
(NPV), Cost-Benefit Ratio (B/C), Equivalent Uniform Annual Costs (EUAC), and Internal
Rate of Return (IRR). The basic formula for each of these benchmarks is shown in table 1.

Table 1—Basic Benchmark Formula

The choice of the appropriate benchmark depends largely on the level and context of the
analysis and may also depend on the degree of uncertainty in some of the input parameters.
For example, for projects that are evaluated in developing countries where there is a lot of
uncertainty in the discount rate, the IRR is a preferred benchmark. On the other hand,
when the analysis period of the project is unknown or if the project is expected to last
indefinitely, then EUAC is considered to be a better benchmark since EUAC equations are
derived with the assumption that the project will last indefinitely.

In principle, the choice of the economic benchmark should be based on the following
questions:

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• Are benefits included in the analysis?

• What is the level of decision-making and/or analysis involved?
• What methods suit the requirements of the particular agency involved?
• How important is the initial capital investment in comparison to future expenditure?
• What method of analysis is the most understandable to the decision-maker?

Since most LCCA aims at evaluating project alternatives that result in equal categorical
benefits but involve unequal costs, the net present value (NPV) is considered the
appropriate (and the prevalent) benchmark for comparing transportation alternatives. The
NPV benchmark, with its additive function, allows the analyst to account for only
differential costs (or benefits) and, at the same time, maintain consistency in the evaluation
process. This characteristic reduces the computations needed in the analysis tremendously.
All costs or benefits that are known (or assumed) to be equal between alternatives do not
need to be evaluated. Many LCCA guidelines restrict these costs to the initial construction
cost, rehabilitation cost, annual maintenance cost, and salvage value (considered negative)
by assuming that all user and societal costs are equal between alternatives.

LCCA Process
The LCCA process can be outlined in the following steps:
1. Define project’s alternatives.
2. Decide on the approach: probabilistic vs. deterministic.
3. Choose general economic parameters: discount rate, analysis period.
4. Establish expenditure stream for each alternative:
a. Design rehabilitation strategies and their timings.
b. Estimate differential agency costs.
c. Estimate differential user costs.
d. Estimate differential societal costs.
5. Compute net present value for each alternative.
6. Compare and interpret results / sensitivity analysis.
7. Re-evaluate design strategies if needed.

Step 1: Define Project’s Alternatives

This is the first step in the LCCA process. Potential life cycle design strategies for a given
project should be identified. Each design strategy should specify initial design and
performance criteria, time-dependent rehabilitation/treatment activities, and the timings of
these rehabilitation activities. Also, at this point, common costs between different strategies
can be identified.

Step 2: Decide on the Approach: Deterministic vs. Probabilistic

By way of definition, the deterministic approach uses point estimates for all input variables
in the analysis, whereas the probabilistic approach uses probability distributions for all
unsure variables and therefore addresses the inherent uncertainty in the analysis. The
decision on whether or not to use a deterministic approach verses a probabilistic approach is
often based on the background and experience of those involved in performing the LCCA.

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Step 3: Choose General Economic Parameters

General economic parameters needed for LCCA include the discount rate and the analysis
periods. Both of these parameters should be equal for all options that are evaluated. The
following is a brief description of each of these parameters:

Discount Rate
One of the key features in the LCCA process is accounting for future costs. The treatment of
future costs is based on a well-established principle in economics regarding the time value
of money, which is to say that the value of a dollar in the future will be worth less than the
value of that same dollar today. The procedure that is commonly used to convert future
costs and benefits into a common time dimension is referred to as discounting. Discounting
is performed by employing a discount rate that represents the percent change in the value of
a dollar for a given period of time.

The discount rate is one of the most sensitive parameters in LCCA. The value that is
selected for this rate can have a great effect on the final outcome. A low discount rate tends
to favor projects that have larger initial capital investments while high discount rates tend to
favor projects that have larger future costs. This sensitivity can be seen in figure 1.

Figure 1—Sensitive Discount Rate Parameter in LCCA

Figure 1 illustrates the sensitivity of this parameter by plotting the present value of the dollar
throughout future periods using three different discount rates: 5 percent, 10 percent, and 15
percent. One dollar after 10 years from today is worth $0.61 today using a 5 percent
discount rate, $0.38 using 10 percent, and $0.25 using 15 percent.

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The Analysis Period

The analysis period is the time frame that is chosen over which the design alternatives will
be analyzed in LCCA. Conceptually, this period should represent the useful life of the
associated facilities/assets affected by the decision, or in other words, the period over which
the project will be in operation.

Most transportation projects are expected to be in operation for as long as they are needed or
for an indefinite period of time. For example, when planning for an interstate highway we
would not plan on the project being used for a specific period of time after which the
highway would be demolished and its right-of-way transferred back for other uses. In such
cases, the analysis period chosen for conducting LCCA is typically estimated by the service
life of the most durable component of the facility, which is often the component that carries
the highest portion of the initial cost. The selection of the analysis period should be long
enough to reflect long-term differences between competing design and rehabilitation
strategies and may contain several maintenance and rehabilitation activities. This concept is
shown graphically in figure 2.

Figure 2—Options for Analysis Period Selection

When options involving facilities with different economic lives are being compared based
on their life cycle cost, it is generally recommended that the analysis period be set the same
for all options and that this period should equal the useful life of the most durable option.

Step 4: Establish Expenditure Stream (Costs) for Each Alternative

Expenditure stream diagrams should be constructed for each alternative. These diagrams
lay out the design strategies, including scope, and timing for each activity, with associated
agency, user, and societal costs shown in real dollars for each year of the analysis period.
Figure 3 shows a typical expenditure stream diagram.

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Figure 3—A Typical Expenditure Stream

Costs
The basic theory behind using an economic evaluation technique such as LCCA is that all
the impacts of a project can be accounted for and converted to a monetary value so that
comparisons between project alternatives can be made directly. As mentioned previously,
net present value (NPV) and equivalent annual uniform cost (EAUC) are the most
common economic benchmarks used for evaluating alternatives of transportation projects
that have similar benefits and similar costs. The costs that are included in LCCA can be
tangible and intangible, current or future, and can be borne by the agency, by the user of
the facility, or by society as a whole. The following are some basic definitions for each of
these types of cost.

Tangible and Intangible Costs: The tangible costs are the “real” out-of-pocket costs,
sometimes considered as the project’s expenditures. On the other hand, the intangible costs
are the costs encountered as a result of implementing the project but are incurred indirectly
and are not necessarily out-of-pocket. The cost of time delay is one example of such costs in
transportation projects. Tangible and intangible costs are estimated through different
approaches. Tangible costs can be estimated based on their available market values whereas
intangible costs require monetary valuation techniques of their measurable criteria (i.e. cost
of time, cost of noise, etc.).

Current and Future Costs: The current costs are the costs that are expected to be incurred
at the present time, prior to project implementation, while future costs are the costs that are
expected to be incurred at some point during the analysis period.

Agency, User, and Social Costs: This classification is based on the definition of which
entity is responsible for bearing the costs. Even though the theory behind LCCA does not

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implicate any differential treatment for these types of costs, LCCA practice is to calculate
them separately so that they may be presented to decision-makers, which may weigh them
differently. For example, agency costs are generally given a greater larger weight than user
costs when evaluating alternatives that are considered close. Figure 4 presents a breakdown
of the various costs under this classification:

Figure 4—Classification of Costs Breakdowns

Step 5: Compute Net Present Value for Each Alternative

After constructing the expenditure stream, computing the NPV of each alternative becomes
a straightforward calculation. It is advisable to compute the agency, user, and societal costs
separately before combining them to arrive at the total value of a project, in order to better
understand the contribution that each cost category has on the total final cost.

Step 6: Compare and Interpret Results/Sensitivity Analysis

Once NPV for each alternative is computed, with agency, user, and societal costs presented
separately, interpretation of these results can be made. Generally, an alternative is preferred
if its NPV is a minimum of 10 percent less than the NPV of other competing alternatives. If
the difference between the NPV of alternatives is less than 10 percent, then such alternatives

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are considered similar or equivalent. When a deterministic approach is chosen for the
analysis, as opposed to the probabilistic approach, than sensitivity analysis should also be
conducted. A sensitivity analysis evaluates the effect of variability in the main input
parameters to the overall results. Sensitivity analysis is typically done by performing an
analysis over a range of possible values of a particular parameter while holding all other
parameters constant. Such analysis can give decision-makers a better representation of the
LCCA comparison and help rule out bias toward certain alternatives.

The following parameters should be tested for sensitivity in the analysis:

• the discount rate;

• timing of future rehabilitation activities;
• costs of the major construction components; and,
• analysis period.

Step 7: Re-evaluate Design Strategies If Needed

Presenting results and analyzing them can help the process of re-assessing competing design
strategies, whether in regards to scope, timing, or other factors. Sometimes minor
alterations of the design strategies can lead to a better choice for the project.

LCCA STATE OF THE PRACTICE

A recent survey of 22 state DOT indicates that approximately 30 percent of these agencies
do not currently use LCCA in any form. This lack of use can be partially explained by an
expressed level of mistrust and criticism of the validity of the LCCA process. In order for
the LCCA process to be better understood, and hopefully gain wider acceptance, the
weaknesses and strengths of LCCA need to be understood in their proper context. Of the
approximate 70 percent of agencies that do indicate a use of LCCA, the following describes
the state of the practice with regards to several of the major components of LCCA.

Discount Rate
The US federal government had set a general guidance on the values to be used for the
discount rate in the OMB Circular 94-A titled: “Guidelines and Discount Rates for Benefit-
Cost Analysis of Federal Programs.” The circular recommends using discount rates that
correspond to the rate of return that the government offers on treasury notes and bonds such
that the maturity dates of these notes corresponds to the analysis period of the project under
evaluation. The Federal Highway Interim Technical Report on LCCA for pavement
investment suggests that the choice of discount rate should reflect historical trends in the
discount rate over long periods of time and suggests using the rate of return on Inflation
Protected Securities as a good measure of the opportunity cost of the public at large.

The actual state-of-the-practice regarding the choice of a discount rate within transportation
agencies tends to follow the guidance provided by OMB 94-A. The survey results show that
the discount rate employed by state DOT generally ranged between 3 percent and 5 percent
with an average of 4 percent.

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Analysis Period
One of the focal points of LCCA is establishing the proper time frame to use for the
analysis. This time frame consists of two components in LCCA:

• The analysis period

• The timing of future maintenance (reconstruction, rehabilitation, resurfacing, and
restoration) activities.

Different types of projects necessitate different analysis periods. In the transportation sector,
projects are classified under three main categories: pavement projects, bridge projects and
the recently introduced ITS projects. Each of these categories tends to use a different
analysis periods for LCCA.

The FHWA recommends that the analysis periods should not be less than 75 years for major
bridge, tunnel, or hydraulic system investment and not less than 35 year for a pavement
investment. It further encourages the use of longer analysis periods for the NHS or other
major routes or corridors. The FHWA also suggests that it might be appropriate to deviate
from the recommended minimum 35-years analysis period for pavement projects when
slightly shorter periods could simplify salvage value computations. It further recommends a
shorter analysis period (i.e. 10 years) when analyzing pavement rehabilitation/reconstruction
projects. The recommended analysis period for new pavements is between 25 and 40 years
and between 5 and 15 for rehabilitation alternatives.

Based on recent surveys, 57 percent of transportation agencies established a preset value for
the analysis period when evaluating new pavement projects. These preset values ranged
between 30 years and 50 years. 43 percent of agencies say they determine the analysis
period on a project-by-project basis.

Rehabilitation Timings
The second component in the time factor is the timings of future maintenance activities.
The treatment of this component is different from the analysis period. This parameter is
one of the more uncertain and sensitive parameters in the LCCA process. Future activities
can be classified as follows:

• Cyclic activities: This covers the activities that take place on a cyclical basis like
annual maintenance and user costs/activities during normal operations. Generally
the timing of these activities corresponds to the time cycles, which is taken as
incremental number of years in LCCA.
• Non-cyclic activities: This covers all rehabilitation, restoration, and resurfacing
activities. The main factor that should affect the timing of these activities is the
pavement condition. In practice, there are often external factors that affect the
actual timings of these activities such as resources constraints within an agency. For
these reasons, the timings of these activities are among the most important yet
uncertain parameters in LCCA.

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In practice there are three ways to determine the timing of non-recurring future activities in
LCCA. The most conventional method is to use engineering judgment and expert opinion
when performing the initial design. This is usually done on a project-by-project basis where
the designer would estimate the rehabilitation strategy for each alternative under evaluation.
Many transportation agencies have devised their standard rehabilitation strategies on the
basis of past practice within the agency. Such strategies generally specify the type and
timing of treatment that should be performed throughout the lifetime of the facility. Some
agencies have established their standard strategies using their expert opinions and
experiences explicitly. Others developed these strategies based on statistical analysis of the
information gathered in their pavement management system databases. These databases
record the location, type, and timing of every activity. A probability distribution of the
rehabilitation timing is then constructed for each type of pavement and for each type of
rehabilitation activity that is generally performed. This method is useful for accounting for
the variability of these timings. However, for this approach to be correct, the recorded
lifecycle strategies should cover as many projects as possible and should depict the whole
lifetime of these pavement projects accurately. In precise terms, these records have to not
only indicate the timing of rehabilitation, but also the type and the order of the
rehabilitation activity. Generally, some agencies might find this approach difficult to employ
mostly because of imperfect databases in their pavement management systems. The third
approach, which is recommended and researched extensively in academia, is to estimate
rehabilitation timings based on empirical or empirical-mechanistic models that predict
pavement deterioration. These models are generally a function of many factors that affect
the condition of the pavement, such as traffic, vehicle loading, traffic growth factor,
environmental factors, pavement classification, original design characteristics, and
pavement age. The future rehabilitation timings are determined by calculating the time/age
at which the pavement condition will reach the minimum acceptable threshold.

While LCCA has become a common economic evaluation tool in some industries, its
record of use in the area of transportations projects is still sporadic at best. Like many other
“theoretical” process that have been proposed before, there is always a lag between what the
“models” tell us and what we may see in the field. While LCCA should never be the only
criterion that is used to make a decision about competing design strategies, it should be
considered, along with other important benchmarks, as part of a comprehensive set of
decision making tools.

RECOMMENDED READING
1. Hawk, H. “Bridge Life Cycle Cost Analysis.” National Cooperative Highway
Research Report 483, Transportation Research Board, Washington, DC. 2002.
2. Office of Asset Management, “Life Cycle Cost Analysis Primer.” Federal Highway
Administration, Washington, DC. 2002.
3. Office of Management and Budget, “Guidelines and Discount Rates for Benefit-
Cost Analysis of Federal Programs”, Circular No. A-94, Revised, Transmittal
Memo No. 64, October 29, 1992.
4. Ozbay, K., N.A. Parker, D. Jawad and S. Hussain, “Guidelines for Life Cycle Cost
Analysis, Final Report,” Federal Highway Administration, Washington, DC. 2003.

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5. “Procedures for Estimating Highway User Costs, Air Pollution, and Noise
Effects,” National Cooperative Highway Research Report 133, Transportation
Research Board, Washington, D.C.
6. Winfrey, R., “Economic Analysis for Highways,” International Textbook Company,
copyright 1969.

ABOUT THE AUTHOR

Robert H. Harbuck, PE, CCE CEP

Senior Estimator
Parsons Brinckerhoff
100 East Pine St., Suite 500
Orlando, FL 32801
USA
Phone: +1.407.5877826
Email: Harbuck@pbworld.com

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