Guidelines for Life Cycle Cost Analysis

FINAL REPORT

July 2003

Submitted by

NJDOT Research Project Manager Nicholas Vitillo

Dr. Kaan Ozbay* Associate Professor

Dr. Neville A. Parker**Professor

Dima Jawad* Graduate Research Assistant

Sajjad Hussain** Graduate Research Assis

*Department of Civil & Environmental Engineering Center for Advanced Infrastructure & Transportation (CAIT)

Rutgers, The State University of New Jersey Piscataway, NJ 08854, 8014

**Department of Civil Engineering

City College of The City University of New York Convent Avenue & 138th Street, NY 10031

In cooperation with

New Jersey Department of Transportation

Division of Research and Technology and

U.S. Department of Transportation Federal Highway Administration

FHWA-NJ-2003-012

tant

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The contents of this report reflect the views of the authors, who are responsible for the facts and the accuracy of the

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July 2003

CAIT/Rutgers/CUNY

Final Report 6/9/2000-6/30/2003

FHWA-NJ-2003-012

New Jersey Department of Transportation CN 600 Trenton, NJ 08625

Federal Highway Administration U.S. Department of Transportation Washington, D.C.

Life Cycle Cost Analysis (LCCA) is an indispensable technique that employs well-established principles of economic analyses to evaluate long term performance of competing investment options. The LCCA process is performed by summing up the discounted monetary equivalency of all benefits and costs that are expected to be incurred in each option. The investment option that yield the maximum gains to the society is considered the optimal option. The analytical framework of LCCA further serves as a support system for making informed and conversant choices in infrastructure management. This report summarizes a thorough research that establishes the guidelines for conducting LCCA. Most of the LCCA input parameters are inherently uncertain, such as the discount rate, the analysis period, and the type and timing of future rehabilitation activities that will take place in each of the life cycle options. In order to conduct LCCA in a reliable and trustworthy manner, a thorough understanding of the theoretical engineering and economics background must be acquired. The report starts by setting LCCA in its broad perspective. It reviews the economic theory of LCCA, discusses the types and levels of analysis in project evaluation, and briefly goes over the historical background of LCCA. Next a systematic and generic approach for conducting LCCA is presented. Then, a discussion about the state-of-the-practice of LCCA in State DOTs in comparison with state-of-the-art of LCCA is introduced. After that, detailed discussions of every component of LCCA are provided. The uncertainty component in LCCA is deliberated along with the probabilistic approach. A review of the available and significant LCCA models is presented as well. Towards the end, the report discusses a distinct application of LCCA in monitoring contractors pay schedule. The LCCA guidelines, presented in this report, aim mainly at providing the reader with sufficient knowledge onhow to perform LCCA, how to estimate its input parameters, and how to interpret its results.

Life Cycle Cost Analysis Monte Carlo

Simulation User Costs

Unclassified Unclassified

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FHWA-NJ-2003-012

Dr. Kaan Ozbay, Dr. Neville A. Parker, Dima Jawad, Sajjad Hussain

Guidelines for Life Cycle Cost Analysis

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TABLE OF CONTENTS

EXECUTIVE SUMMARY............................................................................................................ 1

CHAPTER 1: INTRODUCTION................................................................................................. 3 FINANCIAL ANALYSIS VERSUS ECONOMIC ANALYSIS...........................................................................................................3 THE SYSTEMS METHOD ..............................................................................................................................................................4 LEVELS OF ANALYSIS..................................................................................................................................................................4 LCCA HISTORICAL BACKGROUND...........................................................................................................................................7

CHAPTER 2: GENERAL METHODOLOGY........................................................................... 9

ECONOMIC INDICATORS..............................................................................................................................................................9 LCCA PROCEDURE ...................................................................................................................................................................11 LCCA STATE-OF-THE-PRACTICE VERSUS STATE-OF-THE-ART .........................................................................................15

CHAPTER 3: UNCERTAINTIES AND RELIABILITIES .....................................................20 THE PROBABILISTIC APPROACH..............................................................................................................................................22 RECOMMENDATIONS.................................................................................................................................................................24

CHAPTER 4: THE DISCOUNT RATE...................................................................................27 CONCEPTUAL OUTLOOK...........................................................................................................................................................27 DISCOUNT RATE PHILOSOPHIES..............................................................................................................................................30 STATE-OF-THE-PRACTICE .........................................................................................................................................................31 RECOMMENDATIONS FOR T HE REAL DISCOUNT RATE.........................................................................................................33 INFLATION...................................................................................................................................................................................34

CHAPTER 5: TIME FACTOR..................................................................................................36 THE ANALYSIS PERIOD .............................................................................................................................................................36 FEDERAL GUIDANCE AND STATE-OF-THE-PRACTICE...........................................................................................................37 RECOMMENDATIONS FOR T HE SELECTION OF ANALYSIS PERIOD......................................................................................39 REHABILITATION TIMINGS .....................................................................................................................................................40 RECOMMENDATIONS.................................................................................................................................................................43

CHAPTER 6: COSTS...............................................................................................................46

AGENCY COSTS...........................................................................................................................................................................47 USER COSTS................................................................................................................................................................................48 SOCIAL COSTS............................................................................................................................................................................51

CHAPTER 7: SOFTWARE PACKAGES