Engineering Economic Analysis Practices for Highway Investment

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NATIONAL
COOPERATIVE
HIGHWAY
RESEARCH
NCHRP PROGRAM
SYNTHESIS 424
Engineering Economic
Analysis Practices for
Highway Investment
A Synthesis of Highway Practice
NCHRP Synthesis 424 TRB
TRANSPORTATION RESEARCH BOARD 2012 EXECUTIVE COMMITTEE*
OFFICERS
Chair: Sandra Rosenbloom, Professor of Planning, University of Arizona, Tucson
Vice Chair: Deborah H. Butler, Executive Vice President, Planning, and CIO, Norfolk Southern Corporation, Norfolk, VA
Executive Director: Robert E. Skinner, Jr., Transportation Research Board
MEMBERS
J. Barry Barker, Executive Director, Transit Authority of River City, Louisville, KY
William a.V. Clark, Professor of Geography and Professor of Statistics, Department of Geography, University of California, Los Angeles
eugene a. Conti, Jr., Secretary of Transportation, North Carolina DOT, Raleigh
James m. Crites, Executive Vice President of Operations, Dallas-Fort Worth International Airport, TX
Paula J. C. Hammond, Secretary, Washington State DOT, Olympia
miCHael W. HanCoCk, Secretary, Kentucky Transportation Cabinet, Frankfort
CHris t. HendriCkson, Duquesne Light Professor of Engineering, Carnegie-Mellon University, Pittsburgh, PA
adiB k. kanafani, Professor of the Graduate School, University of California, Berkeley
gary P. lagrange, President and CEO, Port of New Orleans, LA
miCHael P. leWis, Director, Rhode Island DOT, Providence
susan martinoViCH, Director, Nevada DOT, Carson City
Joan mcdonald, Commissioner, New York State DOT, Albany
miCHael r. morris, Director of Transportation, North Central Texas Council of Governments, Arlington
neil J. Pedersen, Consultant, Silver Spring, MD
traCy l. rosser, Vice President, Regional General Manager, Wal-Mart Stores, Inc., Mandeville, LA
Henry g. (gerry) sCHWartz, Jr., Chairman (retired), Jacobs/Sverdrup Civil, Inc., St. Louis, MO
BeVerly a. sCott, General Manager and CEO, Metropolitan Atlanta Rapid Transit Authority, Atlanta, GA
daVid seltzer, Principal, Mercator Advisors LLC, Philadelphia, PA
kumares C. sinHa, Olson Distinguished Professor of Civil Engineering, Purdue University, West Lafayette, IN
tHomas k. sorel, Commissioner, Minnesota DOT, St. Paul
daniel sPerling, Professor of Civil Engineering and Environmental Science and Policy; Director, Institute of Transportation Studies;
and Acting Director, Energy Efficiency Center, University of California, Davis
kirk t. steudle, Director, Michigan DOT, Lansing
douglas W. stotlar, President and CEO, Con-Way, Inc., Ann Arbor, MI
C. miCHael Walton, Ernest H. Cockrell Centennial Chair in Engineering, University of Texas, Austin
EX OFFICIO MEMBERS
reBeCCa m. BreWster, President and COO, American Transportation Research Institute, Smyrna, GA
anne s. ferro, Administrator, Federal Motor Carrier Safety Administration, U.S.DOT
leroy gisHi, Chief, Division of Transportation, Bureau of Indian Affairs, U.S. Department of the Interior, Washington, DC
JoHn t. gray ii, Senior Vice President, Policy and Economics, Association of American Railroads, Washington, DC
JoHn C. Horsley, Executive Director, American Association of State Highway and Transportation Officials, Washington, DC
miCHael P. Huerta, Acting Administrator, Federal Aviation Administration, U.S.DOT
daVid t. matsuda, Administrator, Maritime Administration, U.S.DOT
miCHael P. melaniPHy, President and CEO, American Public Transportation Association, Washington, DC
ViCtor m. mendez, Administrator, Federal Highway Administration, U.S.DOT
tara o’toole, Under Secretary for Science and Technology, U.S. Department of Homeland Security, Washington, DC
roBert J. PaPP (adm., u.s. Coast guard), Commandant, U.S. Coast Guard, U.S. Department of Homeland Security, Washington, DC
CyntHia l. Quarterman, Administrator, Pipeline and Hazardous Materials Safety Administration, U.S.DOT
Peter m. rogoff, Administrator, Federal Transit Administration, U.S.DOT
daVid l. striCkland, Administrator, National Highway Traffic Safety Administration, U.S.DOT
JosePH C. szaBo, Administrator, Federal Railroad Administration, U.S.DOT
Polly trottenBerg, Assistant Secretary for Transportation Policy, U.S.DOT
roBert l. Van antWerP (lt. gen., u.s. army), Chief of Engineers and Commanding General, U.S. Army Corps of Engineers,
Washington, DC
Barry r. Wallerstein, Executive Officer, South Coast Air Quality Management District, Diamond Bar, CA
gregory d. Winfree, Acting Administrator, Research and Innovative Technology Administration, U.S.DOT
*membership as of february 2012.
NAT IONAL COOPERAT IVE H IGHWAY RESEARCH PROGRAM
NCHRP SYNTHESIS 424
Engineering Economic
Analysis Practices for
Highway Investment
A Synthesis of Highway Practice
conSultant
MicHAEl J. MArkow
Teaticket, Massachusetts
SubScriber categorieS
Administration and Management • Economics • Highways
Research Sponsored by the American Association of State Highway and Transportation Offcials
in Cooperation with the Federal Highway Administration
TRANSPORTATION RESEARCH BOARD
WASHINGTON, D.C.
2012
www.TRB.org
NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM NCHRP SYNTHESIS 424
Systematic, well-designed research provides the most effective Project 20-05, Topic 41-03
ISSN 0547-5570
approach to the solution of many problems facing highway
ISBN 978-0-309-22343-0
administrators and engineers. Often, highway problems are of local
Library of Congress Control No. 2011943707
interest and can best be studied by highway departments
individually or in cooperation with their state universities and © 2012 National Academy of Sciences. All rights reserved.
others. However, the accelerating growth of highway transportation
develops increasingly complex problems of wide interest to
highway authorities. These problems are best studied through a COPYRIGHT INFORMATION
coordinated program of cooperative research.
Authors herein are responsible for the authenticity of their materials and for
In recognition of these needs, the highway administrators of the
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NCHRP COMMITTEE FOR PROJECT 20-05 COOPERATIVE RESEARCH PROGRAMS STAFF
CHRISTOPHER W. JENKS, Director, Cooperative
CHAIR Research Programs
CATHERINE NELSON, Oregon DOT CRAWFORD F. JENCKS, Deputy Director, Cooperative Research
Programs
MEMBERS NANDA SRINIVASAN, Senior Program Offcer
KATHLEEN S. AMES, Michael Baker, Jr., Inc. EILEEN P. DELANEY, Director of Publications
STUART D. ANDERSON, Texas A&M University
BRIAN A. BLANCHARD, Florida DOT SYNTHESIS STUDIES STAFF
CYNTHIA J. BURBANK, PB Americas, Inc. STEPHEN R. GODWIN, Director for Studies and Special Programs
LISA FREESE, Scott County (MN) Community Services Division JON M. WILLIAMS, Program Director, IDEA and Synthesis Studies
MALCOLM T. KERLEY, Virginia DOT JO ALLEN GAUSE, Senior Program Offcer
RICHARD D. LAND, California DOT GAIL R. STABA, Senior Program Offcer
JOHN M. MASON, JR., Auburn University DONNA L. VLASAK, Senior Program Offcer
ROGER OLSON, Minnesota DOT TANYA M. ZWAHLEN, Consultant
ROBERT L. SACK, New York State DOT DON TIPPMAN, Senior Editor
FRANCINE SHAW-WHITSON, Federal Highway Administration CHERYL KEITH, Senior Program Assistant
LARRY VELASQUEZ, JAVEL Engineering, Inc. DEMISHA WILLIAMS, Senior Program Assistant
DEBBIE IRVIN, Program Associate
FHWA LIAISON
JACK JERNIGAN TOPIC PANEL
MARY LYNN TISCHER LEIGH BOSKE, University of Texas–Austin
NORMAN S. J. FOSTER, City of New Orleans
TRB LIAISON MARTINE A. MICOZZI, Transportation Research Board
STEPHEN F. MAHER DOUGLAS S. McLEOD, Florida Department of Transportation
PEGGY TADEJ, Northern Virginia Regional Commission, Fairfax
CHRIS WILLIGIS, System Metrics Group, San Francisco, CA
RICHARD Y. WOO, Maryland State Highway Administration
NATHANIEL D. COLEY, JR., Federal Highway Administration
(Liaison)
NADARAJAH “SIVA” SIVANESWARAN, Federal Highway
Administration, McLean, VA
ACKNOWLEDGMENTS
The development of the case examples in chapter three and the and Kumiko Izawa, Traffc and Collision Analysis Engineer, all with
implementation guidelines in chapter four would not have been pos- the Capital Program Development & Management Offce, Washington
sible without the cooperation of knowledgeable state transportation State DOT for the Planning and Programming: Mobility and Safety
and FHWA personnel. Twenty-fve responses to the synthesis screen- Projects case; Michael B. Johnson, Chief, Offce of Specialty Investiga-
ing survey helped guide the selection of case examples. The author tions & Bridge Management, Structure Maintenance & Investigations,
is indebted to those state DOTs and FHWA division offces listed in California DOT for the Bridge Project Programming and Permitting
Appendix C that participated in the screening survey. Their responses case; Louis H. Adams, Acting Director, System Performance & Asset
to the questionnaire refected a degree of time and thought that sig- Management Bureau, New York State DOT for the Economics-Based
naled their understanding of the importance of this synthesis topic. Tradeoff Analysis case; Robert R. Locander, Pavement Design Engi-
Valuable help in identifying case examples and in suggesting key neer, Materials and Geotechnical Branch, Colorado DOT for the Pave-
agency contacts was also provided by members of the 41-03 Topic ment Type Selection case; Thomas Van, FHWA; Kurt Lieblong, State
Panel, the TRB Transportation Economics Committee (ABE20), and Production Support Engineer, Florida DOT; and Troy Tusup, Value
the TRB Asset Management Committee (ABC40). The author thanks Analysis Program Manager, California DOT for the Value Engineering
all of these individuals for their time, perspectives, and contributions to case; and John L. Wilson, Economic Policy Analyst, Offce of Capital
formulating this synthesis. The author further acknowledges with grati- Programs and Performance Measures, Minnesota DOT for the Accel-
tude the cooperation of Douglass B. Lee, Jr., Chair of TRB Committee eration of Project Delivery case; with earlier contributions provided by
ABE20, and Kathryn Zimmerman, Chair of TRB Committee ABC40, Abigail McKenzie, (formerly) Director, Offce of Investment Manage-
in willingly scheduling a presentation on this synthesis at their respec- ment (now retired); and Ed Idzorek, Offce of Capital Programs and
tive committee meetings. Performance Measures, Minnesota DOT.
Managers in the several case-example agencies took the additional Members of the Washington State DOT also provided signif-
time to defne and describe their proposed case, send documentation cant information for chapter four on implementation. The author
of relevant information, participate in follow-up telephone interviews, acknowledges with thanks and appreciation the contributions of the
and review drafts of their respective cases. A heartfelt nod of appre- following WSDOT managers: Pat Morin, Manager, Systems Analy-
ciation and gratitude goes to the following managers who contributed sis & Programming, WSDOT Capital Program Development & Man-
so positively to the case examples: Mark Seaman, Senior Economist, agement Offce; and Jeff S. Uhlmeyer, State Pavement Engineer,
Port Authority of New York and New Jersey, for the Critical Interstate and Mark Russell, State Pavement Design Engineer, State Materials
Transportation Facilities case; Pat Morin, Manager, Systems Analysis & Laboratory-Pavements Division, WSDOT Environmental and Engi-
Programming; Faris Al-Memar, Manager, System Analysis & Planning; neering Programs.
FOREWORD Highway administrators, engineers, and researchers often face problems for which infor-
mation already exists, either in documented form or as undocumented experience and prac-
tice. This information may be fragmented, scattered, and unevaluated. As a consequence,
full knowledge of what has been learned about a problem may not be brought to bear on its
solution. Costly research fndings may go unused, valuable experience may be overlooked,
and due consideration may not be given to recommended practices for solving or alleviat-
ing the problem.
There is information on nearly every subject of concern to highway administrators and
engineers. Much of it derives from research or from the work of practitioners faced with
problems in their day-to-day work. To provide a systematic means for assembling and
evaluating such useful information and to make it available to the entire highway commu-
nity, the American Association of State Highway and Transportation Offcials—through
the mechanism of the National Cooperative Highway Research Program—authorized
the Transportation Research Board to undertake a continuing study. This study, NCHRP
Project 20-5, “Synthesis of Information Related to Highway Problems,” searches out
and synthesizes useful knowledge from all available sources and prepares concise, docu-
mented reports on specifc topics. Reports from this endeavor constitute an NCHRP
report series, Synthesis of Highway Practice.
This synthesis series reports on current knowledge and practice, in a compact format,
without the detailed directions usually found in handbooks or design manuals. Each report
in the series provides a compendium of the best knowledge available on those measures
found to be the most successful in resolving specifc problems.
PREFACE This study has looked at how U.S. transportation agencies have applied engineering eco-
By Jon M. Williams nomics (beneft–cost analyses and similar procedures) to decisions on highway investments.
Program Director State departments of transportation (DOTs) are most likely to use economic methods when
Transportation considering investments in pavement and bridge preservation, safety improvements, and
Research Board major projects on trunk lines and in urban areas. This study, however, has found agencies
that use economic information across their key business and decision processes.
Information was gathered through literature review, presentations at conference com-
mittee meetings, a screening survey of state DOTs, and interviews leading to case studies.
Michael J. Markow, Teaticket, Massachusetts, collected and synthesized the information
and wrote the report. The members of the topic panel are acknowledged on the preced-
ing page. This synthesis is an immediately useful document that records the practices
that were acceptable within the limitations of the knowledge available at the time of
its preparation. As progress in research and practice continues, new knowledge will be
added to that now at hand.
CONTENTS
1 SUMMARY
5 CHAPTER ONE INTRODUCTION
Background, 5
Defnitions, 6
Perspectives on Engineering Economic Analyses, 7
Study Approach, 10
Synthesis Organization, 11
12 CHAPTER TWO ENGINEERING ECONOMIC ANALYSIS
Policy and Procedural Guidance, 12
Texts on Engineering Economic Analysis, 13
Methods, 13
Challenges to Wider U.S. Application of Economic Methods, 21
International Experience, 22
Screening Survey, 25
Preview of Case Examples, 29
32 CHAPTER THREE CASE EXAMPLES
Impact of Critical Interstate Transportation Facilities, 32
Planning and Programming: Mobility and Safety Projects, 38
Bridge Project Programming and Permitting, 48
Economics-Based Tradeoff Analysis, 53
Pavement Type Selection, 57
Value Engineering, 60
Acceleration of Project Delivery, 64
Case Closure, 73
74 CHAPTER FOUR IMPLEMENTATION
Value of Engineering Economic Analysis, 74
Strengthened Agency Decision Making, 75
Level of Effort, 77
Success Factors, 79
Useful Resources, 80
Economic Analysis and Performance Management, 81
Communication and Reporting, 86
Ongoing and Emerging Areas of Analysis, 87
90 CHAPTER FIVE CONCLUSIONS
Study Objectives and Case Development, 90
Findings, 91
Impediments to Wider Application, 93
Research Suggestions, 94
97 ABBREVIATIONS AND ACRONYMS
99 REFERENCES
105 BIBLIOGRAPHY
106 APPENDIX A SURVEY QUESTIONNAIRE
112 APPENDIX B INTERVIEW GUIDE
113 APPENDIX C SCREENING SURVEY PARTICIPANTS
114 APPENDIX D S ELECTED FEDERAL REQUIREMENTS FOR HIGHWAY
ECONOMIC ANALYSES
Note: Many of the photographs, fgures, and tables in this report have been converted from
color to grayscale for printing. The electronic version of the report (posted on the Web at
www.trb.org) retains the color versions.
EnginEEring Economic analySiS PracticES
for HigHway invEStmEnt
Summary To paraphrase a recent study in performance management: Although the bureaucratic ten-
dency in government is often to avoid doing something wrong, economic analyses can demon-
strate that public agencies actually do something right. This synthesis has looked at how U.S.
transportation agencies have applied engineering economics—beneft–cost analyses and simi-
lar procedures—to decisions on highway investments. Although beneft–cost calculations are
often regarded as methods of project appraisal, occurring early in planning and design, experi-
ence shows that these methods have been successfully and productively applied throughout
the project life cycle. Most U.S. state departments of transportation (DOTs) actually conduct
economic analyses for at least certain types of highway investments. Past research suggests
that the most widely used applications of economic methods occur when considering invest-
ments in pavement and bridge preservation (a practice correlated with economic algorithms
in pavement and bridge management systems), safety improvements (considering the social
costs potentially avoided by reducing fatalities, injuries, and property damage resulting from
collisions), and major projects on trunk lines and in urban areas. What the fndings of this
synthesis have demonstrated, however, is that more broad-based applications of engineering
economic analyses are conducted by agencies that are conversant in economic concepts and
methods to a greater than average degree. These agencies have developed a level of prof-
ciency that enables them to integrate economic analyses throughout their daily operations.
Agencies that successfully apply engineering economic analyses across their business
processes strive to develop and maintain the tools and capabilities to perform these analyses
effectively, but in a practical, common-sense way. These tools and capabilities include effec-
tive guidance and executive support, staff knowledge and skills, fnancial and administra-
tive resources, the incorporation of appropriate analytic methods within business processes,
effective data collection and analysis, accessible information technology systems, and sup-
porting institutional relationships with other organizations. The perspective is fundamentally
one of incorporating economic analyses within the normal, routine business processes that an
agency must perform to do its job effectively, rather than one of viewing economic analyses
as additional, somewhat isolated, adjuncts to other activities. Executives in these agencies
value economic information on proposed highway investments. Their managers and staff
work diligently to develop and maintain the capabilities needed to provide this information
for key business and decision processes.
Case examples have been critical to developing the fndings of this synthesis. Several mech-
anisms were used to identify candidate agencies: a literature review, presentations at confer-
ence committee meetings, interviews with topic panel members and other industry experts,
and a screening survey. The screening survey questionnaire was sent to state DOT represen-
tatives on AASHTO’s Standing Committee on Highways, with copies to each state DOT’s
Research Advisory Committee member, and a corresponding questionnaire to each state’s
FHWA division offce. Responses were received from 17 state DOTs and 8 FHWA division
offces. For two states, responses were received from both the DOT and the FHWA division
offce; these were combined to produce a single response for each state, resulting in 23 unique
state responses. Of these 23 responses, 20 states reported using engineering economic analyses,
whereas 3 described themselves as not using such analyses. The 20 affrmatively responding
states were considered as candidates for case examples; the 3 states that responded negatively