TECHNICAL BRIEF #1
Benefit Cost Analysis – Transportation Systems Management and Operations
Fundamentals of Benefit-Cost Analysis for Transportation Systems Management and Operations
This information brief is a continuation of the FHWA Office of Operations Transportation Systems Management and Operations Benefit-Cost Analysis technical briefing series. Earlier briefs were published in 2012 and are available online at: https://ops.fhwa.dot.gov/plan4ops/resources/brochures.htm.
Project Decision Making
This technical brief explains the basic approach to economic analysis as applied to transportation decision making and how such an analysis is useful for understanding and evaluating transportation systems management and operations (TSM&O) programs and projects. This brief provides examples of economic analyses of TSM&O projects and describes the fundamental components of benefit cost analysis (BCA). These methods are demonstrated in the Transportation Systems Management and Operations Compendium, which covers a series of BCA studies conducted around the country by transportation planning agencies and research organizations.
Economic analysis can inform many different phases of the transportation decision-making process. In planning, it can be applied to basic cost and performance data to screen a large number of potential project alternatives, assisting in the development of program budgets and areas of program emphasis. It can also assist engineers in developing more cost-effective designs once a decision has been made to go forward with a TSM&O project. Similarly, an economic analysis can play a critical role in screening alternatives to accomplish a specific project goal and provide information for the environmental assessment process. The Federal Highway Administration (FHWA) has a long history of promoting the application of economic analysis to project planning, design, construction, preservation, and operation, including the use of life-cycle cost applications.
A benefit cost analysis, or BCA, attempts to capture all benefits and costs accruing to society from a project or course of action, regardless of which particular party realizes the benefits or costs, or the form these benefits and costs take. Used properly, a BCA reveals the most economically efficient investment alternative; i.e., the one that maximizes the net benefits to the public from an allocation of resources.
The BCA process begins with establishing objectives for an improvement to the operation and management of transportation assets. The next step is to identify constraints on potential agency options and specify assumptions about the future. The analyst then develops a full set of reasonable improvement alternatives to meet the objectives. This process begins with the development of a base case. The analysis period selected should be long enough to include at least one major rehabilitation activity for each alternative.
The investment costs, hours of delay, crash rates, and other effects of each alternative are measured using engineering methods and then are compared to those of the base case, and the differences relative to the base case are quantified by year for each alternative. The analyst assigns dollar values to the different effects (e.g., the fewer hours of delay associated with an alternative relative to the base case are multiplied by a dollar value per hour) and discounts them to a present value amount.
Based on the results of the BCA and associated risk analysis, the analyst prepares a recommendation concerning the best alternative from an economic standpoint. It is good practice to document the recommendation with a summary of the analysis process conducted.
Benefit-Cost Analysis for Operations Strategies
Due to the long-time use of BCA for more traditional infrastructure project assessment, many regions and States already have established procedures for conducting BCAs. These procedures may range from simple guidance on which measures of effectiveness (MOE) to use to detailed analysis frameworks, specified performance measures, and standardized benefit valuations to be applied. Therefore, care should be taken to be as consistent as possible with the established BCA guidelines and procedures in order to provide for meaningful comparability of results. This consistency will ensure that the TSM&O strategies may be effectively and accurately compared and prioritized alongside more traditional infrastructure investments without risking the overstating or understating of benefits due to the analysis methodology itself.
While consistency between TSM&O and non-TSM&O BCA procedures is generally desirable, analysts should be aware that BCA procedures designed for more established capital intensive infrastructure projects may not be entirely appropriate for analysis of TSM&O projects. Analysts should be aware that existing agency procedures or guidelines may serve to limit the full, comprehensive assessment of the benefits of TSM&O strategies in one or more of the following ways:
While many regions and agencies have made significant efforts to enhance their existing regional BCA guidelines and policies in recent years to be more compatible with TSM&O analysis needs – incorporating new MOEs (e.g., travel time reliability), updating modeling and analysis tool capabilities; and including automated archived data – operations analysts should still be aware of the potential constraints in utilizing existing frameworks, datasets, modeling tools, and cost parameters.
Typical Benefits and Costs of Transportation Systems Management and Operations Projects
Table 1 lists typical benefits and costs used for the evaluation of TSM&O projects. Travel time savings and delay, vehicle operating costs (VOC) and crash reduction or safety used to be the biggest benefits for most transportation projects. However, recently researchers have identified another increasingly important benefit: travel time reliability. The recent integration of reliability into the traditional BCA evaluation of TSM&O strategies adds a new parameter to transportation planner's repertoire. Due to uncertainty in travel time, travelers add "buffer time" to their trips to ensure they arrive at their destination on time. The decrease of such buffer time is also valued as a benefit when conducting a BCA of a TSM&O project.
As the Transportation Research Board states in numerous documents, reductions of travel time and buffer time are considered benefits (for more information visit http://www.trb.org/Publications/PubsSHRP2ResearchReportsReliability.aspx).
SOURCE: FHWA Economic Analysis Primer
Federal Highway Administration Resources and Support
To assist agencies in understanding and applying benefit cost analysis for TSM&O, FHWA has several resources available under its Planning for Operations Program. The resources include the Operations Benefit Cost Desk Reference, other information briefs, a Transportation Systems Management and Operations Benefit-Cost Analysis Compendium of sample case studies (See Table 2 for sample content), and the Tool for Operations Benefit Cost (TOPS-BC). These can be accessed at: https://ops.fhwa.dot.gov/plan4ops/focus_areas/analysis_p_measure/benefit_cost_analysis.htm.
SOURCE: : FHWA TSM&O BCA Compendium
If you have any questions regarding the Benefit/Cost Analysis for Operations or seek technical assistance contact:
United States Department of Transportation - Federal Highway Administration