Operations Benefit/Cost Analysis TOPS-BC User's Manual – Providing Guidance to Practitioners in the Analysis of Benefits and Costs of Management and Operations Projects

Chapter 5. Estimate Life-Cycle Costs of TSM&O Strategies

Overview

Estimating the costs of TSM&O strategies is complex. Compared to more traditional infrastructure improvements, TSM&O improvements typically incur a greater proportion of their costs as continuing O&M costs, as opposed to upfront capital costs. Much of the equipment associated with TSM&O strategies typically has a much shorter anticipated useful life than many traditional improvements, and must be replaced as it reaches obsolescence. Further complicating the TSM&O cost estimation process is the fact that TSM&O deployment costs are greatly impacted by the degree to which equipment and resources are shared across different deployments and jurisdictions.

Despite these difficulties, it is critical that planners fully consider and account for all the costs of TSM&O strategies when evaluating and developing deployment and O&M plans. Failure to recognize and accurately forecast these costs may result in future funding or resource shortfalls, or worse, the inability to properly operate and maintain deployed TSM&O improvements. The cost estimation capability developed within the TOPS-BC support tool is intended to assist planners in estimating and predicting high-level cost and resource requirements of planned TSM&O strategies.

The prior two capabilities described in this User’s Manual were primarily involved with conducting research in order to make more informed decisions. The life-cycle cost estimation capabilities provide the first example of analysis where you will be entering data representing an existing or planned improvement in order to generate values that will be directly used in the comparison of benefits and costs. As such, you are encouraged to carefully think about your file structure – multiple copies of the TOPS-BC file may be required to analyze different projects – as you will likely want to save the data you have entered separately for each one.

Using Capability 3 to Estimate Life-cycle Costs of TSM&O Strategies

The estimation of life-cycle costs is initiated by selecting the capability from the OPENING SCREEN worksheet, or selecting the COST ESTIMATION worksheet tab. This action takes you to an instructional sheet, as shown in Figure 5-1. This sheet also contains links to the worksheets where individual strategies will be analyzed. You may also jump to a particular cost estimation worksheet for a specific strategy by selecting the appropriate hyperlink in the Navigation Menu.

Figure 5-1. Partial Screen View of COST ESTIMATION Worksheet Instructions

Source: Federal Highway Administration.

Prior to initiating a life-cycle cost analysis in TOPS-BC, familiarize yourself with the cost structure and terminology used in the tool. TOPS-BC considers the following cost categories:

• Capital costs – Include the upfront costs necessary to procure and install equipment related to the TSM&O strategy. These costs will be shown as a total (one-time) expenditure, and will include the capital equipment costs, as well as the soft costs required for design and installation of the equipment.
• O&M costs – Include those continuing costs necessary to operate and maintain the deployed strategy, including labor costs. While these costs do contain provisions for upkeep and replacement of minor components of the system, they do not contain provisions for wholesale replacement of the equipment when it reaches the end of its useful life (see Replacement costs). These O&M costs will be presented as annual estimates.
• Replacement costs – Include the periodic cost of replacing/redeploying system equipment as it becomes obsolete and reaches the end of its expected useful life in order to insure the continued operation of the strategy.
• Annualized costs – Represent the average annual expenditure that would be expected in order to deploy, operate, and maintain the TSM&O strategy; and replace (or redeploy) any equipment as it reaches the end of its useful life. Within this cost figure, the capital cost of the equipment will be amortized over the anticipated life of each individual piece of equipment. This figure is added with the recurring annual O&M cost to produce the annualized cost figure. This figure is particularly useful in estimating the long-term budgetary impacts of TSM&O deployments.

The complexity of many TSM&O deployments warrants that these cost figures be further segmented to ensure their usefulness. Within each of the capital, O&M, and annualized cost estimates, costs are further disaggregated to show the infrastructure and incremental costs. These are defined as follows:

• Infrastructure costs – Include the basic “backbone” infrastructure equipment (including labor) necessary to enable the system. For example, in order to deploy a camera (closed-circuit television (CCTV)) surveillance system, certain infrastructure equipment must first be deployed at the traffic management center to support the roadside Intelligent Transportation System (ITS) elements. This may include costs, such as computer hardware/software, video monitors, and the labor to operate the system. Once this equipment is in place, however, multiple roadside elements may be integrated and linked to this backbone infrastructure without experiencing significant incremental costs (i.e., the equipment does not need to be redeployed every time a new camera is added to the system). These infrastructure costs typically include equipment and resources installed at the traffic management center, but may include some shared roadside elements as well.
• Incremental costs – Include the costs necessary to add one additional roadside element to the deployment. For example, the incremental costs for the camera surveillance example include the costs of purchasing and installing one additional camera. Other deployments may include incremental costs for multiple units. For instance, an emergency vehicle signal priority system would include incremental unit costs for each additional intersection and for each additional emergency vehicle that would be equipped as part of the deployment (note that many of the default unit costs for communications capabilities are based on figures originally developed for the ITS National Infrastructure. These communications costs typically represent the cost to lease the capabilities. You may want to review these cost assumptions and modify the values to best represent how you plan to deploy and operate communications systems).

Structuring the cost data in this framework provides the ability to readily scale the cost estimates to the size of potential deployments. Figure 5-2 provides a sample view of the cost data organized according to the defined structure in the TOPS-BC application for a ramp meter deployment, as taken from the individual cost estimation strategy worksheet for centrally controlled ramp metering (the green tabbed worksheet named “RM-Central Control”). Infrastructure costs would be incurred for any new technology deployment. Incremental costs would be multiplied by the appropriate unit (e.g., number of intersections equipped, number of ramps equipped, number of variable message sign locations, etc.); and added to the infrastructure costs to determine the total estimated cost of the deployment. Presenting the costs in this scalable format provides the opportunity to easily estimate the costs of expanding or contracting the size of the deployment, and allows the cost data to be reused in evaluating other corridors.

Figure 5-2. Partial Screen View of Cost Data Organization for a Ramp Meter System

Source: Federal Highway Administration.

In the ramp meter example shown in Figure 5-2, the Annualized Costs for any individual piece of equipment equals the Capital Costs (which represents the total cost to deploy or redeploy that piece of equipment) divided by the Useful Life (to amortize the cost of the equipment over the anticipated life), plus the annual cost of operating and maintaining the piece of equipment. This methodology assumes that the piece of equipment is replaced at the end of its useful life. For example, the Annualized Costs for the equipment called “TMC Hardware for Freeway Control” is calculated as:

Annualized Costs = (Capital Costs/Useful Life) + Annual O&M Costs
or
Annualized Costs = ($22,500/5 years) + $2,000 = $6,500

Some equipment does not have upfront Capital Costs, but only has recurring annual O&M Costs, as illustrated by the “Labor” costs in the Figure 5-2 example. In these situations, the annualized cost is simply the annual O&M Costs.

In the TOPS-BC application, you are able to enter the quantity of Infrastructure and Incremental equipment units you want to deploy, as shown in Figure 5-2; and the tool will calculate the total cost of the selected deployments based on these entries (For most TSM&O strategies, the number of “Infrastructure” deployments will be one, as only one deployment of this equipment is necessary to support multiple deployments of the “Incremental” units. However, you have the opportunity to deploy more than one “Infrastructure” unit if planned deployment is configured in a nontypical manner (e.g., managed from multiple Traffic Management Centers) or enter zero if you already have the Infrastructure deployed. In situations where the infrastructure equipment supports more than one strategy (or multiple deployments of the same strategy on more than one corridor), a fraction may be entered in the User Input cell. For example, if in the sample deployment shown in Figure 5-2, the deployment of 10 ramp meters was meant to analyze one of four corridors that were being planned for deployment, you may want to enter a value of .25 as the number of infrastructure deployments, to represent that each corridor would be expected to incur one-fourth of the infrastructure costs). Average Annual Costs for the ramp metering example, assuming 10 ramp meter locations were included in the deployment, would be calculated as:

Average Annual Costs = (# of Infrastructure Deployments * Annualized Costs of Infrastructure Deployment) + (# of Incremental Deployments * Annualized Costs of Incremental Deployment)
or
Average Annual Costs = (1*$296,500) + (10*$6,740) = $363,900

Outputs from this process include the following:

• An Average Annual Cost – A single expected cost compiling upfront capital, ongoing O&M, and future equipment replacement costs in a single figure.
• A Projected Stream of Costs – An output showing year-by-year expected expenditures over the next 30-year timeframe. This output can be used to calculate Net Present Value (NPV) over any time horizon you choose, if you chose to use NPV instead of average annual costs in your analysis.

Figure 5-3 shows a sample view of the Projected Stream of Costs generated for the ramp meter strategy illustrated in Figure 5-2. In this view, the Capital Costs are not amortized over the life of equipment, but appear in the year they are incurred. Your Upfront Capital Costs appear in the first year of deployment, and Replacement Costs are incurred in future years, as equipment needs to be replaced. In the ramp metering example, the full Capital Cost of deployment is incurred in year 2013, and the same value is incurred again in year 2018, since the equipment involved in the deployment has reached the end of its useful life by this date. Space is provided to view costs up to a 50-year time horizon. You may calculate the Net Present Value (NPV) of the costs by selecting a time horizon (in number of years) and an appropriate discount rate. Defaults are provided, but you may override those defaults by entering different values. The user is encouraged to review information in Chapter 5 of the Desk Reference for more information on calculating and using NPV. The Desk Reference also has information to guide you in selecting an appropriate discount rate to apply in your analysis.

Figure 5-3. TOPS-BC Projected Stream of Costs Output

Source: Federal Highway Administration.

The default view of the stream of costs shown in Figure 5-3 rolls up all Infrastructure and Incremental costs into single values for easy viewing; however, located in hidden rows underneath the display of the stream of costs, a separate working calculations sheet shows the breakout of costs by year, by equipment type for accounting purposes if needed. Figure 5-4 shows a view of this information (in an unhidden view). You are discouraged from directly editing any of the values in this calculations sheet.

Figure 5-4. TOPS-BC Cost Estimation Working Calculations Area

Source: Federal Highway Administration.

To estimate the life-cycle cost of any individual strategy, visit the cost estimation sheet for the selected strategy and enter the appropriate information on the number of infrastructure and incremental units, as well as the Year of Deployment, as shown in Figure 5-5. The Average Annual Cost and Stream of Costs will automatically update based on the inputs.

Figure 5-5. Strategy Cost Estimation Data Input

Source: Federal Highway Administration.

If you intend to use only the default data available in TOPS-BC, there is no need to make any further modifications, other than to enter the number of Infrastructure and Incremental units, and the Year of Deployment. You are strongly encouraged to carefully review the default cost data and make modifications as necessary. You may change the predicted useful life, base unit cost of equipment, or continuing O&M cost for any piece of equipment. You may also delete pieces of equipment or add pieces of equipment to better match your own anticipated equipment mix for the strategy.

Note that if an additional row(s) is needed in order to add a new piece of equipment, you should insert an entire row by first copying an existing row of data. You can do this by highlighting an entire row by clicking on the row number at the far left of the page, conducting a right click, and selecting “Copy.” Right click on the highlighted row number again and select “Insert Copied Cells.” This will create a new row that is properly formatted and contains the cell formulas necessary to maintain the integrity of the analysis. (If you simply decide to “Insert” a new row, you will need to manually merge cells and copy/paste formulas to match the existing equipment rows.) If you are only interested in using the Average Annual Costs in your calculations, no further modifications are needed. If you are interested in viewing the Stream of Costs and calculating the Net Present Costs and Net Present Benefit, you will additionally need to check and see if the added equipment has been added to the Working Calculations Sheet at the bottom of the individual cost estimation sheet [Figure 5-4]. In some cases, due to the manner in which the row was added or the version of Excel being used, the added equipment may not have automatically been generated in the Working Calculations Sheet. Therefore, it is recommended that you check to see that the equipment has been added to the Working Calculations Sheet. If the new equipment is not there, simply follow the directions above for copying and inserting copied rows within the appropriate section of the Working Calculations Sheet to replicate the addition of the new equipment in this Working Calculations Sheet. (Again, you should first copy and “Insert Copied Cells” to ensure the formatting and calculations are maintained.)

As rows are added, the Navigation Menu will temporarily be distorted as gaps will appear in the content; however, once you leave the page where the rows have been added and then return, the Navigation Menu will once again correctly display.

When changing data, note that any modification to the default data requires that the modified data match the data format of the default data. For example, you may enter a new piece of equipment for a particular strategy; however, it must have supporting data on the useful life, capital cost, and annual O&M cost to work within TOPS-BC’s estimation structure.