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NCHRP SYNTHESIS OF HIGHWAY PRACTICE
Engineering Economic Analysis
Practices for Highway Investments
MICHAEL J. MARKOW
oes an engineering economic analysis con- or not to include inflation; whether to use base-year
The author is principal tribute worthwhile information about a or current-year dollars; the differences between an
and owner, Michael J. highway investment or does it impede interest rate and a discount rate; and what to do when
D
Markow, P.E., Teaticket, timely decision making? This question essentially funding contributed by others reduces the project’s
Massachusetts. underlies the problem statement for National Coop- apparent cost to the highway agency.
erative Highway Research Program (NCHRP) Syn- The report provides brief explanations highlight-
thesis Topic 41-03, Engineering Economic Analysis ing the differences between the two types of analy-
Practices for Highway Investments. ses, along with examples of good practice by highway
The results of the study, published ias NCHRP agencies. A project may be economically feasible—
Synthesis 424, affirm the benefits of using engineer- that is, worth doing—but financially infeasible,
ing economic methods by showing how select U.S. because it cannot be paid for. The opposite is also
transportation agencies have applied exemplary true: a project can be economically infeasible—the
practices in benefit–cost analyses and similar proce- expenditure of taxpayer dollars is not economically
1 justified—but financially feasible, because the money
dures. The results indicate a remarkably wide range
Crews work during a of applications in highway investment decision mak- can be found to pay for it, although the project could
weekend closure on the ing. prove a poor use of tax dollars.
SR-520 bridge Table 1 (page 44) illustrates these and other com-
replacement and high- Economic Versus binations of economic and financial possibilities to
occupancy vehicle project Financial Analyses distinguish between the two types of analyses. The
in Washington State. NCHRP Synthesis 424 distinguishes between eco- synthesis focuses solely on the economic analysis of
Transportation agencies nomic analyses and financial analyses of highway agency investments.
often analyze highway investments; both involve streams of dollars and can
safety investments in easily become confused in practice. For example, in an Developing Proficiency
economic terms,
considering the social economic analysis, questions may arise about whether Many U.S. state departments of transportation (DOTs)
costs of fewer collisions. 1 www.trb.org/Publications/Blurbs/167096.aspx. routinely conduct economic analyses for certain cat-
egories of investment—for example, for pavement and
P
HOTObridge preservation, by applying economic models in
:
W pavement and bridge management systems; for safety
ASHINGTON
improvements, by considering the social costs avoided
S by reducing collisions; and for major projects, such as
T
A
TE
DOT expanding the capacity of trunk lines or of large, com-
plex urban transportation facilities. TR
The findings from this synthesis have demon- NEWS
strated, however, that agencies conversant with eco-
nomic concepts and methods regularly conduct 292
more extensive applications of engineering economic MA
analysis. These agencies have developed a profi- Y–JUNE
ciency that enables the integration of economic
analyses into daily operations and the application of 2014
economic results to managerial and executive deci-
sion making. 43
P
A roundabout is installed HOTO
:
on SR-92 in Washington W
State to reduce collision ASHINGTON
risk and improve traffic
S
flow. Roundabouts are a T
A
TE
priority in Washington DOT
State DOT’s strategic
highway safety plan.
Case Examples sampling of agencies identified through a screening
Case examples were critical to the findings of the survey. The list is not exhaustive; other agencies also
synthesis. Many regard benefit–cost analysis and may have attained similar levels of proficiency in the
similar methods solely as tools for project appraisal, use of economic analysis.
for application early in project planning and design.
This synthesis has shown, however, that state DOTs u Planning. One case example applies to critical
and other transportation organizations have applied Interstate bridge and tunnel crossings owned and
engineering economic analysis successfully and pro- operated by the Port Authority of New York and New
ductively to a much wider range of highway invest- Jersey, with a supporting economic analysis by the
ment decisions, from project conception and U.S. Army Corps of Engineers of maritime shipping
planning to project delivery. to the Port of New York and New Jersey. Another case
The cases presented in NCHRP Synthesis 424 are example covers mobility planning by the Washing-
listed as follows; the cases detail the practices of a ton State Department of Transportation (DOT).
TABLE 1 Economic Versus Financial Assessments of Project Candidate Solutions
Economic Justification Financially Feasible Financially Infeasible
Economically justified Solution is economically worth doing. The benefits Solution is economically worth doing. Its costs are
justify the cost. Of the alternatives considered, the justified by its benefits to the public.
solution maximizes benefits to the public. Funding is not sufficient, however, to cover the
Solution is financially feasible—funding is available estimated costs including inflation; or the candidate
in the amount and time needed to pay for the project is ineligible for funding in the amount and
candidate project, including anticipated cost schedule needed.
inflation. Implication: Although worth implementing, the
Implication: With good management of delivery, a solution cannot be paid for with the current design and
worthwhile project can be completed with the funding. The candidate project should not be
available budget. recommended. Other financially feasible solutions to the
need or problem should be explored.
Economically not justified Solution is economically not worth doing. The Solution is neither economically nor financially
benefits do not justify the cost. Unless justified by defensible. Even with other, noneconomic reasons to
2014 other, non economic considerations, the project consider the solution, funding is not available in the
could be seen as a waste of taxpayer money. amount and time needed.
Funding is available to support the candidate project Implication: Reassess the original need or problem to
Y–JUNE if worthwhile. gauge its priority in relation to other needs. If the
MA Implication: Consider revisiting the original need or priority is relatively high, develop new, economically
292 problem to explore other solutions that are stronger viable solutions and consider other financing options
economically, that increase benefits or reduce costs. (including innovative funding mechanisms or redirecting
NEWS Otherwise, consider redirecting the funding to viable funding from lower-priority project candidates) to fund
project candidates that address other needs. the solution. Otherwise, move on to other needs and
TR solutions.
44
u Programming and budgeting. Two case exam- Congestion
ples illustrate methods used by Washington State Index
DOT for mobility programming and safety pro- Effect of Traffic Growth Assuming “No Work” Scenario
gramming; another presents the California DOT
(Caltrans) approach to bridge programming and per-
mitting, including environmental permitting con- B1
siderations; and a fourth case illustrates the
methodological development for an economics-
based trade-off analysis by New York State DOT.
u Resource allocation following budget Project Duration 1
approval.The New York State DOT case example of
economics-based trade-off analysis is instructive for Time
projects at the resource allocation stage as well. (a)
u Project design and development. A case exam-
ple of pavement type selection, comparing the prac-
tices of Colorado DOT and Caltrans, addresses this Congestion
Index
aspect of project design and development, supple- Effect of Traffic Growth Assuming “No Work” Scenario
mented by a value engineering case example, which
compares the practices of Caltrans and Florida DOT.
u Accelerated project delivery. Conventional B1
construction and design–build options are consid-
ered in the case example for acceleration of project B2
delivery, developed with Minnesota DOT.
Economic analyses involve comparisons of alter- Project Duration 2
natives to evaluate differences in costs and benefits
and to identify the preferred—or economically jus- Time
tified—approach that delivers the best value to road (b)
users and the public at large. For example, Figure 1
(right), from the Minnesota DOT accelerated project FIGURE 1 Illustration of highway user cost savings from project acceleration: (a)
conventional construction; (b) accelerated construction with design–build. (B1 =
delivery case, illustrates the comparison of road user benefit; B2 = additional benefit. Source: HDR–HLB Decision Economics, Inc., 2006,
benefits from conventional construction (upper Figure 7, p. 11, with additional annotations by author.)
graphic) and from accelerated construction with
design–build (lower graphic). The additional bene- project delivery; and levels of the system analyzed—
fit component (B2) in the lower graphic denotes for example, link or project, corridor, program, and
additional savings to road users from the faster com- network.
pletion of the project. Considered individually, the case examples show
how engineering knowledge and the need to under-
Practical Frameworks stand the impacts of particular decisions can be orga- Value engineering was
Although economic results are important to invest- nized within a practical economic framework. integrated into the
ment decisions, they are not the sole criterion in the Considered collectively, however, the case examples project development and
final decision. Agencies may consider other factors, reveal common characteristics among agencies that environmental study of
quantitative and qualitative, in a comprehensive successfully apply engineering economic practices the I-595 expansion
assessment of which project alternative to recom- across a range of projects. project in Florida.
mend.
ERR
In addition to the application of engineering eco- K TR
OUG NEWS
nomic methods to various decisions in highway D
:
investment, the case examples also reveal agency HOTO
P 292
practices in building analyses—such as compiling
data, selecting a discount rate, accounting for risk or MA
uncertainty in estimates, defining alternatives, and so Y–JUNE
forth. The case examples represent a variety of pro-
gram areas, such as preservation, mobility, and safety; 2014
life-cycle stages in the decision process, such as plan-
ning, programming, resource allocation, design, and 45
P
HOTO Value of Economic Analyses
:
C The case examples, together with reviews of the lit-
OLORADO
erature and interviews with agency personnel, iden-
DOT tify the following benefits of economic analyses:
u The direct or tangible benefit consists of
obtaining an economic result that shows the value or
merit of a highway investment. This value may be in
the benefits received by road users or in the costs
avoided by road users and by the agency. Generally,
economic performance—the benefits compared with
the costs—is linked to the engineering or technical
performance of the highway facility. Monetized ben-
efits help in understanding the trade-offs between
competing alternatives. The preparation of an eco-
nomic analysis imposes a discipline that accounts
for all costs and all benefits as comprehensively and
Concrete work on US-160 Characteristics of as accurately as possible.
near Cortez, Colorado. Proficient Agencies u The indirect or intangible benefit comes from
Colorado DOT’s Several characteristics differentiate agencies that are encouraging a better decision-making process within
pavement type selection conversant with economic methods and are integral the organization. This benefit provides an incentive
practices are examined in to the agency’s makeup and approach to solving to identify all realistic alternatives for solution; to a
NCHRP Synthesis 424.
transportation problems and addressing needs: focus on the purpose of the proposed investment
and to avoid “scope creep”—uncontrolled changes
u The influence of organizational champions and or growth in a project’s scope; to avoid biases toward
culture, with the support and participation of exec- options, such as particular paving materials; and to
utive leadership; support these objectives through clear agency guid-
u A level of knowledge, proficiency, and comfort ance and communication, backed by analytical tools
with economic methods; and effective data collection and processing.
u Integration of economics into the business and
decision-making processes, so that economic analy- Completing the Steps
ses are a part of routine business, not a distinct, NCHRP Synthesis 424, Engineering Economic Analy-
somewhat isolated task; sis Practices for Highway Investments, describes the
u Creativity in developing alternative solutions; ways that exemplary state DOTs and other trans-
u A willingness to experiment and innovate portation agencies complete the steps of engineering
when available data and analytic methods do not fit economic analysis: articulating the highway system
a situation that requires a decision; need or problem to be investigated; defining alter-
u The reliance of upper management on the native solutions to be assessed; quantifying the pa -
results of economic analyses in making investment r ameters of the analyses; setting economic and engi-
decisions; neering criteria for decisions; introducing other
u The availability of information technology to noneconomic or nonquantitative factors that may
support not only the economic analysis but also affect the outcome; completing the analysis; and
important steps such as diagnosing a problem, defin- interpreting the results. The synthesis also includes
ing realistic alternatives, and displaying results; lessons learned from the
u Providing staff training in economic methods successful implementa-
and tools and encouraging personnel to apply these tion of engineering eco-
2014 capabilities in their daily work; nomic analysis within a
u Maintaining a healthy perspective on engi- highway organization.
Y–JUNE neering economic analysis, viewing results as infor-
MA mation, not as an automatic decision, that becomes For more
292 part of the comprehensive understanding of a proj- information on
ect solution; and NCHRP Synthesis
NEWS u Recognizing that economic outcomes are an 424, visit
www.trb.org/
TR integral part of gauging highway system perfor- Publications/Blurbs/
46 mance. 167096.aspx.
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