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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

June 2013: 

Federal-Aid Highways: 

Improved Guidance Could Enhance States' Use of Life-Cycle Cost 
Analysis in Pavement Selection: 

GAO-13-544: 

GAO Highlights: 

Highlights of GAO-13-544, a report to congressional committees. 

Why GAO Did This Study: 

LCCA provides state transportation agencies with a tool to evaluate 
and select the most cost-effective type of pavement, one of the major 
cost components of many highway projects. Given the high demand for 
federal highway funding, the federal government has an acute interest 
in helping states use LCCA to make cost-effective decisions when 
investing federal-aid highway funds. Accordingly, it is important that 
FHWA’s guidance on LCCA aligns with best practices. The Moving Ahead 
for Progress in the 21st Century Act directed GAO to review LCCA best 
practices. GAO (1) described how state transportation agencies conduct 
and use LCCA and (2) assessed the extent to which FHWA’s LCCA guidance 
conforms to the GAO Cost Guide’s cost-estimating best practices. 

GAO reviewed states’ LCCA practices and interviewed officials from 16 
states (visiting 4), selected to provide information on a wide range 
of LCCA approaches and a wide geographical distribution. Information 
gathered from these states is not generalizable to all states. GAO 
also interviewed FHWA officials. GAO assessed the extent to which 
FHWA’s LCCA guidance, including software and documentation, conforms 
to best practices. 

What GAO Found: 

Thirteen of the 16 state transportation agencies GAO contacted used 
Life-Cycle Cost Analysis (LCCA) to select the pavement type (e.g., 
asphalt or concrete) for certain road construction and rehabilitation 
projects. Officials in all 13 states indicated that LCCA helped ensure 
that the agency selected the pavement that was most cost-effective 
over the long term, but states’ specific LCCA practices varied. In 
general, these states used LCCA for larger projects, but each state 
had unique criteria to determine which projects should be subject to 
an LCCA. Likewise, the broad categories of LCCA inputs-—such as agency 
costs, timing of future road work, and discount rate-—are similar, but 
state transportation agencies handled each of these inputs in 
different ways. For example, estimates of when future roadwork would 
occur for a particular pavement type were based on state-specific 
factors, such as past experience with pavements and climate. 
Furthermore, state agencies used different criteria to decide if LCCA 
results clearly indicated a pavement type with the lowest life-cycle 
cost. In 9 of the 13 states that used LCCA, the Federal Highway 
Administration’s (FHWA) LCCA guidance was an important influence on 
state practices, according to state transportation officials, and 7 
states used LCCA software developed by FHWA. 

FHWA’s LCCA guidance largely aligns with the GAO Cost Guide’s best 
practices for two of the four phases of the cost-estimating process 
and partially aligns with two other phases. FHWA’s guidance in the 
Initiation phase, which includes initial planning steps, aligns with 
best practices overall. Agency guidance covers about half of the best 
practices of the Assessment phase, but does not, for example, discuss 
the use of independent cost estimates for comparison and cross checks, 
an important quality step to ensure the estimate’s credibility. In the 
Analysis phase, FHWA’s guidance does a good job explaining how to 
address the variability inherent in cost estimation, but could better 
address how LCCA should be documented for subsequent review. Lastly, 
in the Presentation phase, FHWA’s guidance does not include sufficient 
information on how to present LCCA results to management for decision-
making and on when an LCCA should be updated. By better incorporating 
best practices in the guidance, FHWA could help states produce 
credible and accurate cost estimates and make more cost-effective 
federal-aid highway fund investment decisions. 

Figure: Federal Highway Administration’s Guidance Compared to GAO Cost 
Guide’s Best Practices: 

[Refer to PDF for image: illustrated table] 

Cost estimating phase: Overall phase assessment; 
Initiation: Aligns; 
Assessment: Partially aligns; 
Analysis: Substantially aligns; 
Presentation: Partially aligns. 

Key: 

Aligns: Completely satisfied the best practice. 
Substantially aligns: Satisfied a large portion of the best practice. 
Partially aligns: Satisfied about half of the best practice. 

Source: GAO analysis of Federal Highway Administration documents. 

[End of figure] 

What GAO Recommends: 

To better ensure federal-aid highway funds are invested effectively, 
FHWA should update LCCA guidance to fully incorporate the Cost Guide’s 
best practices. The Department of Transportation agreed to consider 
this recommendation and provided technical comments that were 
incorporated as appropriate. 

View [hyperlink, http://www.gao.gov/products/GAO-13-544]. For more 
information, contact James R. McTigue, Jr., at (202) 512-2834 or 
McTigueJ@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

States' Life-Cycle Cost Analysis Practices Vary, Though They Are Often 
Informed by FHWA Guidance: 

FHWA LCCA Guidance Aligns with About Half of the Cost-Estimating Best 
Practices: 

Conclusions: 

Recommendation: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Federal Highway Administration (FHWA) Guidance and Assistance 
Available to States on Life-Cycle Cost Analysis (LCCA), 1998-Present: 

Table 2: GAO's Cost-Estimating Process Best Practices: 

Table 3: Key Inputs for Conducting Life-Cycle Cost Analysis (LCCA) and 
GAO's Summary of Selected State Practices: 

Figure: 

Figure 1: Summary of GAO's Assessment of Federal Highway 
Administration Life-Cycle Cost Analysis Guidance: 

Abbreviations: 

AASHTO: American Association of State Highway Transportation Officials: 

ASCE: American Society of Civil Engineers: 

FHWA: Federal Highway Administration: 

LCCA: Life-Cycle Cost Analysis: 

OMB: Office of Management and Budget: 

TRB: Transportation Research Board: 

[End of section] 

GAO: 
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

June 12, 2013: 

The Honorable Barbara Boxer: 
Chairman: 
The Honorable David Vitter: 
Ranking Member: 
Committee on Environment and Public Works: 
United States Senate: 

The Honorable Lamar Smith: 
Chairman: 
The Honorable Eddie Bernice Johnson: 
Ranking Member: 
Committee on Science, Space, and Technology: 
House of Representatives: 

The Honorable Bill Shuster: 
Chairman: 
The Honorable Nick J. Rahall, II: 
Ranking Member: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

Billions of federal-aid highway dollars are obligated each year for 
projects in states for the construction and rehabilitation of road 
pavements. There are multiple pavement types and designs that can be 
used to construct or rehabilitate roads, and selecting the appropriate 
material and design to meet a specific road's performance needs is a 
highly technical engineering task.[Footnote 1] Pavement types, for 
example, include many combinations of asphalt, concrete, and advanced 
material alternatives. Through the federal-aid highway program, 
administered by the Federal Highway Administration (FHWA), the federal 
government provides about $40 billion in funding to state 
transportation programs each year. Thus, the federal government has a 
significant interest in helping state transportation agencies make 
informed and prudent pavement-type selection decisions, particularly 
as states face limited transportation funding, both from federal and 
state sources, and many are struggling to meet road-building and 
maintenance needs. Though federal-aid highway funds are used by states 
for a wide range of project types--such as bridge building and repair, 
road maintenance, and safety projects--that do not involve large 
amounts of pavement, major road construction or reconstruction 
projects can include costly pavement components. As the interstate 
highway system ages, there is potential that these types of major 
projects may become more frequent. Life-Cycle Cost Analysis (LCCA) is 
an important economic tool to evaluate and help select the pavement-
type for a particular project that will minimize costs over the long 
term, rather than just minimizing initial construction costs. 
Nevertheless, state transportation agencies may not use LCCA, or may 
not conduct it well, for a variety of reasons, including limited 
experience with LCCA, historical material preferences, and data 
limitations. 

To facilitate the use of LCCA in pavement-type selection decisions, 
FHWA issued interim guidance in 1998 and has since provided LCCA 
software--called RealCost--that states can use to conduct LCCA, among 
other guidance and assistance. Because FHWA has a pivotal role in 
assisting states in the execution of the federal-aid highway program, 
it is important that FHWA's guidance on LCCA aligns with best 
practices for cost estimation. Congress, FHWA, and state 
transportation agencies may benefit from a better understanding of the 
LCCA practices currently used by states and what federal actions, if 
any, could better support these practices and ensure federal 
transportation investments are made wisely. 

We conducted this study in response to a mandate adopted in the Moving 
Ahead for Progress in the 21ST Century Act, the most recent federal 
surface transportation authorization act.[Footnote 2] The mandate 
called for a GAO examination of LCCA best practices and 
recommendations on specific technical elements of LCCA conduct. We 
designed our review to identify any potential opportunities for FHWA 
to advance the state of LCCA practices, recognizing that there may not 
be one correct approach to addressing the technical elements of LCCA. 
Specifically, this report (1) describes how state transportation 
agencies currently conduct and use LCCA and (2) assesses the extent to 
which FHWA's guidance for conducting LCCA conforms to best practices 
identified in GAO's Cost Estimating and Assessment Guide (Cost Guide). 
[Footnote 3] The Cost Guide consolidates best practices that federal 
cost-estimating organizations and industry use to develop and maintain 
reliable cost estimates throughout the life of a government 
acquisition program. These criteria are applicable to FHWA's guidance 
because both the GAO Cost Guide and FHWA's guidance describe cost 
estimation processes for capital investment decision making. 

To determine how state transportation agencies conduct LCCA for 
federally funded highway projects, we visited 4 states to interview 
FHWA division office officials, state transportation agency officials, 
and representatives from the asphalt and concrete pavement industry 
associations and conducted telephone interviews with state 
transportation agency officials in 12 additional states. We selected 
states based on criteria that allowed us to gather information from 
state transportation agencies with a wide range of LCCA approaches and 
a wide geographical distribution. The results of our interviews are 
not generalizable to all states. Additionally, we reviewed states' 
pavement selection and design manuals in the 16 selected states and 
reviewed relevant literature on LCCA from researchers, industry, and 
professional organizations. To assess FHWA's guidance, we identified 
the key LCCA guidance provided by FHWA to state transportation 
agencies and compared the guidance to GAO's Cost Guide best 
practices.[Footnote 4] We determined whether FHWA's guidance aligns 
(provided complete evidence that satisfies the best practice), 
substantially aligns (provided evidence that satisfies a large portion 
of the best practice), partially aligns (provided evidence that 
satisfies about half of the best practice), minimally aligns (provided 
evidence that satisfies a small portion of the best practice), or does 
not align with these best practices (provided no evidence that 
satisfies any of the best practice). Finally, to inform all our 
objectives, we conducted interviews with appropriate FHWA officials, 
pavement industry stakeholders, and other relevant groups. See 
appendix I for more details on our scope and methodology. 

We conducted this performance audit from August 2012 to June 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our: 

findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

Background: 

LCCA is a type of economic analysis that evaluates the long-term 
financial costs of a capital investment--such as highway construction--
by comparing estimates of both initial cost and likely future costs of 
different investment alternatives. By considering all of the costs 
associated with each alternative over the life of the investment, as 
opposed to considering only initial investment costs, the lowest 
overall cost alternative can be determined. In brief, LCCA involves 
developing alternative investment scenarios that meet project 
objectives, estimating the timing and costs of activities associated 
with constructing, using, and maintaining each alternative over a set 
analysis period, and discounting future costs into present dollar 
terms. Finally, initial and discounted future costs for each 
alternative are summed and compared. Costs that are considered include 
direct costs incurred by the transportation agency (agency costs), 
such as the cost of materials, and costs that other individuals or 
entities may incur due to the investment. For example, in addition to 
direct costs, a state transportation agency may chose to consider the 
costs of motorists being delayed during the construction of the 
different alternatives. LCCA does not evaluate the benefits--such as 
increased mobility--of different alternatives and, consequently, 
should only be used to compare alternatives that provide equivalent 
benefits. Other types of economic analysis may be used to compare 
alternatives which have differing benefits.[Footnote 5] 

LCCA can be applied to investments in road infrastructure because 
there are multiple pavement design and pavement-type alternatives that 
can meet the level of performance needed in road projects. Using 
standard design tools, engineers can design a road using different 
pavement types that are functionally equivalent in terms of lanes, 
traffic capacity, ability to handle heavy trucks, and other factors. 
[Footnote 6] For example, a new road could be built with a variety of 
asphalt or concrete designs; LCCA provides a method to compare the 
costs of a concrete or asphalt design, or the costs of different 
designs using differing types of the same material. The agency cost of 
these alternatives may vary in terms of prices for materials, labor, 
and future maintenance, rehabilitation, and reconstruction work. For 
example, the initial construction costs of a concrete road may be 
higher than an asphalt design, but may require less frequent 
maintenance and rehabilitations. Further, alternatives may impose 
different user costs upon motorists due to, for example, travel-time 
delays associated with initial construction and future roadwork, and, 
as noted above, these costs may also be included in LCCA.[Footnote 7] 

As part of its responsibilities to ensure federal funds are used 
effectively, FHWA encourages the use of LCCA in pavement-type 
selection decisions.[Footnote 8] However, there is no current 
requirement that LCCA be conducted or used to select among pavement 
types used on federally funded highway projects.[Footnote 9] 
Accordingly, FHWA's LCCA guidance and assistance to state 
transportation agencies is advisory. Furthermore, FHWA recommends LCCA 
be used as a decision support tool--not for planning or programming 
projects--within the framework of each state's own pavement management 
processes. As shown in table 1, FHWA first issued printed LCCA 
guidance in 1998 with an interim technical bulletin, which was 
followed by additional guidance and LCCA software. Each piece of 
guidance covers slightly different aspects of LCCA, at different 
levels of detail, and reflects the state of FHWA's guidance at the 
time of publication. For example, FHWA's 1998 Life-Cycle Cost Analysis 
in Pavement Design interim technical bulletin and the 2002 Life-Cycle 
Cost Analysis Primer pre-date the release of FHWA's RealCost software 
and associated User Manual and, consequently, do not reference or 
discuss these tools. FHWA has been in the process of updating the 1998 
interim bulletin since 2009. FHWA also provides LCCA training, which, 
like other FHWA training, is typically offered based on state 
interests and requests. Collectively, FHWA's guidance and assistance 
is intended to provide state transportation agencies with sufficient 
information and tools to conduct and use LCCA to make cost-effective 
pavement-type selection decisions. Furthermore, the Office of 
Management and Budget (OMB) provides federal agencies with guidance 
about many of the technical aspects of conducting economic analyses, 
such as LCCA. For example, OMB has issued guidance related to the 
selection of a discount rate.[Footnote 10] 

Table 1: Federal Highway Administration (FHWA) Guidance and Assistance 
Available to States on Life-Cycle Cost Analysis (LCCA), 1998-Present: 

FHWA guidance and assistance: Life-Cycle Cost Analysis in Pavement 
Design interim technical bulletin (1998); 
Description: Describes how LCCA can be used to inform pavement-type 
selection and how to conduct LCCA. Currently being revised. 

FHWA guidance and assistance: Life-Cycle Cost Analysis Primer (2002); 
Description: Summarizes LCCA techniques and benefits. 

FHWA guidance and assistance: RealCost LCCA software (first released 
in 2002, most recent version 2011); 
Description: Facilitates the conduct of LCCA by providing a 
computational tool. 

FHWA guidance and assistance: RealCost LCCA User Manual (updated in 
2010); 
Description: Explains how to use RealCost software and discusses LCCA 
concepts and practices. 

FHWA guidance and assistance: LCCA training by FHWA; 
Description: Provides training on a variety of LCCA concepts and 
tools, including RealCost. 

Source: GAO analysis of FHWA materials. 

[End of table] 

In 2009, GAO issued the Cost Guide to provide guidance on best 
practices for cost estimation to address a gap in federal guidance 
about processes, procedures, and practices needed for ensuring 
credible cost estimates.[Footnote 11] These best practices delineate 
the process that should be followed to develop a reliable, high-
quality cost estimate, including appropriate consideration of life-
cycle costs. These best practices represent an overall process of 
established, repeatable methods that result in high-quality cost 
estimates that are comprehensive and accurate and that can be easily 
and clearly traced, replicated, and updated. Each of the practices is 
important for ensuring that high-quality cost estimates are developed 
and delivered in time to support important decisions. The Cost Guide 
delineates a four phase process with 12 constituent steps (table 2). 

Table 2: GAO's Cost-Estimating Process Best Practices: 

Phase: Initiation; 
Best practice: Define estimate's purpose; 
Summary of tasks within best practices: Determine purpose, scope, 
required level of detail of estimate, as well as who will receive 
estimate. 

Phase: Initiation; 
Best practice: Develop estimating plan; 
Summary of tasks within best practices: Determine cost estimating 
team, schedule, and outline tasks in writing. 

Phase: Assessment; 
Best practice: Define program characteristics; 
Summary of tasks within best practices: Identify technical 
characteristics of planned investment, quality of data needed, and 
plan for documenting and updating information. 

Phase: Assessment; 
Best practice: Determine estimating structure; 
Summary of tasks within best practices: Define the elements of the 
cost estimate, including best method for estimating costs and 
potential cross-checks, and standardized structure. 

Phase: Assessment; 
Best practice: Identify ground rules and assumptions; 
Summary of tasks within best practices: Define what the estimate will 
include and exclude, key assumptions (such as life cycle of 
investment), schedule or budget constraints, and other elements that 
affect estimate. Assumptions should be measurable, specific, and 
consistent with historical data. Assumptions should be based on 
expert, technical judgment and approved by management. 

Phase: Assessment; 
Best practice: Obtain data; 
Summary of tasks within best practices: Create data collection plan, 
identify sources, collect valid and useful data, analyze data for cost 
drivers and other factors, and assess data for reliability and 
accuracy. 

Phase: Assessment; 
Best practice: Develop a point estimate and compare it to an 
independent cost estimate; 
Summary of tasks within best practices: Develop cost estimation model 
and calculate estimate, in constant dollars for investments that occur 
over multiple years, and other cross checks and validation, and 
compare estimate to an independent estimate and previous estimates. 
Update as more data are available. 

Phase: Analysis; 
Best practice: Conduct sensitivity analysis; 
Summary of tasks within best practices: Test the sensitivity of cost 
elements to changes in input values, ground rules, and assumptions. 

Phase: Analysis; 
Best practice: Conduct risk and uncertainty analysis; 
Summary of tasks within best practices: Determine which cost elements 
pose technical, cost, or schedule risks; analyze those risks; and 
recommend a plan to track and mitigate risks. A range of potential 
costs, based on risks and uncertainties, should be identified around a 
point estimate. 

Phase: Analysis; 
Best practice: Document the estimate; 
Summary of tasks within best practices: Document all steps used to 
develop the estimate so it can be recreated, describing methodology, 
data, assumptions, and results of risk, uncertainty, and sensitivity 
analysis. 

Phase: Presentation; 
Best practice: Present estimate to management for approval; 
Summary of tasks within best practices: Develop briefing on results, 
including information on estimation methods and risks, making content 
clear and complete so those unfamiliar with analysis can comprehend 
estimate and have confidence in it. 

Phase: Presentation; 
Best practice: Update the estimate to reflect actual costs and changes; 
Summary of tasks within best practices: As technical aspects of 
project change, the complete cost estimate should be regularly updated 
and, as project moves forward, cost and schedule estimates should be 
tracked. 

Source: GAO. 

[End of table] 

States' Life-Cycle Cost Analysis Practices Vary, Though They Are Often 
Informed by FHWA Guidance: 

State Life-Cycle Cost Analysis Practices Vary: 

Most of the selected states we reviewed use LCCA in some capacity to 
help ensure the long-term cost-effectiveness of investment decisions. 
Thirteen of the 16 states included in our review used it in some 
capacity.[Footnote 12] State transportation officials in all 13 of 
these states indicated that the goal of LCCA was to help ensure that 
the agency makes long-term, cost-effective investment decisions. Some 
state officials also noted that LCCA can help the state transportation 
agency communicate to stakeholders--pavement industry representatives, 
state legislators, and taxpayers--that it is making sound decisions. 
For example, according to transportation officials in Florida, LCCA 
results have helped communicate to the legislature that higher initial 
cost projects may offer long-term value for some road projects. 
Officials in some states, however, noted that budget constraints made 
it difficult to pursue higher initial cost projects even if those 
projects made sense in the long term. Conversely, 3 of the state 
transportation agencies we examined do not use LCCA as part of their 
pavement-type selection process. State transportation officials for 
these states explained that it was not a consideration in pavement 
selection decisions for several reasons, including initial cost 
constraints, engineering reasons for pavement selection, and 
institutional resistance to consideration of pavement-type 
alternatives not historically used in the state. 

In general, selected states use LCCA for larger projects, be they new 
or reconstruction projects, but states had different specific policies 
for determining which projects should have an LCCA conducted. In the 
states we reviewed, these policies included conducting an LCCA when a 
project dollar threshold is met, such as when pavement material costs 
exceed $2 million, when a project adds new capacity, or when a 
specified amount of pavement material would be used, among others. 
Because a state may have few projects that meet the state's threshold, 
LCCA may be used infrequently. Officials in 6 states indicated that 
fewer than five LCCAs were typically conducted each year. However, 
when LCCAs are conducted, the projects tend to be among the state's 
largest or most expensive transportation projects. For example, the 
California Department of Transportation used LCCA to help select the 
pavement type for a major interstate improvement project between San 
Francisco and Sacramento, with life-cycle costs estimated to be over 
$50 million for each project alternative. 

Of the 13 states we reviewed that conduct LCCAs, 10 perform LCCA early 
during project design (e.g., when 30 percent of design work is 
completed), but practices varied among states about reviewing and 
updating LCCAs later during the project. By making a pavement 
selection early, transportation officials from 3 states indicated that 
they are able to make decisions about right-of-way acquisitions or 
other project elements that are contingent on the selection of a 
pavement-type.[Footnote 13] When an LCCA is completed early in project 
design, 2 or 3 years may pass before project construction. In 5 of the 
10 states that indicated that LCCAs were conducted early, officials 
indicated that LCCAs were not updated later during design; officials 
in the other 5 of these 10 states indicated they had procedures to 
update LCCA, noting that pavement decisions can be reevaluated and 
changed, if warranted. The 3 remaining states performed LCCA later in 
the design process. Some state officials reported that completing an 
LCCA takes agency staff anywhere from a couple days to several months, 
depending on the project's complexity, the data collection needed to 
conduct the analysis, and the sophistication of the LCCA technical 
approach used. 

State transportation agencies generally consider the same categories 
of inputs in their analysis, but state agencies handle each of these 
inputs in different ways. Key categories of inputs include agency 
costs, timing of future roadwork, user costs, analysis period, 
discount rate, and the treatment of the risk and uncertainty that are 
associated with these inputs. For example, we found that states use 
different analytic approaches in regard to risk and uncertainty; 9 
states conducted deterministic LCCA and 4 conducted probabilistic LCCA 
of the 13 we reviewed.[Footnote 14] Table 3 provides additional 
information about key inputs and the variation in state practices. The 
fact that states do not treat all key inputs similarly does not 
necessarily indicate that one state's LCCA is of a higher quality than 
another because there could be more than one legitimate approach to 
addressing these inputs. Some variations may reflect that state 
agencies used LCCA inputs that make sense given their state's 
particular historical experiences, circumstances, and needs. We found 
that estimates used in LCCA of when future roadwork would occur for a 
particular pavement type and design were based, for example, on past 
experience with the durability of the materials and climatic 
conditions, among other influences on the pavement life within the 
state. 

Table 3: Key Inputs for Conducting Life-Cycle Cost Analysis (LCCA) and 
GAO's Summary of Selected State Practices: 

Input and description: Agency Costs: Estimated cost of initial 
construction project and of expected future road work; 
Importance for LCCA: Estimating costs is fundamental to accurate LCCA, 
particularly as material prices fluctuate over time; 
Summary of state practices: All 13 states considered agency costs, but 
sources varied, including historical statewide bid prices, regional 
prices, and engineers' estimates. Cost estimates for each project 
alternative were developed either by project engineers, cost 
estimation specialists, or based on general cost estimates for 
projects of certain types. 

Input and description: Timing of Future Road Work: Estimate of when 
future road work will be needed for each design alternative. Timing 
determines how many rehabilitations or reconstructions fall in the 
analysis period; 
Importance for LCCA: Comparing differences in the cost of future work 
between alternatives is essential for deciding if a higher initial 
cost option is cost effective over a project's life cycle; 
Summary of state practices: All 13 states estimated future needed road 
work. We found timing ranged from 3 to 35 years after the original 
project, depending on, for example, traffic volume, climate, material, 
and design. Estimates were based on the state's historical experience 
with similar roadways, engineering judgment regarding design and 
material properties, or pavement industry estimates. 

Input and description: User Costs: Costs that are not paid by the 
agency but are incurred by the traveling public in the form of delay 
or vehicle operating costs, for example; 
Importance for LCCA: Costs incurred by users can, in some cases, be 
large. By including these costs in selecting a pavement-type, an 
agency may decide to procure a more costly pavement type or make 
changes in construction timing (e.g., day time vs. night construction) 
to lower user costs; 
Summary of state practices: Eight states considered user costs--3 
included only travel time delays, 5 included vehicle operating costs, 
and 1 included crash costs. Four of these 8 gave user costs equal 
weight to agency costs in their LCCAs. Of the 5 states that did not 
consider user costs, 2 indicated that the affect on users might be 
considered in making a final pavement-type selection outside of the 
LCCA framework. FHWA's RealCost or state-specific data may be used to 
determine the value of travel time delay reductions. 

Input and description: Analysis Period: Length of time over which 
estimated future costs of different alternatives are analyzed; 
Importance for LCCA: Longer periods will typically include more 
occurrences of future road work. The correct length analysis period 
allows for the LCCA to reflect the long-term cost differences 
associated with each alternative; 
Summary of state practices: In all 13 states, analysis periods ranged 
from 25 to 55 years, per state policy decisions or FHWA guidance, but 
generally were set to include a least one occurrence of major future 
road work for each alternative. 

Input and description: Discount Rate: Discounting incorporates the 
time value of money and allows future costs to be compared with 
current costs in terms of present value; 
Importance for LCCA: The higher the discount rate, the lower the 
present value of anticipated future costs and the less impact future 
costs have on LCCA results; 
Summary of state practices: Among the 13 states, discount rates ranged 
from 0.1 to 5 percent, per Office of Management and Budget (OMB) or 
FHWA guidance, state interpretation of OMB or FHWA guidance, or state 
economic policy.[A] Some state agencies updated their discount rate 
routinely (e.g. annually or biennially) whereas others did not have a 
formal practice to update the rate. 

Input and description: Treatment of risk and uncertainty: Analysis 
inputs in LCCA are based, to some extent, on estimates that may prove 
incorrect. To address such risk and uncertainty, inputs can be 
specified as a range of probable values rather than as point estimates; 
Importance for LCCA: Addressing risk and uncertainty in LCCA can 
provide a more reliable analysis and more robust pavement-type 
selection decisions, but adds technical complexity; 
Summary of state practices: Nine of 13 states used point estimates 
calculated in a deterministic LCCA analysis, and some stated it was 
because the deterministic analysis was simpler to conduct or easier to 
communicate results. Four of 13 states conducted some form of 
probabilistic analysis, varying at least some of the technical inputs. 
All of the selected states that conducted probabilistic analysis used 
FHWA's RealCost software to do so. 

Source: GAO analysis of Federal Highway Administration and state data. 

[A] OMB provides annual updates to discount rates recommended for use 
in economic analysis. FHWA's 1998 guidance on LCCA cites OMB as a 
source for information on selecting an appropriate discount rate, 
noting that historical rates applicable to LCCA ranged from 3 to 5 
percent. In recent years, OMB has recommended rates ranging from about 
1 to 3 percent for long-term capital investment due to declines in 30 
year Treasury bill rates, upon which OMB's discount rates are based. 

[End of table] 

The accuracy and appropriateness of the inputs used is important for 
LCCA results to be credible. In some states and nationally, there is 
debate among states and pavement industry stakeholders about many of 
these inputs because they can determine the final LCCA result. One 
approach used in some states to help ensure the accuracy of inputs was 
to involve pavement industry stakeholders in LCCA review. For example, 
Colorado and Florida had formal processes to solicit industry comments 
on LCCAs prior to making pavement-type selection decisions. Other 
state agencies had other approaches with industry stakeholders. 
Washington and California, for example, collaborated with industry 
stakeholders, to varying degrees, regarding overall LCCA policies and 
procedures, rather than on project-level LCCA inputs. 

Lastly, state agencies used different criteria to decide if LCCA 
results clearly indicated a lowest life-cycle cost pavement-type and 
had different approaches for documenting LCCA results. Seven of the 13 
state transportation agencies that we interviewed that conduct LCCA 
for pavement-type selection concluded that the assessed alternatives 
were "equal" (as opposed to clearly identifying a lowest life-cycle 
cost alternative) when the estimated life-cycle cost of different 
alternatives were within 5 to 20 percent of one another. By contrast, 
one state defined the preferred alternative strictly as having the 
lowest life-cycle cost. In 10 of the 13 states we reviewed, when LCCA 
results indicated a clear preferred alternative, state officials said 
that the transportation agency usually selected that pavement. When 
the LCCA does not result in a clear preferred alternative, final 
pavement selection was generally based either on a range of factors 
that were not considered within the LCCA or through an alternative 
bidding process, in which the agency accepts bids for both pavement 
types. For example, the agency may consider the ease of maintenance or 
the duration of construction for pavement alternatives to minimize 
workers' exposure traffic and increase safety, or the agency may opt 
for the alternative with the lowest initial cost. Additionally, state 
agencies document the results of an LCCA and the agency's decisions in 
different ways. We found no standard template for reporting LCCA 
results. LCCA documentation is important so that, decision makers 
fully understand the strengths, assumptions, or limitations of the 
analysis. Further, when stakeholders have a clear understanding for 
the basis of a pavement-type selection, decisions will not seem 
arbitrary or unfounded. 

State Practices Are Often Informed by FHWA Guidance: 

Selected states often used FHWA's guidance in developing their LCCA 
policies. In the 13 states we reviewed that conduct and use LCCA, 
FHWA's guidance was a central influence on state policy for 9 states, 
according to state transportation officials. FHWA support was 
especially important as some state transportation agencies initially 
developed LCCA policies and procedures. For example, in 3 of the 4 
states we visited, state transportation officials stated that 
assistance from FHWA personnel or information provided in FHWA's 
guidance was central to the LCCA policies and procedures established 
by the state agency. Many states reported that FHWA has provided 
valuable training on LCCA or useful LCCA tools (e.g., RealCost). 
Additionally, peer exchanges sponsored by FHWA, in which officials 
from multiple states could share their experiences, were noted by 
officials in 4 states as helpful. Furthermore, officials in 2 of the 4 
states we visited indicated that FHWA assistance could be particularly 
helpful to state agencies that are interested in incorporating LCCA 
into their pavement-type selection process. Officials we interviewed 
in all 13 states that conducted LCCA indicated that they would 
consider any new or additional FHWA guidance on LCCA. Specific areas 
in need of clarification cited by state officials included technical 
clarifications about discount rate and user costs, among others. 

FHWA LCCA guidance, assistance, and tools also are used by many--but 
not all--of the states we reviewed when conducting and using LCCA to 
make pavement-type selections for specific projects. In some states, 
FHWA officials are active in pavement-type selection, such as when the 
results of an LCCA are close between alternatives. For example, for 
federal-aid highway projects in Colorado, when the cost of 
alternatives is within 10 percent, a selection committee that includes 
a representative from FHWA is convened to review the project and make 
a selection. The FHWA representative reviews the state analysis and 
provides comments on technical inputs, adherence to the state's LCCA 
policy, and factors not considered in the LCCA that may affect 
pavement selection. In other states, FHWA staff may have little 
involvement in project-level analysis, but may, for example, 
participate in the review or revision of the state's LCCA policy or 
process. In addition, FHWA tools are central to how many of our 
selected states conducted their LCCAs. Specifically, 7 of the 13 
states we reviewed used FHWA's RealCost software, with one using a 
customized version for the state. In general, many state officials 
indicated that RealCost was very helpful software, though some noted 
that the many inputs required in RealCost made it too complicated, and 
consequently, they preferred to do LCCA on simpler tools developed by 
the state. 

FHWA LCCA Guidance Aligns with About Half of the Cost-Estimating Best 
Practices: 

FHWA's LCCA guidance largely aligns with best practices for two of the 
four phases of the cost-estimating process and partially aligns with 
two other phases. As we have previously found,[Footnote 15] there are 
a number of best practices that can help ensure credible and reliable 
cost estimates. FHWA's LCCA guidance includes many elements of those 
best practices.[Footnote 16] In particular, FHWA's guidance in the 
initiation and analysis phases aligns or substantially aligns with 
best practices, but only partially aligns with best practices in the 
assessment and presentation phases (see fig. 1).[Footnote 17] As 
discussed earlier in this report, FHWA's guidance is a central 
influence on state policies, so inclusion of cost-estimating best 
practices in FHWA's LCCA guidance is important to facilitate the best 
use of LCCA. 

Figure 1: Summary of GAO's Assessment of Federal Highway 
Administration Life-Cycle Cost Analysis Guidance: 

[Refer to PDF for image: illustrated table] 

Cost estimating phase: Initiation; 
Overall phase assessment: Aligns; 

Best practice: Define estimate’s purpose; 
Best practice assessment: Aligns. 

Best practice: Develop estimating plan; 
Best practice assessment: Substantially aligns. 

Cost estimating phase: Assessment; 
Overall phase assessment: Partially aligns. 

Best practice: Define program characteristics; 
Best practice assessment: Partially aligns. 

Best practice: Determine estimating structure; 
Best practice assessment: Substantially aligns. 

Best practice: Identify ground rules and assumptions; 
Best practice assessment: Substantially aligns. 

Best practice: Obtain data; 
Best practice assessment: Partially aligns. 

Best practice: Develop point estimate and compare it to an independent 
cost estimate; 
Best practice assessment: Partially aligns. 

Cost estimating phase: Analysis; 
Overall phase assessment: Substantially aligns. 

Best practice: Conduct sensitivity analysis; 
Best practice assessment: Aligns. 

Best practice: Conduct risk and uncertainty analysis; 
Best practice assessment: Aligns. 

Best practice: Document the estimate; 
Best practice assessment: Partially aligns. 

Cost estimating phase: Presentation; 
Overall phase assessment: Partially aligns. 

Best practices: Present estimate to management for approval; 
Best practice assessment: Minimally aligns. 

Best practices: Update the estimate to reflect actual costs and 
changes; 
Best practice assessment: Partially aligns. 

Key: 

Aligns: Completely satisfied the best practice. 
Substantially aligns: Satisfied a large portion of the best practice. 
Partially aligns: Satisfied about half of the best practice. 
Minimally aligns: Satisfied a small portion of the best practice. 
Does not align: Did not satisfy the best practice. 

Source: GAO analysis of Federal Highway Administration documents. 

[End of figure] 

Initiation: 

FHWA's guidance aligns with the best practices for the first phase of 
cost estimating by defining the cost estimate's purpose and 
substantially aligns with describing how to develop an estimating 
plan. As stated in the Cost Guide, guidance on the work to be 
performed in this phase is important to help states understand why the 
estimates should be conducted, the level of detail required in the 
estimate, and the time required to prepare the estimate. 

* Define estimate's purpose: Aligns. FHWA describes the LCCA purpose 
and process in detail, in both FHWA's Life-Cycle Cost Analysis Primer 
(Primer) and FHWA's Life-Cycle Cost Analysis in Pavement Design, 
Pavement Division Interim Technical Bulletin (Technical Bulletin). The 
documents describe when a LCCA should be completed, what the purpose 
of the LCCA is, and what a LCCA should include. FHWA's Life-Cycle Cost 
Analysis--RealCost User Manual (User Manual) also describes the 
purpose of a LCCA consistent with the description in the Technical 
Bulletin. 

* Develop estimating plan: Substantially aligns. FHWA presents the 
steps to develop a LCCA estimating plan--such as establishing pavement 
alternatives, estimating agency and user costs, and analyzing results--
in detail in both the Primer and Technical Bulletin documents. The 
description of the process states that the scope and level of detail 
should be identified. However, we found that the guidance did not 
include a proposed schedule for when these steps should be completed. 
Without adequate time to develop a competent estimate, a team may be 
unable to deliver an estimate of sufficiently high quality. According 
to the Cost Guide, a schedule ensures that an estimating team has 
sufficient staff time to perform the estimate. 

Assessment: 

FHWA's guidance partially aligns with best practices in the second 
phase of the cost estimation process. In this phase, we found that 
FHWA provided guidance that substantially aligned with best practices 
on how to develop an estimating structure and how to identify ground 
rules and assumptions, which can help state transportation agencies 
better understand LCCA and how to conduct LCCAs more efficiently. 
However, the guidance partially aligned with best practices of 
defining the program's characteristics, obtaining data, and developing 
a point estimate for comparison with an independent cost estimate. 
Providing additional guidance in these three areas, consistent with 
best practices, could help ensure the technical execution of an LCCA 
is optimal. 

* Define program characteristics: Partially aligns. FHWA's LCCA 
guidance identifies the type of technical information needed, such as 
route; location; annual average daily traffic, including the 
percentage of which is trucks; speed limit; and other details to 
define the project characteristics required to perform a LCCA, but the 
guidance does not include adequate discussion on developing plans for 
updating technical information to stay current with the project 
requirements. If the technical information is not updated, then as the 
project changes, the estimate may no longer be credible. For example, 
if the cost of a pavement-type alternative used in the LCCA is based 
on initial technical information assumptions, and those assumptions 
change after the LCCA is completed, resulting in the pavement being 
designed to a different thickness with a different cost, then an 
alternate pavement type may be more cost-effective but not identified 
unless the LCCA is updated. 

* Determine estimating structure: Substantially aligns. FHWA's LCCA 
guidance contains cost categories identifying which cost elements are 
to be collected, including costs to the transportation agency and user 
costs. However, FHWA's LCCA guidance does not provide enough 
information on how to create the estimating structure, or what it 
should look like, both of which are elements of the best practice in 
the Cost Guide.[Footnote 18] The use of a standardized estimating 
structure allows the collection of data to be standardized and shared 
across organizations, and facilitates the comparison of cost elements 
across projects, all of which makes the estimating process more 
efficient. 

* Identify ground rules and assumptions: Substantially aligns. FHWA's 
LCCA guidance states that the ground rules and assumptions for an 
estimate should be identified, reasonable, and conform to accepted 
practices. However, it does not mention that assumptions should be 
developed in coordination with the technical community and approved by 
management, both of which are elements of the best practice. 
Coordination with the technical community and management's acceptance 
of these ground rules and assumptions is important, because the 
rejection of even one of these assumptions can influence the cost 
estimate and the resulting decisions made based on the cost estimate. 
The assumptions also play an important role in the execution of 
sensitivity and risk analysis used to determine the possible 
variability of the estimate and can also be beneficial in helping 
management fully understand the estimate. 

* Obtain data: Partially aligns. FHWA's LCCA guidance states the 
importance of obtaining and using historical data, but it does not 
include guidance on validating that the data are reliable, 
statistically analyzing the data to determine whether it applies to 
the given estimate, or continually collecting, protecting and storing 
data for future use. These factors in data quality affect the 
estimate's overall credibility. The Cost Guide states that collecting 
valid and useful historical data is a key step in developing a sound 
cost estimate. In our selected states, we found that states generally 
used historical data, when available, for items such as construction 
costs and the length of time before the pavement is to be 
rehabilitated; however, pavement industry officials in 2 of the 4 
states we visited commented that they were not confident in the 
application of that data in LCCAs in their state. Officials in 2 of 
the 4 states we visited also noted that in some cases they were not 
confident in how the data were being selected for use and that there 
could be some bias in the estimates. For example in one state--where 
their regional offices perform the LCCA and a headquarters staff 
member reviews it--officials stated that they have found that one of 
the department's regions has some bias in their estimates of the 
length of the service life of pavement rehabilitations and initial 
costs that reflects a desire to utilize a specific pavement type. 
Guidance on how to validate that data are reliable and appropriate for 
an LCCA could help state transportation agencies improve the 
credibility of their estimates. 

* Develop point estimate and compare it to an independent estimate: 
Partially aligns. FHWA's LCCA guidance emphasizes the different 
methods for estimating the life-cycle costs and tools to automate 
portions of the process when developing a point estimate of the life-
cycle cost. However, no mention was made of using either an 
independent estimate for comparison or cross checks for the point 
estimate's major cost drivers. The Cost Guide states that independent 
estimates are important to ensure confidence in LCCAs by making sure 
the LCCA cost estimates are credible, reasonable, objective, and 
unbiased. The extent to which the selected states we reviewed had 
independent estimates varied. For example, one state's transportation 
agency officials stated that LCCAs prepared by their regional offices 
are independently reviewed by both the central office and on some 
occasions by pavement industry representatives, and that these reviews 
were very important to ensuring that the LCCAs were accurate and based 
on reasonable inputs. Another state transportation agency we reviewed 
does not conduct an independent estimate; however, each year, agency 
officials conduct a compliance review of approximately 25 percent of 
their projects to see if the staff followed official policy and 
processes. However, this review would not result in a revised LCCA, 
only additional staff training and other corrective actions to improve 
future LCCAs. Guidance on using independent LCCA cost estimates and 
cross checks of major LCCA cost drivers could help state 
transportation agencies ensure their estimates are credible, 
objective, and unbiased. 

Analysis: 

FHWA's guidance substantially aligns with the best practices in this 
phase; however, improvements could be made in defining how LCCA 
results should be documented. Without clear guidance on how to 
document LCCAs, states may not obtain all the benefits of the process. 
The Cost Guide states that good documentation enables the LCCA to be 
easily updated and replicated and can help establish an estimate's 
validity and credibility, as well as support the agency's decision 
making. Good documentation can also help demonstrate the agency's 
commitment to good financial decisions. 

* Conduct sensitivity analysis and conduct risk and uncertainty 
analysis: Aligns with both. FHWA did a good job of identifying 
practices that address the risk and uncertainty in the analysis to 
ensure that state transportation agencies can determine how sensitive 
their analysis is to the inputs used in the model. For example, FHWA's 
RealCost software enables users to conduct probabilistic LCCAs where 
technical inputs are specified as ranges of values instead of single 
values, allowing the analysis to better quantify risk and uncertainty 
inherent in the cost estimation process. The Cost Guide notes that 
guidance on quantifying risk and uncertainty is important, because 
these analyses provide a way to assess the possible variability 
(range) of the estimated costs and this range allows the estimator to 
demonstrate to decision makers a level of confidence in achieving the 
most likely cost. 

* Document the estimate: Partially aligns. FHWA's LCCA guidance states 
that good documentation of the estimate is an important part of an 
LCCA, but it does not provide guidance on what constitutes good 
documentation or state what documentation should be included. The 
RealCost software creates good documentation of the data input into 
the software and the results; it does not, however, provide good 
documentation of any costs or other inputs into the LCCA that are 
determined outside of RealCost. For example, if a state develops its 
own user costs and inputs them into RealCost, then RealCost only 
records the input number, not the various components that went into 
that cost. In another example, construction costs for each alternative 
are input into RealCost as a single cost. As a result, the underlying 
information (such as material prices and quantities of materials) 
included in that cost are not documented in RealCost and cannot be 
reviewed unless the agency takes additional steps to document those 
costs. A state agency may include this additional information in 
customized versions of RealCost, but FHWA does not provide guidance on 
what additional steps states that currently do not provide this 
documentation may consider or find helpful. Documenting an estimate is 
essential for validating and defending an estimate that is 
independently reviewed by stakeholders, especially if they question 
its credibility. Pavement industry officials in 2 of the 4 states we 
visited commented that due to the lack of available documentation, 
they are not able to fully review LCCAs and make a determination of 
the validity of the LCCAs. Guidance on what constitutes good 
documentation, and that documentation should be required, could help 
state transportation agencies ensure their estimates are valid, 
credible, and defendable. 

Presentation: 

FHWA's guidance partially aligns with best practices in this final 
phase of the cost estimation process. We found that FHWA's guidance 
included some aspects of presenting information to management and 
updating estimates; however, the guidance does not provide sufficient 
information on how LCCA results should to be presented to management 
and when an LCCA should be updated, in accordance with best practices 
in the Cost Guide. Presenting the LCCA estimate to management for 
approval is important, as is briefing management on how the estimate 
was developed, including the risks associated with underlying data and 
methods. It is also important to inform those conducting LCCAs that 
the cost estimates be updated as the project progresses to determine 
whether the preliminary information and assumptions remain relevant 
and accurate. Additional guidance on how to present the results of 
LCCA to management and when to update an LCCA may enhance the use of 
LCCA by states. 

* Present estimate to management for approval: Minimally aligns. Our 
analysis of FHWA's guidance showed that there were brief references in 
the guidance to presenting information about the LCCA to management, 
but there were no discussions of what should be included in the 
presentation. We heard from one state transportation official that it 
would be beneficial to have guidance on how to present the results of 
a probabilistic LCCA analysis to management, because their 
management's limited understanding of a probabilistic analysis was a 
barrier to their using it. State transportation agency officials in 
another state, which does not currently use LCCA, felt that guidance 
on how to communicate the results and benefits of using LCCA to their 
state legislators would be beneficial to their possibly adopting it as 
a tool. 

* Update the estimate to reflect actual costs and changes: Partially 
aligns. The Technical Bulletin supports using updated input values and 
information. For example, it refers to using updated data to determine 
user costs due to vehicle crashes in areas under construction. 
However, the Technical Bulletin and User Manual do not include a 
discussion about updating the estimate as a whole. According to the 
Cost Guide, updating the estimate gives decision makers accurate 
information for assessing alternative decisions. Without updating 
estimates, state transportation agencies lack assurance that the LCCA 
results are still valid. As discussed above, 10 of our 13 selected 
states complete their LCCA early in the project, and officials in 5 of 
these states indicated that they did not update their LCCAs close to 
the time the project is advertised for bids to construct the project. 
When the final LCCA is conducted too far in advance of the project 
being advertised for bids, material costs may change sufficiently to 
affect the selection of the most cost-effective pavement type. 
Officials in one state found it can be advantageous to update their 
LCCAs and reconsider a pavement material type selection closer to the 
completion of project design to determine whether the original 
assumptions or data have changed. This update can be very important in 
time periods where construction material costs are fluctuating or when 
the pavement designs changed significantly from the design at the time 
the LCCA was conducted, as the chosen material type may no longer be 
the most cost-effective. Guidance on when to update the complete LCCA 
estimate could help state transportation agencies provide more 
accurate information to their decision makers resulting in more cost-
effective pavement-type selection decisions. 

Providing consistent guidance that fully incorporates GAO's 12 cost-
estimating best practices could help ensure that states make accurate, 
cost-effective, and credible cost estimates. GAO's Cost Guide was 
issued in 2009, and was developed to address gaps in then-available 
cost-estimating guidance, so it is not unexpected that FHWA's guidance 
that pre-dates the Cost Guide does not include all the best practices 
identified in the guide. While FHWA has updated its RealCost software 
and User Manual in recent years, FHWA has been in the process of 
updating the Technical Bulletin since 2009, but has not yet issued an 
updated version, which it had planned to do in 2011. FHWA officials 
stated that it has taken longer than expected to complete the update 
because they wanted to incorporate information from guidance that was 
under development by others into FHWA's LCCA guidance. 

Conclusions: 

LCCA offers state transportation agencies an important tool for making 
sound, long-term, cost-effective investment decisions. While LCCA 
practices vary among states, so too do state processes for making 
decisions about road projects. Some variation in LCCA use is, 
therefore, to be expected and, to the extent that the technical 
elements of LCCA are handled well, some variation is not itself 
problematic. Nevertheless, correct execution of LCCA is important for 
LCCA results to be accurate and for decisions based on LCCA results to 
be justified. FHWA's guidance has been an important influence on 
states' LCCA practices and, given the willingness of state 
transportation officials to consider future FHWA guidance, this 
influence should continue. 

Current FHWA guidance--which was issued as interim guidance in 1998 
and not yet finalized--includes some, but not all, best practices for 
cost estimation. Each of the 12 best practices, however, is important 
for assuring the credibility and accuracy of cost estimates and, 
ultimately, the cost-effectiveness of investment decisions. FHWA's 
ongoing effort to revise its guidance on LCCA provides the agency with 
an opportunity to more fully incorporate GAO's cost-estimating best 
practices, including those related to the data necessary to conduct 
LCCA, how to corroborate LCCA results independently, how to document 
and when to update LCCA results, and how to present LCCA results to 
decision makers. Particularly given FHWA's role in overseeing the 
federal-aid highway program and in light of current infrastructure 
funding challenges, it is critical that FHWA do the utmost to aid 
states in making cost-effective investment decisions. Enhanced 
guidance that better incorporates all best practices for conducting 
LCCAs will better position states to do so. 

Recommendation: 

The Secretary of Transportation should direct the FHWA Administrator 
to issue updated LCCA guidance to fully incorporate the cost-
estimating best practices in GAO's Cost Guide, including guidance 
regarding the following: 

* input data quality and reliability, 

* use of independent cost estimates, 

* documentation of the analysis, 

* how to present the analysis for management approval, and: 

* describing when the estimate should be updated. 

Agency Comments: 

We provided a draft of this report to the Department of Transportation 
for comment. The department agreed to consider our recommendation. The 
department also provided technical comments that were incorporated as 
appropriate. 

We are sending copies of this report to the Administrator of FHWA, the 
Secretary of the Department of Transportation, and interested 
congressional committees. In addition, the report will be available at 
no charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-2834 or McTigueJ@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix II. 

Signed by: 

James R. McTigue, Jr. 
Director, Physical Infrastructure: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The 2012 Moving Ahead for Progress in the 21ST Century Act (MAP-21) 
[Footnote 19] amended the United States Code to mandate that GAO 
conduct a study of the best practices for calculating life-cycle costs 
and benefits for federally funded highway projects. This report (1) 
describes how state transportation agencies currently conduct and use 
Life-Cycle Cost Analysis (LCCA) to inform pavement-type selections for 
federally funded highway projects; and (2) assesses the extent to 
which Federal Highway Administration's (FHWA) guidance for conducting 
LCCA conforms to cost estimating best practices. 

To examine how state transportation agencies are currently conducting 
and using LCCA to inform pavement-type selections for federally funded 
projects, we interviewed FHWA's Office of Transportation Performance 
Management, Office of Asset Management, and Office of Program 
Administration officials, and reviewed FHWA documentation regarding 
LCCA. We also interviewed officials from the American Association of 
State Highway and Transportation Officials (AASHTO), the American 
Society of Civil Engineers (ASCE), the Transportation Research Board 
(TRB), the research community, the concrete industry, and the asphalt 
industry at the national level. We collected, reviewed, and summarized 
documented pavement-type selection practices from pavement selection 
and design manuals for 16 selected states, practices that were then 
confirmed by officials from those states as current practices or 
corrected to reflect current practices. We also reviewed research and 
surveys regarding states use of LCCA for pavement-type selection that 
was conducted by researchers for TRB and state transportation 
agencies. In 4 selected states--California, Colorado, Florida, and 
Washington--we visited and interviewed FHWA division office officials, 
state transportation agency officials, and industry association 
officials representing the asphalt paving and concrete paving 
industries in these states. The results on these interviews are not 
generalizable to all industry officials. In 12 additional selected 
states--Arizona, Maine, Maryland, Michigan, Minnesota, Missouri, 
Nevada, North Dakota, South Carolina, Tennessee, Texas, and Wisconsin--
we interviewed, via teleconference, state transportation agency 
officials regarding their state transportation department's use, or 
non-use, of LCCA in pavement-type selection and LCCA practices. 

We selected the 16 states to visit and interview based on the states 
having a variation of practices when performing LCCA. For example, we 
selected states that did and did not include user costs, states which 
used probabilistic and states which used deterministic means of 
calculating their life-cycle costs, and states with high and low 
discount rates. To identify states with a variation of LCCA practices, 
we used data from a 2008 survey conducted by Applied Research 
Associates for use in National Cooperative Highway Research Program 
Report 703 issued in 2011 as the basis for making these selections. 
The survey was limited to 35 responses (including DC and Puerto Rico), 
but we found these data to be sufficient for use in the selection of 
states for a nongeneralizable sample because respondents included 
states with a broad range of LCCA practices. To ensure we did not omit 
any states that have LCCA practices which are important for us to 
include in our study, but did not respond to the survey, we reviewed 
the states in this survey against recommendations made to us during 
interviews of FHWA, researchers, professional organizations, and 
industry associations and considered for inclusion in the interview 
list those states which they believe to have advanced or noteworthy 
LCCA practices. Finally to make sure that there were no geographically 
based reasons for differences in the use of LCCA, we ensured that the 
selected states were geographically spread across the country. For the 
4 states--of the 16--which we selected to visit, we selected only 
those which used LCCA and had been recommended by FHWA, researchers, 
professional and industry associations, as states that had an advance 
use of LCCA. The use of selected states does not allow us to 
generalize the findings of LCCA practices to all states. 

To determine the extent to which FHWA guidance for conducting LCCA 
conforms to cost-estimating best practices we interviewed and analyzed 
documentation from the FHWA Office of Transportation Performance 
Management and Office of Asset Management. We also interviewed 
officials from AASHTO, ASCE, TRB, the concrete industry, and the 
asphalt industry at the national level. In 4 selected states 
(described above), we visited and interviewed FHWA division office 
officials, state transportation agency officials, and industry 
association officials representing the asphalt paving and concrete 
paving industries in these states; and from 12 additional selected 
states (described above) we interviewed, via teleconference, state 
transportation agency officials. 

To assess the extent to which the FHWA guidance for LCCA is supported 
by a reliable cost estimating process, and if not reliably supported, 
why not, we compared FHWA's Life-Cycle Cost Analysis in Pavement 
Design, Pavement Division Interim Technical Bulletin; Life-Cycle Cost 
Analysis--RealCost User Manual; and Life-Cycle Cost Analysis Primer 
[Footnote 20] with the 12 steps of a high-quality cost estimate, 
identified in GAO's Cost Estimating and Assessment Guide (Cost Guide). 
[Footnote 21] GAO's Cost Guide, consolidates best practices that 
federal cost-estimating organizations and industry use to develop and 
maintain reliable cost estimates throughout the life of a government 
acquisition program. These criteria are applicable to FHWA guidance 
because both, the GAO Cost Guide and FHWA's guidance, describe cost 
estimation processes for capital investment decision making. 

The Cost Guide, which includes input from cost community experts and 
extensive research of best practices for estimating program costs, 
indicates that a high-quality, valid, and reliable cost estimate 
should be well documented, comprehensive, accurate, and credible and 
contain the 12 steps that high-quality, valid, and reliable cost 
estimates should follow. We reviewed the cost-estimating best 
practices mentioned in FHWA's LCCA guidance against these 12 steps and 
rated each step as being either: Aligns, Substantially aligns, 
Partially aligns, Minimally aligns, or Does not align. The ratings 
were determined as follows: Aligns: FHWA's guidance documents provided 
complete evidence that satisfies the best practice; Substantially 
Aligns: FHWA's guidance documents provided evidence that satisfies a 
large portion of the best practice; Partially Aligns: FHWA's guidance 
documents provided evidence that satisfies about half of the best 
practice; Minimally Aligns: FHWA's guidance documents provided 
evidence that satisfies a small portion of the best practice; and Does 
Not Align: FHWA's guidance documents provided no evidence that 
satisfies any of the best practice. After completing this review, a 
GAO cost analyst developed an assessment using this 5-point scale. A 
second analyst then verified this assessment of FHWA's LCCA guidance. 
To establish the overall phase assessment rating, we assigned 
following values to each of the 12 step ratings: Aligns = 4, 
Substantially aligns = 3, Partially aligns = 2, Minimally aligns = 1, 
and Does not align = 0. We added the ratings for the steps in each 
phase and averaged them. The averaged phase ratings that were 0.5 to 
0.99, 1.5 to 1.99, 2.5 to 2.99, 3.5 to 3.99 were each rounded up to 
the next whole number, below those ranges were rounded down to the 
next whole number, and those whole numbers were used to set the 
overall phase assessment rating. 

We conducted this performance audit from August 2012 to June 2013 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. McTigue, Jr., (202) 512-2834 or mctiguej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Heather MacLeod (Assistant 
Director), Sharon Dyer, Jennifer Echard, Bert Japikse, Delwen Jones, 
Terence Lam, Leslie Locke, Sara Ann Moessbauer, Joshua Ormond, Karen 
Richey, and John Stambaugh made key contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, Information on Materials and Practices for Improving Highway 
Pavement Performance, [hyperlink, 
http://www.gao.gov/products/GAO-13-32R] (Washington, D.C.: November 
2012). 

[2] Pub. .L. No. 112-141, § 52,003(a), 126 Stat. 405, 875 (2012), 
codified as positive law at 23 U.S.C. § 503(b)(3)(D)(ii). 

[3] GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs. [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). 

[4] We reviewed the FHWA guidance Life-Cycle Cost Analysis in Pavement 
Design, Pavement Division Interim Technical Bulletin, Publication No. 
FHWA-SA-98-079 (September 1998); the most recent, publicly available, 
draft FHWA Life-Cycle Cost Analysis - RealCost User Manual v. 2.5 
(October 2010); and FHWA, Life-Cycle Cost Analysis Primer (August 
2002). 

[5] GAO, Highway and Transit Investments: Options for Improving 
Information on Projects' Benefits and Costs and Increasing 
Accountability for Results, [hyperlink, 
http://www.gao.gov/products/GAO-05-172] (Washington, D.C.: January 
2005). 

[6] State transportation agencies often use guidance developed by the 
American Association of State Highway Transportation Officials 
(AASHTO) to design pavements. In 2011, AASHTO released a new software 
program (Pavement ME Design). Many states are in the process of 
evaluating this software and a few states have adopted this software 
for routine pavement design. The new software may indicate a different 
thickness of pavement material should be used that, in turn, would 
change the total cost of materials for that design. This software must 
be calibrated for conditions in individual states because, for 
example, the same design may perform differently in different climatic 
conditions and differently based on the available construction 
materials and stone in the state. Additionally, the Practical Guide to 
Cost Estimating released by AASHTO in 2013 provides states with 
guidance on how to develop cost estimates for highway projects. 

[7] Any costs or activities that are expected to be the same for all 
alternatives--such as lane painting--may be excluded from an LCCA. 
Consequently, a life-cycle cost estimate may not include all the costs 
of a project. Likewise, environmental costs, such as noise and 
emissions, are generally not included in LCCA for pavement-type 
selection because of the difficulty in monetizing these factors, 
though public agencies may have an interest in minimizing such costs. 

[8] We have previously reported on the benefits and risks for the 
federal-aid highway program due to FHWA's partnership with state 
transportation agencies. To advance the federal-aid highway program, 
FHWA engages in a range of activities, including providing technical 
assistance and developing solutions to identified problems--to 
encourage the effective and efficient use of federal-aid highway 
funding. GAO, Highway Infrastructure: Federal-State Partnership 
Produces Benefits and Poses Oversight Risks, [hyperlink, 
http://www.gao.gov/products/GAO-12-474] (Washington, D.C.: April 2012). 

[9] The Intermodal Surface Transportation Efficiency Act of 1991, Pub. 
L. No. 102-240, § 1024(a), 105 Stat. 1914, 1958 (1991), codified as 
positive law at 23 U.S.C. § 134(f)(12), had an LCCA requirement, but 
this requirement was dropped by the Transportation Equity Act for the 
21ST Century, Pub. L. No. 105-178, 1203(f)(1), 112 Stat. 107, 174 
(1998), which replaced 23 U.S.C. § 134(f). Federal-aid highway 
projects on the National Highway System with total costs above $50 
million for highway projects and $40 million for bridge projects are 
required to have value engineering analysis, a type of economic 
analysis designed to identify more efficient and less costly 
engineering approaches to executing a project. Value engineering 
analysis may include LCCA. There is also no federal requirement that 
states use LCCA for bridge projects. 

[10] Office of Management and Budget, Circular A-94 and associated 
clarification memorandums, including M-12-06 and an unnumbered 
correspondence to agencies dated September 20, 2012 on inflation, 
discounting, and life-cycle cost time periods. 

[11] [hyperlink, http://www.gao.gov/products/GAO-09-3SP]. 

[12] A Transportation Research Board (TRB) project surveyed state 
transportation agencies and reported that 29 of 35 states that 
responded to its survey use LCCA for new construction or 
reconstruction projects. Transportation Research Board of the National 
Academies, National Cooperative Highway Research Program, Report 703: 
Guide for Pavement Type Selection (Washington, D.C.: 2011). 

[13] For new construction projects, or reconstruction projects that 
involve changes in road location, the state may need to acquire 
additional land, or right--of--way, to build a project. In some cases, 
the amount of land needed may be contingent on the pavement design 
selected for the project. 

[14] Two different computational approaches can be used in LCCA--
deterministic and probabilistic. The methods differ in the way they 
address the variability associated with the LCCA input values. In the 
deterministic approach, the analyst assigns each LCCA input variable a 
fixed, discrete value that is used to compute a single life-cycle cost 
estimate for the alternative under consideration. The deterministic 
approach, however, does not address simultaneous variation in multiple 
inputs, and does not convey the degree of uncertainty associated with 
the life-cycle cost estimates. The probabilistic approach entails 
defining individual input variables by a frequency/probability 
distribution, rather than by discrete values. It represents a risk 
analysis of the life-cycle costs of a particular design alternative. A 
probabilistic analysis provides a much greater understanding of the 
variability associated with inputs, its effects on projected life-
cycle costs, and how it can be managed to increase the reliability of 
results and the confidence in identifying the most economical 
alternative. 

[15] [hyperlink, http://www.gao.gov/products/GAO-09-3SP]. 

[16] GAO's Cost Guide, which is based on input from cost community 
experts and extensive research of best practices for estimating 
program schedules and costs, indicates that a high-quality, valid, and 
reliable cost estimate should be well documented, comprehensive, 
accurate, and credible. As discussed earlier in this report, the cost 
estimation process contains 12-steps which occur within four 
overarching phases: initiation, assessment, analysis, and presentation. 

[17] We reviewed the FHWA guidance Life-Cycle Cost Analysis in 
Pavement Design, Pavement Division Interim Technical Bulletin, 
Publication No. FHWA-SA-98-079 (September 1998); the most recent, 
publicly available, draft FHWA Life-Cycle Cost Analysis-RealCost User 
Manual v. 2.5 (October 2010); and the FHWA Life-Cycle Cost Analysis 
Primer (August 2002). 

[18] The cost estimating structure (referred to as the work breakdown 
structure in the GAO Cost Guide) is a framework for defining the 
detailed work necessary to complete the project. It provides a basis 
for identifying the resources and tasks required for developing a 
project cost estimate. 

[19] Pub. .L. No. 112-141, § 52,003(a), 126 Stat. 405, 875 (2012), 
codified as positive law at 23 U.S.C. § 503(b)(3)(D)(ii). 

[20] Life-Cycle Cost Analysis in Pavement Design, Pavement Division 
Interim Technical Bulletin, Publication No. FHWA-SA-98-079 (September 
1998),; the most recent, publicly available, draft FHWA Life-Cycle 
Cost Analysis - RealCost User Manual v. 2.5 (October 2010); and the 
FHWA Life-Cycle Cost Analysis Primer (August 2002). 

[21] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and 

Managing Capital Program Costs, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). 

[End of section] 

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