Benefit-Cost Analysis Analyses Guidance for Applicants

Each applicant should provide evidence that the expected benefits of the proposed project justify its costs, recognizing that some costs and benefits can be difficult to quantify.  Benefits should measure the extent to which residents of the United States as a whole are made better off as a result of the project, while costs should include the burden that constructing the project will place on the U.S. economy.  This appendix provides general information and guidance on conducting benefit-cost analysis for proposed projects. In addition to this guidance, applicants should refer to OMB Circulars A-4 and A-94 in preparing their analysis (http://www.whitehouse.gov/omb/circulars/). Circular A-4 also cites textbooks on benefit-cost analysis (e.g., Mishan and Quah) if an applicant wants to review additional background material.

Applicants should consult the BCA Resource Guide, available on the USDOT FASTLANE Grants website (http://www.transportation.gov/tiger/guidance) and on the FASTLANE Grants website (http://www.transportation.gov/FASTLANEgrants), for supplemental information on procedures for conducting benefit-cost analysis, standard monetized values for many benefits, and other useful guidance for preparing a BCA.  Applicants who need additional help after reading this appendix should contact DOT staff, who are available to answer questions and offer technical assistance until the final application deadline has passed.   

In the Executive Summary for any benefit-cost analysis, applicants should provide a project matrix (in Microsoft Word or Excel format) describing the project and what it changes (see below).  The first column should provide a description of the current infrastructure baseline (including any anticipated changes over the analysis period), and identify the problem that the project will address. The second column describes how the project would change the current infrastructure baseline.  The third and fourth columns describe the impact of that change and the corresponding population it will affect.  The fifth column identifies the economic nature of those benefits.  The last columns summarize the results and indicate where in the analysis the benefits are calculated.  The matrix below provides an example of a completed matrix.

If an application contains multiple separate projects (but that are linked together by a common objective), each of which has independent utility, the applicant should provide a separate matrix (and analysis) for each project. The Executive Summary should also report the full cost of a project, including Federal, State, local, and private funding, as well as expected operations and maintenance costs, rather than simply identifying the requested grant amount or the local share of project funding.

In addition to the matrix, the applicant should summarize all pertinent data and quantifiable benefit and cost calculations in a single spreadsheet tab (or table in Word).  It should also summarize all benefits that are difficult to quantify and have consequently not been included in the quantified estimates, and the applicant should also note that the project is expected to generate such benefits this at the beginning of the BCA. The table below provides a simplified example to illustrate the calculation of discounted benefits and costs from a road project that is expected to provide travel time savings to local travelers over the course of five years. In practice, applicants should estimate both benefits and costs for each year after the project’s start date and for a period of time of at least 20 years in the future (or the project’s useful life, if it is shorter).  If the project will continue to have benefits beyond the end of the analysis period, applicants can include a residual value of the project at the end of the analysis period (equal to its remaining benefits net of residual costs), and treat that value as an additional benefit that occurs at the end of the analysis period and is discounted appropriately.  Applicants may also discount the benefits and costs separately and calculate a present value of each.

The following sections will help guide applicants through the matrix.  This is useful both to fill out the matrix (and in the process to adequately scope and outline the analysis) and to actually carry out the analysis.

Baselines

Applicants should measure costs and benefits of a proposed project against a baseline (also called a “base case” or a “no build” case). The baseline should be an assessment of the way the world would look in the future if the project did not receive the requested grant funding. Sometimes, it is reasonable to forecast that that baseline world resembles the present state. However, it is important to factor in any projected changes (e.g., baseline economic growth, increased traffic volumes, or completion of already planned and funded projects) that would occur even in the absence of the requested project.

Baseline assumptions need to incorporate the transportation options with the highest net benefits that would be available in the absence of the project.  Baselines should incorporate accurate descriptions of current traffic/shipping patterns.  It is also important that the applicant assume the continuation of reasonable and sound management practices in establishing a baseline. For example, a baseline scenario in which the owner of the facility is assumed to do no maintenance on the facility and ignore traffic problems and maintenance is not realistic, is likely to lead to the overstatement of project benefits, and will affect the rating of the BCA.

Applicants must demonstrate that the proposed project has independent utility, and that its benefits do not depend on the completion of accompanying projects that are uncertain to occur. Sub-components of a larger project may have little or no transportation value in the absence of the other components; for example, a ramp to an undeveloped site does not have much utility if the site does not get developed.  Where the benefits of a proposed project depend on the completion of accompanying land development, applicants should include benefits of such projects to current and anticipated future users only if construction of that development is already under way.  Applicants should limit the scope of their analysis to transportation benefits such as reduced travel time (compared to alternate routes to get to the site without the ramp), and should exclude benefits anticipated to result from the development itself (see Transfers).

Baselines also need to be realistic in the transportation assumptions that they make.  If a project would construct a short freight rail spur from a railroad mainline to a particular facility, it is unrealistic to assume that individuals would ship cargo by truck for thousands of miles in the absence of the project, whereas they would ship the same cargo over that distance by rail with the project.  A realistic baseline would more likely have current cargo traffic going by rail for most of the distance, and then by truck for the relatively short distance over which rail transportation is not now available.   

The applicant must make clear exactly what portions of the project form the basis of the estimates of benefits and costs. Most important, it is incorrect to claim benefits for the entire project but only count as costs the costs of the portion of the project funded by the grant. Thus, it would be incorrect to attribute all the benefits from a new port facility to a grant when the costs that are counted only cover the portion of the project funded by the grant, for example, paving a loading area.

There are cases where a grant may simply accelerate the completion of a project that an applicant already plans to build.  The benefits and costs in this case should thus be limited to the marginal benefits (and any additional costs) of completing the project in a shorter period of time, including the cost of expending resources on the project sooner than otherwise planned (i.e., a “now versus later” comparison).

Alternatives

An applicant should present and consider reasonable alternatives to the proposed project in the analysis. Applicants should evaluate smaller-scale and more focused projects for comparison purposes. For example, if an applicant is requesting funds to replace a pier, it should also analyze the alternative of rehabilitating the current pier. Similarly, if an applicant seeks funds to establish a relatively large streetcar project, it should also evaluate a more focused project serving only the more densely populated corridors of an area. A careful evaluation of the baseline will typically yield several alternative actions to address the central problem.  The analysis should demonstrate that the proposed project is the most cost-effective option of all the alternatives considered.

Affected Population & Types of Impacts

Applicants need to carefully identify the different impacts a proposed project will have.  For example, the rationale for many highway projects is to relieve peak-hour congestion, which in turn reduces travel times and vehicle emissions.  Other highway projects can improve road safety and in turn reduce accidents and corresponding property damage, injuries, and fatalities.  It is important that applicants then match the types of impacts to the corresponding affected population (group and number of affected entities).  For example, for a passenger project applicants should measure the number of passengers and for a freight project the amount of freight affected.

Applicants should measure affected passenger and freight traffic in passenger-miles and freight ton-miles (and possibly value of freight).  If, as is often the case (e.g., projected growth in highway traffic), the affected population is not the same for all years, then the applicant needs to break out affected population annually. Measures of freight traffic might include growing future levels of port calls. In some cases, the relevant population is the volume of traffic that the project diverts from one mode to another. Applicants should be realistic as to how the project is expected to affect these different populations.

Benefits – Long Term Outcomes

Each application must include in its analysis estimates of the project’s expected benefits with respect to each of the five long-term outcomes that DOT specified under Selection Criteria. We recognize that it may in some cases be unclear in which of these categories of outcomes an applicant should list a benefit. In these cases, it is less important in which category an applicant lists a benefit than to make sure that it lists and measures it (but only once).  The following Table provides examples of some of the types of benefits that might be listed under each of the long-term outcomes.  These are some of the primary benefit categories, but this is not an exhaustive list.  We describe these categories later.

Types of Societal Benefits

Travel time savings can result from transportation improvements whose purpose is to expand capacity or improve a facility’s state of repair.  Where this is the case, applicants should clearly demonstrate how the travel time savings will be experienced by the affected population, and how that population is expected to value those savings.  If travel time savings vary over time, the applicant must clearly show savings by year.  The applicant must also be careful to estimate savings solely from the project funded by the requested grant, and not from other related projects that are not funded by the requested grant.  Once the applicant generates its estimate of hours saved, it should apply the Department’s guidance on the value of time to those estimates found on both the TIGER website (http://www.transportation.gov/tiger/guidance and on the FASTLANE website (http://www.transportation.gov/FASTLANEgrants) to monetize them separately for business and non-business travelers.

In cases of scheduled passenger travel (transit, passenger train, etc.) where time savings from the propose d project are limited  to one phase of typical trips, applicants need to demonstrate whether and to what extent this results in a trip-wide reduction in travel time.  For example, increasing the frequency of feeder bus service to a rail transit station may not result in travel time savings for passengers’ entire door-to-door trips, unless there is a corresponding increase in the frequency of rail service to that station.  

Operating cost savings frequently occur from both freight-related and passenger-related projects. Freight-related projects that improve roads, rails, and ports frequently generate  fuel savings and other operating cost savings to carriers.  While freight carriers may pass some or all of these savings to shippers in the form of lower freight rates, and shippers may in turn pass these savings to consumers, they represent benefits in any case.  Passenger-related projects can also reduce operating costs for passengers by providing lower-cost alternatives to the use of private vehicles or by reducing the operating costs of those vehicles.  If applicants are projecting these savings as benefits, they need to carefully demonstrate how the proposed project would generate such benefits. However, applicants must be careful to count the value of the fuel and other operating cost savings (however allocated among carriers, shippers, and consumers) only once in the benefit-cost analysis; it cannot be re-counted in full each time it transfers from one group to the other, as this would entail double-counting of the same benefit.

Transportation can generate environmental costs in the form of emissions of “criteria pollutants” (e.g., SOx, NOx, and particulates) and greenhouse gases, such as carbon dioxide (CO₂). Because traffic congestion increases these emissions, transportation projects that reduce congestion can reduce these emissions and produce Environmental Benefits, even if they do not necessarily reduce total vehicle travel.   Also, transportation projects that encourage transportation users to shift from more-polluting to less-polluting modes can similarly reduce emissions. Applicants claiming these types of benefits must clearly demonstrate and quantify how the proposed project will reduce emissions. Once an applicant has adequately quantified levels of emission reductions, it should estimate the dollar value of these benefits using information on the social benefits of reducing criteria pollutant emissions in the online BCA Resource Page found on both the TIGER website (http://www.transportation.gov/tiger/guidance) and on the FASTLANE Grants website (http://www.transportation.gov/FASTLANEgrants).

Many infrastructure projects that improve the state of good repair of transportation infrastructure can reduce long-term maintenance and repair costs. These benefits are in addition to the benefits of reductions in travel time, shipping costs, and crashes, and applicants should account for them separately by including maintenance and repair savings as additional benefits. Improving state of good repair may also reduce operating costs and congestion by reducing the amount of time that the infrastructure is out of service due to maintenance and repairs, or may prevent a facility (such as a bridge) from being removed from service entirely. Thus applicants should also consider differences in maintenance and repair costs when comparing project alternatives.

For example, an applicant can compare the maintenance costs that would be required after rehabilitating an existing pier with those that would be required after building a new one. As part of the data that go into estimating the benefits of improving the state of repair, applicants should provide accepted measures for assessing an asset’s current condition. For example, applicants can use Present Serviceability Ratings (PSR) or the International Roughness Index to discuss pavement condition, and bridge sufficiency ratings to discuss the condition of a bridge. As discussed in the section on costs, the Department expects applicants to consider the complete life-cycle costs of the proposed project and any alternatives when making these comparisons.

Projects can also improve the Safety of transportation. A well-designed project can reduce fatalities and injuries, as well as reduce other crash costs such as property damage, costs for emergency response and cleanup, or medical costs for treating injuries. The applicant should clearly demonstrate how the project will improve safety.  For example, to claim a reduction in fatalities, an applicant must clearly demonstrate how the existence of the project would have prevented the types of fatalities that commonly occur in that area. Applicants should use crash causation factors or similar analyses of causes of crashes to show the extent to which the type of improvements proposed would actually reduce the likelihood of the kinds of crashes that actually had occurred.  Alternatively, when only a few cases are involved, the applicant should provide a description of the incidents and demonstrate the linkage between the proposed project and crash reduction. 

In some cases, safety benefits may occur because of modal diversion from a less safe to a safer mode. When applicants claim this type of benefit, they should provide a clear analysis of why the forecasted modal diversion will take place. Once the applicant has established a reasonable count of the incidents that the project will likely prevent, it should apply the Department’s guidance on value of life and injuries (http://www.dot.gov/office-policy/transportation-policy/guidance-treatment-economic-value-statistical-life ) to estimate their monetary value.  This and other relevant information on Abbreviated Injury Scale (AIS) are available at the BCA Resource Guide found on both the TIGER website (http://www.transportation.gov/tiger/guidance) and on the FASTLANE website (http://www.transportation.gov/FASTLANEgrants).

Applicants must carefully net out other effects before taking benefits from Property Value Increases (e.g. from a transit station). For example, if the value of a property goes up by the exact same amount as the developer’s investment in improvements to that property, then the increase in the property’s value is not a net benefit.  Property value increases over and above the developer’s investment may potentially capture benefits from the project, but only to the extent that they exceed the capitalized value of direct transportation benefits that are already included in the analysis.  Thus for example, applicants must net out any property value increases that result from time savings or other benefits that have already been counted, and include only the net increase in land value as a benefit. 

Simply asserting that there is a property value increase net of time savings or other direct transportation benefits is inadequate.  The Department expects any applicant claiming these types of benefits to provide a rigorous justification of the benefit.  Applicants should note that any claimed societal benefit from a property value increase is only a one-time  benefit, which cannot be claimed as a stream of benefits that recurs annually.  To the extent possible, applicant should use survey methods to estimate the value of the estimate the value of the expected property value increase from transit or other transportation improvements. The analysis should also consider to what extent an increase in land values induced by the project in one area causes a reduction in land values in some other area. 

If an applicant uses “benefit transfer” methods – that is, where an applicant claims that its proposed project will produce benefits that are similar in magnitude to those resulting from a previously completed project, it should take great care to satisfy the selection criteria and the disqualifying criteria noted in OMB Circular A-4 (p. 25).  The basis for the claimed benefit should be a peer reviewed study that clearly demonstrates benefits from an original project that shares many similar characteristics with applicant’s proposed.  This would include transit type (e.g. light rail), number of stations, number of track miles, type of neighborhood, retail activity, general demographic characteristics (e.g. per capita income), size of municipality, and geographic region.  Meeting all these criteria is difficult, but an applicant should satisfy most or all of them before applying this approach. If they cannot do so (and this will often be the case), applicants should limit themselves to only a qualitative discussion of these types of benefits.

Transit and bicycle paths may provide greater accessibility to alternative transportation modes, but they will enhance livability or other neighborhood attributes only to the extent that people actually use them, which is likely to depend in part on the access these modes provide and on the accompanying amenities that their users experience.   If there is mode shift from vehicles to a bicycle path, then there will be benefits from reduced congestion for remaining drivers, time savings for mode-shifters (if applicable), savings from reduced vehicle operating costs (to some extent offset by any bicycle-related costs), and environmental benefits from reduced vehicle emissions. Because the magnitude of each of these depends on the number of vehicles removed from surrounding roadways, applicants should carefully estimate this number and use the resulting estimate to calculate the corresponding benefits. 

There may also be transportation benefits to existing users of a mode – such as pedestrians or cyclists – from being able to use a new dedicated trail (“mobility benefits”) rather than sharing a roadway with motor vehicles.  However, the methodology for estimating these benefits – as well as for estimating recreational benefits to cyclists and pedestrians – is neither well developed nor widely accepted.  As a consequence, applicants should generally limit themselves to a qualitative discussion of these types of benefits.

Other

Transfers of resources or payments from one party to another do not represent benefits, and applicants should distinguish carefully between real benefits and such transfers. Benefits reflect real savings in the use of resources and consequent improvements in society’s well-being, while transfers represent payments by one group to another that do not result in a net increase in societal welfare.  In the case of job creation, for example, wage payments represent both a cost to the employer (who pays a wage) and an exactly offsetting benefit to the employee (who receives the wage payment), so additional wage payments associated with increased employment are transfer payments rather than real benefit.  The correct measure of net benefits from increased employment is any difference between the value of labor services those workers provide in their newly-assumed jobs and the value of services they provided previously, and this difference is likely to be significant only where they were previously unemployed .

With respect to economic development, investment in new buildings or other improvements accompanying a proposed project or increases in property tax revenues do not represent real economic benefits resulting from the project, and should not be included in the applicant’s benefit-cost analysis.  Increased payments of property taxes represent benefits to municipal governments receiving them, but are exactly offset by higher payments from land and property owners, and thus do not reflect an improvement in well-being.  Revenues from transit fares contributed by new riders are another example of a transfer rather than a real economic benefit, because they simply represent resources changing hands.

Although such transfers are commonly included in “economic impact analyses,” an economic impact analysis is not acceptable as a substitute for a benefit-cost analysis.  Other examples of transfers include port/rail projects whose purpose is to take away business from competitors without any accompanying savings in real economic costs to carriers or shippers.  In contrast, transportation cost savings that result from shifting traffic to a more convenient location do represent real economic benefits that can be claimed to result from projects that generate them.   Applicants should not include employment or output multipliers that purport to measure secondary effects as societal benefits, because these secondary effects are often comprised largely of transfers and in any event are likely to be of approximately the same magnitude per dollar of spending, regardless of what specific project is funded by such spending.

As noted above, the estimate of Costs associated with a proposed project must pertain to the same project as the corresponding estimate of benefits. If the requested grant would pay for only part of a project but the project is indivisible (i.e., no one part of the project would have independent utility), then the applicant should compare the benefits resulting from the entire project to the costs of that entire project, including costs that will be paid by State, local, and private partners or any investors other than the Federal government.

In general, applicants should use a life-cycle cost analysis approach in estimating the costs of the project, meaning that their estimates of a project’s costs should include those anticipated to occur at any point throughout its useful lifetime, each appropriately discounted to its present value. The Department expects applicants to include operating, maintenance, and other life-cycle costs of the project, along with the initial capital and any other costs necessary to complete it, including those for project design and engineering, land acquisition, or other project elements.

If the time period considered in the analysis is long enough to require rehabilitating the facility during that period, then the costs of doing so should be included.  Applicants should also consider external costs, such as those resulting from increased noise, increased congestion, and environmental pollutants caused by use of the facility, or by related changes in usage on other facilities in the same network. To the extent possible, applicants should also include costs to users during construction, such as delays and increased vehicle operating costs associated with work zones or detours. The applicant should correctly discount costs occurring at each point throughout the lifetime of the proposed project (or the analysis period, if shorter) to arrive at a present value of the project’s cost.

Applicants should discount future benefits and costs to present values using a real discount rate (i.e., a discount rate that reflects the opportunity cost of money net of the rate of inflation) of 7 percent, following guidance provided by OMB in Circulars A–4 and A–94 (http://www.whitehouse.gov/omb/circulars_default/).  Applicants may also provide an alternative analysis using a real discount rate of 3 percent. They should use the latter approach when the alternative use of funds to be dedicated to the project would be private consumption spending rather than private investment. In presenting these year-by-year streams, applicants should measure them in constant (often referred to as “real” or inflation-adjusted) dollars prior to discounting. Applicants should not add in the effects of inflation to their estimates of future benefits and costs prior to discounting. 

Benefit-cost analyses of transportation projects almost always depend on forecasts of projected levels of usage (road traffic, port calls, etc.). When an applicant relies on such forecasts to generate benefit estimates, it must assess the reliability of these forecasts.  If the applicant is using outside forecasts, it must provide complete documentation of the source for those forecasts.  Applicants should incorporate indirect effects and resulting benefits into their forecasts where possible (e.g., induced demand resulting from reductions in travel times or improvements in service quality).  Applicants should also take great care to match forecasts of usage levels to the corresponding year.  For example, using projected traffic levels for 2030 to generate benefits for all earlier years will cause the latter to be overstated, often significantly; the correct procedure is to use the forecast to impute future traffic during each intervening year and estimates the resulting benefits for each year of the project’s lifetime.

Applicants should make every effort to make the results of their analyses as transparent and reproducible as possible. A Department reviewer reading the analysis should be able to understand the basic elements of the analysis and the way in which the applicant derived the estimates of benefits and costs. It is inadequate for the applicant only to provide links to large documents or spreadsheets as sources.  The Department expects applicants to clearly cite all outside data sources with the corresponding page number (or cell number, for a spreadsheet). For more detailed documentation, applicants must include a thorough verbal description of how they performed each calculation. This should include references to tabs and cells in the spreadsheet. This verbal description should include specific sources for all the numbers in the spreadsheet (i.e. those that the spreadsheet itself does not calculate). 

If an applicant uses a “pre-packaged” economic model to calculate net benefits, the applicant should provide annual benefits and costs by benefit and cost type for the entire analysis period (including forecast year traffic volumes). In any case, applicants must provide a detailed explanation of the assumptions used to run the model (e.g., peak traffic hours and traffic volume during peak hours, mix of traffic by cars, buses, and trucks, etc.). The applicant must provide enough information so that a Department reviewer can follow the general logic of the estimates (and, in the case of spreadsheet models, reproduce them).  If the applicant fails to do so, the Department reviewer may not be able to positively confirm the results of the analysis. This will have an adverse effect on the level of certainty the Department reviewer places on the project’s benefits.