Knowledge Base - Benefit Cost Analysis
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Use of terms "Benefits" and "Costs"
Benefit and Cost categories showing net positive
Accounting for the Opportunity Cost of Capital
Highway Projects vs. Transit Projects
Benefits Included in Social/Environmental Benefits
Measuring Benefits of Highway Widening Projects
Dealing with Externalities That Can Increase GSP
Measuring Productivity Improvements
Understanding a Business (formerly "On-The-Clock”) Trip
Value of Time and Value of Accidents
Safety and Environment Benefits
Accounting for Costs of Access Modes to Transit
Impact of Local Economy on Economic Benefits
Modeling Reconstruction or Resurfacing Projects
Construction of Toll Booths - Project Cost?
Tolls and Transit Fares - Costs or Benefits?
Construction Spending - No Benefit?
Inflation Effect on Impacts and Benefits
Use of terms "Benefits" and "Costs"
Question: What does the term "Benefits" comprise? What do "Costs" comprise?
Answer: In TREDIS, the term and categories under Benefits generally represent anything that is caused by the project, such as changes in driving costs, pollution, travel time, or other. Costs, on the other hand, are the direct spending and balances incurred by the designing, building, and maintenance of the project. For example, the costs of designing a new roadway or rail line and the cost of buying and operating new train cars would all fall under Costs.
Question: Why are some “benefits” negative? Why are some “costs” negative?
Answer: Since the Benefits encompass all the effects of the project, they include disbenefits. A very common example is a highway that decreases travel times for passenger cars by increases the number of miles traveled. In this case, the disbenefits of more pollution and more traffic incidents are measured as negatives (from increased miles driven) – they reduce the total Benefits of a project – while the savings in travel time will be positives. One of the purposes of TREDIS is to determine if the net benefits remain positive for a given project.
In the category of Costs, sometimes a residual value of the project – a bridge, for example – will provide a negative Cost at the end of the project. Of course, this is almost always offset by much higher positive Costs that represent outlays to build and operate the infrastructure.
Benefit and Cost categories showing net positive
Question: Why are Benefit and Cost categories both usually net positive?
Answer: Capital and O&M costs are entered by the user, and TREDIS applies these expenditures across various sectors of the economy. TREDIS also distributes the respective costs over the construction period, and the operations period. In Advanced Mode, users may specify where expenditures are to be applied to. For example, the user may specify right of way costs, engineering costs, and other categories. If one mode has a different cost distribution than another mode, the user can specify this allocation in Advanced Mode.
Question: How do capital expenditures impact the economy for different modes?
Answer: Though abstractly Benefits and Costs are weighed against one another in a project, TREDIS presents Benefit and Cost category items both as being net positive (in a typical project) because they are often used to compose a Benefit-Cost ratio, Benefit over Cost. If a project has $100 M in Costs and $200 M in Benefits, the ratio will be 2. This measure requires both to be positive.
Another typical way to compare Benefits and Costs is to subtract Costs from Benefits, which is also more intuitive if both Benefits and Costs are measured as positive.
Question: How is reliability considered in TREDIS?
Answer: TREDIS considers reliability through a combination of user-inputs for congested travel, and empirically-based data on buffer times. As congestion increases, TREDIS assumes users apply more buffer time to their travel, and those costs are also calculated in the model. Projects that decrease congestion, thus improving reliability, reduce overall user costs.
Question: What units are costs in?
Answer: Capital costs and O&M costs must be entered in millions of present year dollars. The present year is defined by the user when setting up a project.
Accounting for the Opportunity Cost of Capital
Question: How does TREDIS account for the opportunity cost of capital, in other words, the effect of dollars spent via public investment and not spent privately?
Answer: TREDIS recognizes different purposes and uses of economic analysis. For instance, benefit cost analysis may be used to prioritize projects (or select the most desirable alternative for a single project) within the bounds of an already funded program. In such cases, the opportunity cost of capital is not relevant. However, if the analyst wishes to consider whether or not to impose a new fee or tax increase to pay for a new project or program, then it could be appropriate to consider alternative uses of the money. In such cases, TREDIS provides a public-private benefit and cost accounting that can account for the effect of raising a fee and decreasing household funds available for other uses.
Highway Projects vs. Transit Projects
Question: I have seen that benefit-cost models tend to make highway projects appear better than transit projects. Is that also true for TREDIS?
Answer: That is not true with TREDIS. The statement generally holds for benefit-cost analyses that focus just on user time and cost savings (and that happens because highways tend to have higher volumes of users and speed up more than transit buses when congestion is reduced). But TREDIS has several features that can help provide a more balanced representation of benefit for transit. This includes productivity benefits from job market access and agglomeration effects, decreases in pollution emissions, reductions in traffic congestion growth (from mode switching) and transportation choice (option value) benefits.
Benefits Included in Social/Environmental Benefits
Question: What benefits besides air quality are included in the TREDIS social/environmental benefits category?
Answer: The benefit-cost analysis element of TREDIS allows users to define and calculate the value of social and environmental benefits as broadly as desired. However, there is a default valuation factor only for emissions reductions, so any additional social or environmental benefits must be calculated outside of TREDIS.
Measuring Benefits of Highway Widening Projects
Question: How can TREDIS measure benefits and other effects of induced demand brought about by highway widening projects?
Answer: Users provide information on the extent to which traffic growth impacts are due to routing or time-of-day trip shifts, or induced as new trips. The valuation of enabling new types of activities via induced trips is recognized as “consumer surplus” in the benefit-cost calculation. This may be offset by negative effects on travel times and pollution emissions.
Dealing with Externalities That Can Increase GSP
Question: Can TREDIS deal with externalities that can increase GSP, but not enhance the local economy, e.g., oil sales (a net export), health care costs from accidents, etc.?
Answer: Yes, TREDIS calculates effects on safety and emissions. Both affect its benefit-cost calculations but do not change economic impacts (in terms of jobs, local income or business sales).
Measuring Productivity Improvements
Question: How do we measure productivity improvement in TREDIS, using wage increase by industry?
Answer: TREDIS calculates four types of productivity benefit: (1) travel cost savings, (2) reliability benefits for industry, (3) delivery logistics and supply chain benefits, and (4) agglomeration effects on access to specialized skills and services.
Question: What is a discount rate? How does it work in TREDIS?
Answer: The discount rate represents the time value of money beyond the effect of inflation. It can be viewed as the cost of borrowing money that is above the rate of inflation, or it can be viewed as society’s valuation of getting benefits sooner rather than later. Commonly, analysis studies use discount rates ranging from 3% to 7%. For more information on this topic, see the TREDIS benefit-cost analysis technical documentation.
Question: For travel time reliability, TREDIS uses a buffer time concept. Is this based on the TTI buffer index? Does the user have to input the buffer time or can TREDIS do it automatically?
Answer: The Buffer Time concept in TREDIS is indeed based on the TTI Buffer Time Index (BTI) concept. The BTI is defined as a ratio of extra time needed to ensure an on-time arrival relative to the average travel time. For example, a buffer time of 3 minutes on a trip that takes 30 minutes on average translates to a 10% buffer time index. Following this example, TREDIS does not ask for the buffer time index, but rather the buffer time per trip (in hours) – in this case, 0.05 hours per trip.
Users enter this information (if available) in the Travel Demand Characteristics table. If users don’t have this information, then TREDIS provides the option of supplying buffer time per trip estimates based on observed relationships between congestion and buffer time. If selected, this option will automatically fill in the buffer time per trip field for cars and trucks only.
Understanding a Business (formerly “On-the-Clock”) Trip
Question: Among the choices of trip purpose, what is abusiness trip, and why does it make a difference to isolate it?
Answer: A “Business” trip is a passenger trip where the purpose is business-related, and the traveler is compensated usually by an hourly wage. For the auto mode, examples are light-truck construction/service travel, courier or light-truck delivery services, or other traveling services (such as nursing care). For Air travel, the business trip purpose includes all business trips.
Cost savings for business trips affect the economy in significantly different ways than personal or commute trips. Whereas saving an hour of personal time constitutes a welfare gain to the driver, no economic impacts are generated from the savings. In contrast, business trips are being compensated at an hourly wage by a local business. Therefore, saving an hour on such a trip allows the business to reallocate the driver/passenger to other productive uses or eliminate the expense altogether. This constitutes a true monetary savings to the business, which can be used to gain market share or reinvest in the company.
Value of Time and Value of Accidents
Question: Are there embedded default constants for the value of time and the value of accidents prevented in TREDIS or does the user have to provide them? If so, may the user change the value of time and accident value factors?
Answer: Yes. There are default constants for both the value of time and the value of accidents. Time values include Business, Commute, and Personal for Passengers and also include Crew time values for Car, Truck, Bus, Rail, Air, and Vessel. Accidents includes monetary values for Property Damage, Personal Injury, and Fatalities. These values for time and accidents drawn from industry publications and also guidance from the Bureau of Labor Statistics (BLS) and the U.S. Department of Transportation (DOT). Users are able to change the both time and accident values to reflect local or regional preferences.
Question: I have a construction schedule that is staged with different levels over time, yet TREDIS appears to allocate the construction cost equally over the construction period. Can this be overridden? Is there a way to make use of my construction schedule?
Answer: In TREDIS version 3.3, users can input a custom construction schedule on the project page. After you have defined your project (set up regions and time periods), and after you have fixed your construction period, click the green "Spending Allocation" button. This will bring up a table where you can enter, for each year in the construction period, the fraction of total construction budget spend in that year. Note that the sum over all years should equal 1. This information is later used to estimate total construction impacts on a year-by-year basis.
Question: How does TREDIS account for safety benefits?
Answer: TREDIS has input fields for changes in the incidence of three categories of accidents, and default values (that can be changed) setting the unit valuation of those accidents. The system calculates accident costs and allocates them to various household and industry sectors of the economy depending on the levels of traffic and mix of users on affected facilities.
Safety and Environment Benefits
Question: How are safety and environmental benefits calculated for projects?
Answer: TREDIS calculates safety benefits based on empirically-based safety rates. Changes in VMT have resulting impacts on the estimated number of crashes, and the monetized impacts of those crashes (fatalities, injury, and property damage). Users may change the crash rates for their project, and for the build and no-build scenario. Environmental benefits are calculated by emissions rates based on changes in VMT, congestion, and fuel consumption.
Accounting for Costs of Access Modes to Transit
Question: How does TREDIS account for monetary, energy, environmental, etc. costs of access modes to transit (e.g., park-and-ride, feeder bus, etc.)?
Answer: TREDIS has separate inputs for travel cost, energy use, pollution emissions and other aspects of changes in usage and performance of alternative modes – spanning air, marine, rail, road, transit and bicycle modes.
Impact of Local Economy on Economic Benefits
Question: Do characteristics of a local economy affect economic benefits?
Answer: Yes, difference in local industry mix affects the way TREDIS allocates transportation impacts to affected sectors of the economy, including impacts on commuting/labor markets and truck delivery markets.
Question: Within the travel cost module, how do you treat household cost savings (like fuel costs or vehicle ownership costs)? Are they treated as increases in household disposable income?
Answer: Both of the cost types mentioned above are household out-of-pocket travel costs, which are estimated in the Travel Cost Module. The treatment of these costs in economic analysis occurs in the Economic Adjustment Module. In this case, it estimates how changes in household out-of-pocket travel expenditures affect the greater economy. The process is as follows. When households save money on travel expenses, those foregone expenses get removed from travel-related sectors such as fuel, maintenance, and vehicle purchasing, and get re-allocated as consumer spending according to average consumption patterns. The net effect on the economy is typically small but positive, as consumer spending is moved out of sectors with a high degree of leakage (fuel, auto purchases), and into sectors with higher regional multipliers (dining, retail, services).
Question: Does TREDIS allow more than one way to calculate the benefit/cost ratio?
Answer: Yes. TREDIS has four ways to calculate the benefit/cost ratio. One includes only direct benefits, (avoided vehicle cost and certain avoided traveler times), another also includes avoided travel time for recreation trips and avoided safety costs, still another also includes avoided shipper logistics costs, and a final calculation also includes avoided social costs. This is done because some funding agencies and report reviewers have a more restricted view of benefits and some have a less restrictive view of benefits.
Question: Does TREDIS allow a different discount rate to be used for the different B/C calculations? If so, how is this done?
Answer: Yes. The discount rate is an explicit input which beginning in TREDIS 5 is defaulted to 3% and 7% (on the Results Setting Screen) per the USDOT guidance for the discretionary TIGER grants. Earlier versions of TREDIS do not provide a default value, which is set on the Timing screen.
Question: Does TREDIS allow for a cost of induced VMT (or benefit of avoided VMT) because of the air quality or carbon emissions of the travel? If so, how does this generally work?
Answer: Yes. The environmental costs related to induced VMT are based on the additional emissions of volatile hydrocarbons. The benefits of induced VMT are based on the value of the additional travel which is being done for productive purposes (e.g., because of additional jobs or better jobs).
Modeling Reconstruction or Resurfacing Projects
Question: Can TREDIS be used for highway reconstruction or resurfacing projects or transit vehicle upgrade projects in which capacity is not increased and safety is not a factor? If so, what is the general procedure for this?
Answer: Yes. The general procedure is to create a project to represent the upgrade (highway or transit) and compare it with the base case. It will require user creation of an upgrade project. An important input will be the operation and maintenance aspect, particularly the difference between the upgrade, with less maintenance required on the upgrade project and either less user cost per mile (if a highway project) or some diversion from highway to transit (if a transit project).
Construction of Toll Booths - Project Cost?
Question: Should the cost of construction of toll booths, etc. count as project cost?
Answer: Yes. Typically this is a small percentage of total construction unless a free highway is being converted to a toll highway.
Tolls and Transit Fares - Costs or Benefits?
Question: Do toll revenues or transit fares count as project operations or project user costs or benefits in TREDIS?
Answer: In the context of benefit/cost analysis, fees (including highway tolls and transit fares) are considered to be transfers of money between two parties (flowing from travelers to facility operators). From the societal viewpoint in benefit/cost ratio, which considers all parties, there is no overall net cost and no overall net benefit from this transfer. Thus, they are not reported in the Benefit/Cost reports. However, the transfer does enable financing and funding of projects that can provide real travel benefits to users. The flow of money between parties is tracked and reported in the Tax & Finance Module.
Question: Our long-range urban transportation plan invests in transit to shift people out of cars, yet the input to TREDIS then shows a loss of auto vehicle trips that is larger than the gain in bus vehicle trips. That leads to a loss of total vehicle trips. Does that introduce error in the benefit calculation?
Answer: In analyzing mode shift policies, it is important to distinguish changes in the pattern of person-trips and the pattern of vehicle-trips.
Construction Spending - No Benefit?
Question: Tried using TREDIS. We added construction spending and see an economic impact but no benefit. Is something wrong?
Answer: Nothing is wrong. Construction spending does increase the flow of income in the regional economy during construction years and TREDIS shows that impact. However, from a benefit-cost viewpoint, construction spending reflects a cost rather than a net benefit. (Another way of viewing it is to see that the money spent on construction occurs by foregoing other uses of that money which would also flow through the economy.)
Inflation Effect on Impacts and Benefits
Question: Is there any way to recognize the fact that construction costs are rising faster than the rate of inflation? Doesn’t this affect benefit/cost analysis results?
Answer: Yes. While the benefit/cost analysis already controls for inflation, it is true that construction costs have been growing even faster than general inflation, and transportation building costs are rising yet faster due to growth of non-construction factors (land acquisition, context-sensitive design, etc.). That increases the net benefit of accelerated investment and decreases the benefit of delayed investment.
Question: What are the sources for the environmental factors captured in your Grant Report and the Environmental Factors report?
Answer: The data sources for the environmental factors are the U.S. Environmental Protection Agency and the U.S. Department of Energy.
Question: Does TREDIS measure the dis-benefit from not maintaining the existing system, lowering accessibility for some? How does it do this?
Answer: TREDIS can be (and indeed has been) used to measure economic losses associated with failure to maintain existing transportation facilities and services. In general, this can be modeled by having the analyst define scenarios that reflect the extent to which travel times will lengthen, trips will transfer to alternative (and more costly) options, and effective labor market and delivery market areas will shrink in size.
Question: How do environmental and safety benefits get measured and used in the benefit-cost calculation?
Answer: TREDIS provides options for users to estimate accident, injury and fatality impacts, as well as air quality or other environmental impacts, based on changes in vehicle-miles of travel. Alternatively, it also provides an option for users to do their own external calculations of environmental impact and just enter those calculated results. All of these impacts can be considered in the benefit-cost calculation (though they do not all affect the separate calc of regional income growth).
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