Benefit-Cost Analysis

A benefit-cost analysis (BCA) is when you would like to know if something is worth the attempt. In other words, you are going to spend money on a project, for, say improve the safety of an intersection by adding a left turn lane in one of the legs but how sure are you on the benefits you get from this. Is the cost of the project worth the attempt and it will pay you back in the future? Will it save some lives or prevent some crashes? That is something you definitely would like to know before you approve a project for construction. That is when the BCA will come into play. One step in the safety management process is the economic appraisal which is directly related to this same subject of cost and benefit. If we can determine the cost and potential benefit of a project, then the benefit divided by cost provides a ratio called benefit-cost ratio (BCR) and if this ratio is more than 1 we are on the lucky side for proceeding into the next levels of project approval.

OK, so what do we need here? We want to determine the cost and benefit of a project. The cost of a project is a summation of its planning, preliminary engineering, right of way, utility replacement, construction, and maintenance costs. These are something we need to figure out by asking the expert people in each area. For the ease of the process sometimes, the cost of utility replacement, right of way, and preliminary engineering are estimated as a percentage of the construction cost.

What is the benefit we can get from a safety improvement project? A safety improvement will prevent crashes and that would be the benefit we receive. Now we need to convert it to some monetary value so we can say it will benefit us by this much dollar amount. For that, we need to know how much a society loses when a road accident occurs. The car is damaged and/or the passenger(s) may be injured or killed. These hurts will not exist if the safety project is implemented and basically the cost of these damages will be the benefit we receive as a result of safety improvement. Now how to estimate the costs of all these crash damages and injuries? The highway safety manual has provided a table (Table 1) that show the societal costs of accidents with different severity levels. There is two ways to look at these costs. Human capital, and Comprehensive. 

• The human capital cost is an estimate of the monetary losses related to medical care, emergency services, property damage, and lost productivity.

• The comprehensive crash costs include the human capital cost plus the non-monetary costs related to the reduction in the life quality. This cost provides a more accurate level of the burden a crash impose on the society.

Table 1. An estimate of the crash costs for each severity

The values in the above table are for the year 2001 and they have to be scaled up to the current year based on the inflation rates using the Consumer Price Index (PCI) for the human capital cost and using the Employment Cost Index for the comprehensive cost. The PCI for the current month/year can be found here, and the ECI can be found in table 5 under this report. How it works is easy, the average value of CPI for 2001 is 177.1 and in whatever month you are right now, find the CPI value for it (for example, CPI for February 2015 is 234.722) and then find the ratio. (for example, for February 2015 it will be 234.722/177.1 = 1.3254 and multiply this value to the human capital costs. The result is for the human capital cost for the current date. Similarly, for the comprehensive cost, the average ECI for 2001 is 85.8 and find the ECI for the current date (for example, the ECI for Oct 2014 is 121. Then the ratio is calculated as 121/85.8 = 1.41 which is multiplied to the comprehensive cost and you will have all the costs for the current time.

Next step, is to see how many crashes are going to be potentially prevented so that we can calculate the potential benefit based on the cost of those crashes.

TO BE CONTINUED - April 8 2015