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51 APPENDIX B Example of Pavement-Type Selection in Alternate Bidding This appendix illustrates how pavement-type selection is Step 1: Identify a Pool of made in alternate bidding projects using the process proposed Pavement-Type Alternatives in the Guide. The information presented in this example is intended for illustrative purposes only. The pavement-type selection committee identifies a broader group of pavement-type alternatives for consideration in the selection process. The committee periodically identifies alter- Needs Statement natives based on what does or does not work in their state, Assume that an agency is in the process of selecting region, or district. This step is not required for the selection pavement-type alternatives for a reconstruction project on a process at the project level. For this example, the pavement- rural highway. The agency has evaluated the suitability of alter- type alternatives approved by the selection committee are des- nate bidding in this project and intends to use this method of ignated Alternatives 1, 2, and 3. project delivery if at least two qualifying alternatives are identi- fied through the pavement-type selection process. Step 2: Identify Feasible The agency routinely uses three pavement types for projects Alternatives for the Project of this nature, as approved by the pavement-type selection committee. Project preliminary scoping studies found no engi- At the project level, the process begins with the alternatives neering constraints in using any of these alternatives. approved by the pavement-type selection committee. Within The agency requires an LCCA of alternatives for all new or this group, pavement types that are considered inappropriate reconstruction projects and has established the following for this project are identified. For this example, all three alter- inputs for use in the LCCA: natives are used routinely for the anticipated section traffic level and composition, and there are no issues with the exist- Analysis period: 45 years. ing pavement condition, historical trends, or roadway periph- Discount rate: 3 percent. eral features. Computation approach: deterministic. The agency conducts an evaluation of existing pavement Economic analysis technique: NPV. type through nondestructive testing and destructive sam- User costs are not considered. pling. In this example, the results indicate that there were no significant factors, such as the subgrade type or drainage The agency applies predefined economic criteria to deter- conditions, that would override the use of these alternatives. mine the cost feasibility of alternatives and eliminates alter- natives whose initial or life-cycle costs exceed those of the During project scoping, the agency also evaluates roadway competing alternatives by 20 percent. peripheral features such as changes in vertical profile, over- The agency has identified three noneconomic factors nec- head clearances, and on-grade structures. In this case, no essary for evaluation in the selection process: engineering constraints are found. Material recycling. Step 3: Develop Pavement Stimulation of competition. Life-Cycle Strategies Maintenance experience and capability. For each of the feasible alternatives identified in step 2, the The following steps illustrate the pavement-type selection agency develops pavement life-cycle strategies to maintain process. the desired performance level over the 45-year analysis period.

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52 Table B1. Service-life estimates of pavement types. Step 4: Perform LCCA Pavement Expected Service Life (Years) The agency's LCCA procedure requires the computation of Alternative First Rehabilitation Subsequent Rehabilitation 1 13 12 NPV over a 45-year analysis period at a discount rate of 3 per- 2 20 20 cent. While the agency considers salvage value and supple- 3 12 10 mental costs for traffic control, preliminary engineering, and construction engineering, it does not consider road-user costs The agency first performs the structural designs, estimates the in the pavement-type selection process. The agency reports the service lives, and identifies the timings and extents of antici- direct cost estimate of each activity with supplemental costs pated M&R treatments. included. The agency develops pavement designs for the alternatives Table B3 and Table B4 present the direct agency costs for using the same inputs and design criteria such as daily traffic each alternative by the activity type in both real (undiscounted) volume, design life, reliability, and terminal performance with and discounted terms, respectively. The salvage value for Alter- appropriate design procedures. native 3 has been calculated using the straight line depreciation In routine practice, the agency typically uses statewide method (see Figure B1). The expenditure-stream diagrams of pavement management data to develop service life estimates each alternative are presented in Figure B2 through Figure B4. of the initial structure and rehabilitation activities through performance trend analysis. The service life estimates of the The summary of the LCCA is presented in Table B5. three alternatives are presented in Table B1. The agency identifies the type of major rehabilitation activ- Step 5: Evaluation Using ities for each alternative and sequences their timing based on Economic Factors the service-life estimates (results are provided in Table B2). Major rehabilitation is planned at years 20 and 33 for Alterna- Upon computing the life-cycle costs, the agency conducts an tive 1, at year 25 for Alternative 2, and at years 15, 27, and 37 economic evaluation of alternatives to assess their cost feasibil- for Alternative 3. Scheduled maintenance will be performed ity at the project level as well as the agency level. annually for all the alternatives. The agency first determines the cost feasibility of alternatives While Alternatives 1 and 2 are expected to have no useful at the project level. The agency eliminates an alternative when remaining life at the end of the 45-year period, Alternative 3 its initial cost or life-cycle cost is 20 percent higher than that of is likely to have 2 years of unused life, as the scheduled reha- the lowest competing alternative. bilitation at year 37 will extend its service life by 10 years. Based on the cost estimates presented in Table B5, the life- Therefore, salvage value is included only for Alternative 3 in cycle cost of Alternative 1 is the lowest. The life cycle costs of the LCCA. Alternatives 2 and 3 are approximately 7 and 16 percent higher Table B2. Timing and type of M&R activities. Time at which M&R Strategies will be performed Pavement Rehabilitation Rehabilitation Rehabilitation Alternative Maintenance 1 2 3 1 Year 20 Year 33 Annual 2 Year 25 Annual 3 Year 15 Year 27 Year 37 Annual Table B3. Direct agency costs (real dollars). Pavement Initial Rehabilitation Rehabilitation Rehabilitation Salvage Maintenance Alternative Structure 1 2 3 Value 1 $2,650,000 $335,100 $405,000 $2,025/year 2 $3,100,000 $188,500 $1,951/year 3 $2,910,000 $357,000 $412,000 $474,000 $2,250/year -$94,800 Table B4. Direct agency costs (discounted dollars). Pavement Initial Rehabilitation Rehabilitation Rehabilitation Salvage Maintenance Alternative Structure 1 2 3 Value 1 $2,650,000 $185,537 $152,696 $49,650 2 $3,100,000 $104,357 $47,836 3 $2,910,000 $229,145 $185,478 $158,782 $55,167 -$25,069

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53 End of service life End of analysis Improvement cost period Figure B1. Salvage value calculation for Alternative 3. End of analysis Initial construction period Figure B2. Expenditure-stream diagram for Alternative 1. End of analysis Initial construction period Figure B3. Expenditure-stream diagram for Alternative 2. End of analysis Initial construction period Figure B4. Expenditure-stream diagram for Alternative 3.

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54 Table B5. Results of LCCA. Cost Factor Alternative 1 Alternative 2 Alternative 3 Initial costs $2,650,000 $3,100,000 $2,910,000 Present value of future $338,232 $90,029 $548,336 rehabilitation costs Present value of future $49,650 $47,836 $55,167 maintenance costs Present value of total costs $3,037,882 $3,237,865 $3,513,503 than that of Alternative 1, respectively. Also, the initial cost of Based on its evaluations, the agency concludes that all Alternative 1 is the lowest. The initial costs of Alternatives 2 alternatives meet the evaluation of noneconomic criteria (see and 3 are approximately 17 and 10 percent higher than that of Table B6). Alternative 1, respectively. Since the initial and life-cycle costs of Alternatives 2 and 3 are within the 20 percent threshold, none Step 7: Weighing of Economic of them are eliminated. and Noneconomic Factors The agency then determines if the selection of an alterna- tive would have an adverse impact on the agency's financial Since all the alternatives meet the economic criteria and goals and the overall system needs. The economic factors there are no noneconomic factors to override their inclu- include: sion, these alternatives are considered as qualified alternatives. Now these alternatives are compared using an alternative- Initial costs. preference screening matrix to determine if there are consid- Life-cycle costs. erable differences in the economic and noneconomic aspects Annual maintenance costs. of these alternatives. Based on this comparison, if a single Future rehabilitation costs. alternative emerges as the most advantageous alternative, it is selected for traditional design-bid-build contracting. Other- The agency finds the cost estimates of alternatives compara- wise, if two or more alternatives emerge with no significant ble and unlikely to have adverse impacts at the agency level and differences, then these alternatives are considered for alter- concludes that all three alternatives satisfy its economic evalu- nate bidding. ation criteria. A detailed discussion of the alternative-preference screening matrix is presented in Appendix A. This section presents only the application of the screening matrix in selecting the pre- Step 6: Evaluation Using ferred pavement types for the project under consideration. Noneconomic Factors In this step, the agency ascertains whether the risks from Step 7a. Identification and noneconomic factors will override inclusion of the alternative. Grouping Evaluation Factors The agency considers the following noneconomic factors nec- essary for evaluation in the selection process: The factors considered in the evaluation are presented in Step 5 and Table B6. Material recycling--Does the inclusion of this alternative encourage material recycling? Step 7b. Assignment of Group Stimulation of competition--Does the inclusion of this and Individual Factor Weights alternative hinder competition? Maintenance capability--Does the maintenance unit have The agency's goal is to select the preferred alternative(s) the experience and equipment to maintain this alternative? with overall cost-effectiveness and lower initial costs. There- Table B6. Evaluation of alternatives using noneconomic factors. Noneconomic Factors Alternative 1 Alternative 2 Alternative 3 Material recycling More recycling Some recycling More recycling possibilities possibilities possibilities Stimulation of Encourages Encourages Encourages competition competition competition competition Maintenance capability Common experience Common experience Common experience

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55 Table B7. Weighing for individual factors and groups. Factor Weights Factor Weights Group Factor within a Group across Groups Economic factors Initial costs 15 12 Rehabilitation costs 25 20 Maintenance costs 5 4 Life-cycle costs 55 44 Group total 100 80 Noneconomic Material recycling 20 4 factors Stimulation of competition 50 10 Maintenance capability 30 6 Group total 100 20 Note: All values are in percent. fore, the agency has assigned 80 percent weight to economic parable. In terms of noneconomic factors, the comparative factors and 20 percent to noneconomic factors. Since the advantages and disadvantages can be established based on the agency considers alternate bidding as an option, the agency information presented in Table B6. has placed additional emphasis on life cycle among the eco- The agency then assigns preference ratings to evaluation fac- nomic factors and the stimulation of completion among the tors based on the advantages that a given alternative offers. noneconomic factors. Table B9 presents the guidelines for rating economic factors. Table B7 presents the distribution of weights assigned to In this example, Alternative 1 has the lowest initial and life- individual factors within each group, as well as their relative cycle costs among the alternatives, so it is rated "High" for these importance in the overall evaluation of the matrix. factors. Similarly, as the life-cycle cost of Alternative 3 is more than 10 percent of the lowest life-cycle costs, the alternative is rated "Low" for life-cycle cost factor. Table B10 presents the Step 7c. Preference Rating complete set of evaluation factors and the ratings for the alter- of Individual Factors natives considered in this example. In this step, preference ratings are assigned to individual fac- tors based on the comparative evaluation of advantages and Step 7d. Scoring Pavement-Type disadvantages of each alternative. Alternatives Table B8 presents the percent differences in cost estimates for the three alternatives for the various economic factors. As In this step, the preference ratings are converted to numer- noted, Alternative 1 has the lowest initial and life-cycle costs, ical scores. Next, for each alternative, the unweighted numer- while Alternative 2 has the lowest rehabilitation costs. The ical scores are adjusted to weighted scores using the weights estimated maintenance costs of all three alternatives are com- tabulated in Table B7. Then the unweighted group scores are Table B8. Comparative evaluation of economic factors. Economic Factors Difference in Cost Estimate (%) Alternative 1 Alternative 2 Alternative 3 Initial costs 0 17 10 Present value of future 276 0 509 rehabilitation costs Present value of future 4 0 15 maintenance costs Net present value of life- 0 7 16 cycle costs Note: "0" indicates the alternative having the lowest cost estimate for the specific economic factor. Table B9. Agency's rating of economic factors. Factor Eliminate Low Medium High Initial costs Cost > 20 % Cost >10% and 5% and 10 % Cost 5 % Rehabilitation costs Cost >10% and 5% and 10 % Cost 5 % Maintenance costs Cost >10% and 5% and 10 % Cost 5 % Life-cycle costs Cost > 20 % Cost >10% and 5% and 10 % Cost 5 % Note: The percentage differences of cost items are calculated to their corresponding lowest value of the alternatives.

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Table B10. Ratings of economic and noneconomic factors. Group Factor Alternative 1 Alternative 2 Alternative 3 Economic Initial costs High Low Medium factors Rehabilitation costs Low High Low Maintenance costs High High Low Life cycle costs High Medium-high Low Noneconomic Material recycling Medium-high Medium Medium-high factors Stimulation of High High High competition Maintenance capability No difference No difference No difference Table B11. Summary of the alternative-preference screening matrix scores. Alternative Alternative Alternative Preferred Group 1 2 3 Alternative Economic factors 64.0 61.6 20.8 Noneconomic factors 13.2 12.4 13.2 1&2 Total score 77.2 74.0 34.0 Note: All values in percent. Table B12. Alternative-preference screening matrix worksheet. Factor Alternative 1 Alternative 2 Alternative 3 Factors and Groups Weight Rating Weighted Score Rating Weighted Score Rating Weighted Score Group A. Economic factors Initial costs 15 Hig h 1 5 .0 Low 3 .0 Medium 9 .0 Future rehabilitation costs 25 Low 5.0 High 25.0 Low 5.0 Future maintenance costs 5 High 5.0 High 5.0 Low 1.0 Life cycle costs 55 High 55.0 Medium-high 44.0 Low 11.0 Group A unweighted total 100 80.0 77.0 26.0 Group B. Noneconomic factors Material recycling 20 Medium-high 16.0 Medium 12.0 Medium-high 16.0 Stimulation of competition 50 High 50.0 High 50.0 High 50.0 Maintenance capability 30 No difference 0.0 No difference 0.0 No difference 0.0 Group B unweighted total 100 66.0 62.0 66.0 Group Group Group Group Group Group Group Subtotals Weights Unweighted Weighted Total Unweighted Weighted Total Unweighted Weighted Total Total Total Total A. Economic factors 80 80.0 64.0 77.0 61.6 26.0 20.8 B. Noneconomic factors 20 66.0 13.2 62 12.4 66 13.2 Grand total 100 77.2 74.0 34.0 Note: All values in percent. adjusted to weighted group scores. Table B11 summarizes the Therefore, the agency considers Alternative 1 and Alterna- total scores for the alternatives considered in this example, and tive 2 as equivalent pavement types and selects these alternatives Table B12 presents the completed worksheets of the screening for alternate bidding. matrix. Step 7f. Calculate Bid Adjustment Factor Step 7e. Interpreting Results The agency then determines the bid adjustment factor for As noted in Table B11, Alternative 1 ranks firsts, followed by alternatives based on the difference in the present value of their Alternatives 2 and 3. Alternatives 1 and 2 have nearly similar future costs. Using the estimates presented in Table B5, the scores, but Alternative 3 has a much lower score (primarily agency calculates the bid adjustment factor for the project as because of the rehabilitation cost requirements). Therefore, follows: Alternative 3 can be eliminated. The initial cost for Alternative 1 is about 7 percent less than Future costs of Alternative 1 (Present value) = that for Alternative 2, and both alternatives have comparable $338,232 + $49,650 = $387,882. scores. This situation is ideal for alternate bidding. By leaving Future costs of Alternative 2 (Present value) = the decision of selecting the final pavement type to the contrac- $90,029 + $47,836 = $137,865. tors, there is potential for savings in initial costs and gain from Bid adjustment factor = difference in future costs = the competition between the industries. $387,882 - $137,865 = $250,017.