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In its evaluation of cost effectiveness of a proposed project, FTA considers the incremental cost per hour of transportation system user benefits in the forecast year. This measure, expressed in constant base-year dollars, is based on the annualized total capital and annual operating costs divided by the forecast change in annual user benefits, comparing the proposed project to the New Starts baseline alternative. The current Cost-Effectiveness (CE) thresholds used by FTA for assigning High, Medium-High, Medium, Medium-Low and Low cost-effectiveness ratings is shown below:
FTA has proposed adjusting these threshold figures in future years by applying an adjustment factor based on changes in Gross Domestic Product (GDP). The problem with this proposed approach is that the cost of construction, which is a major component of the annualized total capital cost, has recently been rising (from 2002 - 2005) at a much higher rate than the rate of growth of GDP. The attached chart shows the trends in GDP, the Consumer Price Index (CPI), ENR Materials Price and Skilled Labor Indices, and a curve representing 70% of the composite construction cost increases from 2002 through 2005 .
Between 2002 and 2005, construction costs rose by 21.92% , whereas the GDP rose by only 4.43% and the CPI increased by 15.4%. Assuming annualized construction cost contributes 70% of the total of the annualized capital and annual operating cost, seven-tenths of the construction cost increase equates to 15.34% during this 3-year period, which is virtually the same as the growth in the CPI. So adjusting the Cost-Effectiveness threshold by the rate of growth of the CPI appears to be a more appropriate adjustment factor than using GDP as the basis for adjusting the threshold figures.
The second attachment is a table of current New Starts projects showing the Cost-Effectiveness figure for each project and illustrating how these projects would fare based on how the CE Threshold figures are adjusted. If the current $21.99 upper limit for a Medium rating is not adjusted at all through 2009, all but three projects would become ineligible assuming the recent construction cost trends continue. If the CE Medium Threshold figure were adjusted by the current average annual growth in GDP, all but five of these projects would become ineligible by 2009 (assuming current construction cost trends continue). If the CE Medium Threshold figure were adjusted to the CPI rate of growth, all of the currently eligible projects (i.e., those with a CE of $21.99 or less) would still be eligible in 2009 (again assuming current construction cost trends continue). Unless the FTA is seeking to raise the eligibility bar, it should adjust the CE Threshold by at least the CPI percentage annually.
1) The reason we use 70% of the construction cost growth rate is that this is roughly the percentage contribution of annualized construction cost of the total annualized capital plus O&M cost of each project. This ignores any growth in annualized O&M costs over this period.
2) ENR composite Materials and Labor Price Index rose 21.92% between 2002 and 2005.
