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Engineering process | Planning | Cost-Effectiveness Policy

Cost-Effectiveness Policy process

Introduction

MnDOT first established its policy on cost-effectiveness in the 2003 edition of the Minnesota Statewide Transportation Plan. The intent of the Cost-Effectiveness Policy is to make the best overall investment decisions based upon a balanced consideration of both the quantitative cost-effectiveness goals and qualitative goals outlined below.

For projects that meet Federal Highway Administration (FHWA) criteria mandating a value engineering (VE) study, performing a cost-effectiveness evaluation as outlined in the memorandum will not qualify as a VE study. VE studies, which are typically performed during the project development/design process once the preferred alternative layout has been selected, are completed using a methodology different from the process in this document for cost-effectiveness evaluations.

Threshold criteria

For all projects meeting the following thresholds, complete the analysis described below.

Any MnDOT project requiring an Environmental Impact Statement (EIS), an Environmental Assessment (EA), or an Environmental Assessment Worksheet (EAW) is subject to the provisions of this policy.

The State EAW thresholds for trunk highway projects are:

  1. Construction of additional travel lanes that are over one mile (1.6 kilometers) in length on an existing road.
  2. Construction of a road on a new location over 1.6 kilometers (one mile) in length that will function as a collector roadway.
  3. Addition of one or more new interchanges to a completed limited access highway.
  4. Stand-alone access consolidation or closure projects that are more than two miles (3.2 kilometers) in length.

Note: 1, 2, and 3 above are from Minnesota Rules, part 4410.4300, subpart 22, which establishes mandatory State EAW thresholds for highway projects.

Locally initiated projects with significant MnDOT participation (approximately $1 million or more) that meet the thresholds above are also subject to these requirements. The responsible governmental unit under the state rules is be responsible for carrying out the analysis.

As part of quality assurance/quality control, the Office of Transportation System Management will review all cost-effectiveness assessments for EIS and EA projects.

Timing

Carry out a cost-effectiveness assessment during the alternatives analysis phase of project development. Performing the analysis while developing the environmental document provides you enough information to make decisions at the appropriate time. A cost-effectiveness analysis during this phase provides a framework for discussing the reasons for advancing a project and a measure of how well each alternative meets the project mobility, safety, and/or other performance objectives. It may also help the project proposer with “right-sizing” the solution to the problem.

Reevaluate the cost effectiveness analysis if there are changes in the project that require an update or amendment to the environmental document.

Methodology

The cost-effectiveness evaluation is a three-step process.

Step 1: Benefit/Cost (B/C) Analysis

First evaluate the project alternatives using a traditional B/C analysis following the methodology described in User and Non-User Benefit Analysis for Highways, AASHTO, September 2010. An abbreviated methodology is available at Benefit-Cost Analysis for Transportation Projects.

Cost effective projects are projects that have a present value of the project benefits that exceeds the present value of the implementation costs of the project (i.e. a B/C ratio greater than 1.0).

If you are advancing project alternatives that have a B/C ratio less than 1.0, then you must proceed to Step 2 and concurrently to Step 3.

Step 2: Best Value Assessment

For projects within the scope of this policy (see the Threshold Criteria section), this step asks three questions:

  • Are you carrying forward the project alternatives with the highest B/C ratio?
  • Can you re-scope the project alternatives to yield a B/C ratio greater than 1.0?
  • Are you evaluating the project as an essential component of a larger project whose B/C ratio exceeds 1.0?

Use the following approval process in cases where you are advancing alternatives with lower B/C ratios. While it is desirable to meet the cost-effectiveness standards in steps 1 and 2, the qualitative measures in step 3 have equal consideration in decision making. Follow the approval process below and provide the quantitative and qualitative information necessary for decision making.

  • When any proposed alternative moving forward in the draft environmental document has a B/C ratio less than 1.0, obtain approval from the District Engineer or Office Director and document the approval in the form of a memorandum in the project file
  • When you have selected the preferred alternative:
    • If the B/C ratio is between 0.5 and 1.0, obtain the District Engineer’s or Office Director’s approval to proceed with development
    • If the B/C ratio is less than 0.5, obtain the Transportation Program Investment Committee’s (Deputy Commissioner and Division Directors) approval to proceed with development

Step 3: Social, Environmental, and Community Goals and Business Impacts

For qualifying trunk highway projects, complete this step if the B/C results from step 1 are less than 1.0.

The impacts of some projects are difficult to monetize. Projects may address, effect, or be affected by critical goals such as minimum accessibility to a transportation system or service, protection of an environmental asset, or specific regional or transportation system goals. In this step, identify any social, environmental, or community goals and business impacts critical to the project and document how the proposed improvement addresses or affects these goals, either positively or negatively. Identify the critical goals in the Purpose and Need section of the environmental document. The Transportation Program Investment Committee is responsible for approving projects that do not meet the criteria set forth in steps 1 or 2, and rely on step 3 criteria alone.

For more information, see the MnDOT Benefit Cost Analysis Guidance.