Accounting for Inflation in Life-Cycle Cost Analsis of Paving
White paper by the Massachusetts Institute of Technology’s Concrete Sustainability Hub: The Effects of Inflation and Its Volatility on the Choice of Construction Alternatives
Life cycle cost analysis (LCCA) is an economic method used to assess the total cost of ownership throughout the life of a construction project. In the case of a road or highway, it includes not just the cost of initial construction, but the future cost of maintenance and rehabilitation required during the useful life of the project as well as its value or costs at the end of life.
The LCCA process enables state transportation officials to select materials and project designs with the lowest total lifetime cost – not solely based on the lowest initial costs. An important factor in LCCA for highways and roads is estimating the future costs of materials used for maintenance and rehabilitation.
One example is asphalt for overlays and patching of existing roadways. LCCAs have traditionally ignored the possibility of future changes in relative prices of different building materials by assuming that the real prices of all construction materials remain fixed. That is, a standard inflation rate is applied to all building materials.
MIT researchers reviewed data on real price changes of four basic construction materials: concrete, asphalt, steel, and lumber. The study found that the assumption of constant real costs is seriously inconsistent with historical experience. Ignoring this inconsistancy can lead to serious errors in cost projections.
Looking over a 50-year time frame, the study predicts that the mean real price of concrete decreases by 20% while the real mean prive of asphalt increases by 95%.
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