Costs of Highways
Determining Relevant Costs:
The total cost for improvements to a highway system or segment includes engineering and design, expenditures for planning, the outlay for acquiring rights of way, and the costs of constructing roadway, structures, and pavements. Selection of the cost items to be included in and excluded from specific economy studies requires straight and careful thinking. A detailed discussion is beyond the scope of this book. However, four of the most important considerations are as follows:
1. In general, allocated costs, used for accounting purposes, should be omitted from economy studies. To illustrate, a given percentage may be added to estimated project costs for administration, planning, and engineering overhead. These costs probably will be incurred whether or not a specific project is undertaken; if so, they are not relevant in comparisons between possible courses of action. Stated differently, only the added or incremental costs are relevant.
2. Expenditures made before the time of the economy study should not be considered. These are called sunk costs, in that they cannot be recovered by any present or future action. For example: the roadway and pavement of an existing road may be in good condition and have a substantial “book value” in the records of the highway agency. Nevertheless, if one alternatives in the economy study. Again, it would be improper to include costs incurred earlier for preliminary planning and design.
3. All relevant costs must be included and all irrelevant charges excluded. In this regard, as mentioned earlier, transferred costs may be particularly trouble some. Assume, for example, that one of several plans for a proposed highway improvement requires a private utility company to move its facilities at its own expense. From a budgetary standpoint this cost is not chargeable against the project from a public works economy-study standpoint; however it is a proper charge. Economic resources are consumed. Even though paid from private rather than public funds.
4. In certain types of economy studies. It is proper to make an allowance for the salvage value of a machine or structure at the end of its estimated useful life. As a general rule, salvage value should be neglected in economic studies for highways. It is conjectural at best to assume that an investment in a highway will have great worth 20, 30, or 40 yr in the future. One exception might be to assign salvage value to the land occupied by the road. Even in this situation only the raw value of the land in its predicted future use, after deducting the cost of converting it to that use, would be included. Other costs associated with acquiring the land in the first place, such as legal expenses and the cost of cleaning it of buildings cannot be recovered and would not be a part of the salvage value.
Proposed highway improvements often will bring changes in annual maintenance and operating costs. For present conditions, data for these should available from the cost records of the highway agency. Estimates of these costs for the proposed improvements must be projected. Here again, only the relevant costs are to be sure that only true cost differences are reflected.
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