Benefit/Cost Ratios

One of the more frustrating parts of my day job is when a project requires the calculation of a Benefit/Cost ratio. This ratio is simple in concept: add up all the financial benefits of a project including the projected reductions in congestion, crashes, etc. and divide it by the amortized total cost of the project. This is a tool for evaluating whether a project is worth building. For example, if I’m proposing a project that is going to cost $1 million but it only provides the benefit of $1/2 million than the B/C ratio is 0.5. We’re getting only a 50% return on our investment, therefore don’t build it! Easy, right? Maybe. Let’s talk about where the numbers come from.

Calculating the project cost is the easy part (easy, even if it’s occasionally inaccurate due to unforseen circumstances and rising material prices). Calculating the projected financial benefits of a project can be straightforward, too, if it’s intended as a congestion relief project; there is plenty of documentation concerning reductions in delay time vs. financial benefit. Things are a bit murkier when trying to assemble a financial benefit to projected reductions in collisions because it’s hard to say whether a reduction (or increase) in collision rate is due to a project or not. Lastly, it’s nearly impossible to calculate the benefit (or impact) of a road project on the surrounding business and homes. There are broad overarching assumptions, but they are at best a WAG1. This is why I cringe every time I’m requested to include a B/C ratio on a project. On non-capacity projects (projects that aren’t adding roadway lanes) it’s very difficult to achieve a B/C ratio of greater than 1.0 which is the assumed benchmark when someone asks for that number.

The reason for all this ramp-up is because of a news report yesterday morning in Atlanta. The Georgia Dept. of Transportation is shutting down all constructions projects (with a few exceptions) within 5 miles of a shopping mall or other retail center from Thursday to Sunday to allow for the Sales Tax holiday that Georgia is having this weekend.

My question, and I admittedly have NO CLUE, is whether the B/C ratio for this proposed work stoppage is greater than 1.0? Sure, there will be less congestion during the weekend, but does this really improve the bottom line for the taxpayer? The contractors are going to figure the cost of a 4 day work stoppage into the project cost, so it might end up at the end that this Tax Holiday congestion relief program will actually cost the state, therefore the taxpayers, more than the congestion would have.

Unfortunately, you’d have to make so many assumptions and WAGs that it’s probably impossible to say with any certainty one way or the other. It’s an interesting thought experiment, though.

1 WAG is a technical acronym standing for “Wild Ass Guess”.

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