A project's initial costs are those that are incurred during the design and construction process. They can include any of the following:
For project alternatives that use new and relatively unproven technologies, special care is needed to develop realistic estimates of the initial costs. It may be appropriate to perform a sensitivity analysis to determine how higher costs for unanticipated changes to the design would affect the project's cost efficiency.
Projects that are dependent on one another should be considered together if possible. The same is true for projects that will be completed in several phases. When interdependent projects cannot be analyzed as a single entity, care should be given to proper accounting of the relevant joint costs. For example, if a project proposes to expand a wharf so that it can accommodate larger ships, the analysis should include an appropriate share of the cost of any dredging needed to allow the ships to reach the wharf, even though the dredged channel will also be used by vessels destined to other nearby facilities.
For projects with optional additional phases, only the first phase of the project should be analyzed, since there is no guarantee that the future phases will ever be implemented. However, the first phase might be compared to an alternative that combines other phases. This will give decision-makers an idea of the role of subsequent phases in the overall efficiency of the project.
If the project will use resources already owned by the agency, the opportunity costs of these resources should be included. The opportunity cost is the value of the resource in its best alternate use. For example, if the project uses land that could otherwise be sold, include as a cost the net proceeds if the property were sold. Another example of opportunity costs would be staff time that would otherwise be spent on other work. However, do not include the costs of resources already owned by the agency that have no opportunity costs. An example might be loop detectors installed in the roadway. Such costs are referred to as sunk costs.
Interest costs should not be included in the initial costs. These costs are included implicitly in the discount rate.
The treatment of inflation should be consistent over all benefits and costs. All costs and benefits should be either in constant/real dollars or in inflated/current dollars. For public sector evaluation, standard practice is to exclude normal inflation and express all costs (and benefits) in constant/real dollars.
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