Use of Inflation Rates in Metropolitan Financial Plans

January 25, 2007

Mass Mailout Number III-2007-8

Subject:  Use of Inflation Rates in Metropolitan Financial Plans

Dear Transit Colleagues:

A joint FTA/FHWA guidance on fiscal constraint for metropolitan plans, transportation improvement programs (TIPs) and statewide TIPs calls for the use of “forecast year” dollars in preparing cost projections for highways and transit projects in those planning documents.  In response to questions about the rate of inflation that should be assume, FTA joins the FHWA Office of Planning in recommending use of a four percent (4%) annual inflation rate for construction costs for 2007 and beyond – for highway and transit improvements.

However FTA recognizes that circumstances may vary from State-to-State, as well as between highway and transit projects, which could warrant use of a lower or higher rate.  That is acceptable provided documentation is provided in the financial plans that accompany metropolitan plans, TIPs, and STIPs.  The documentation should be a concise, clear explanation of the basis for the assumption that substantiates the "reasonableness" of the forecast, citing past trends, as appropriate.  FTA recognizes that cost escalation and inflation rates are not an "exact science."  In fact, several proprietary sources are available for use in forecasting capital costs in relation to the Consumer Price Index.

It is important to note that the 4% inflation rate applies to "planning-level" cost estimation only.  It is not to be used in place of the more researched forecasts required during project development for risk assessments and cost estimation of New Starts.  This information does not change the FTA requirement for the more rigorous cost estimation by project sponsors during Alternatives Analyses, Preliminary Engineering, and Final Design, with associated documentation.

If you have any questions or need additional assistance on this issue, please contact Darin Allan, Community Planner in FTA Headquarters at (202) 366-6694.

Please feel free to distribute this throughout your organization as appropriate.

Sincerely,

Herman C. Shipman

Acting Regional Administrator