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1 SUMMARY Determining Highway Maintenance Costs There is broad recognition that recent investment levels in transportation infrastructure have been and remain inadequate. In addition, future funding levels are generally uncertain. As a result, the pressure on state departments of transportation (DOTs) to do more with less has never been greater, and agencies continue to actively pursue opportunities to lower costs while striving to maintain or even improve performance. In the maintenance arena, this has led an increasing number of state DOTs to consider the options of outsourcing and publicprivate partnership of some maintenance services. Cost is most often cited as a factor that must be considered when exploring such alterna- tive delivery methods. To date, however, there has been no widely accepted process for deter- mining the costs associated with performing highway maintenance if done entirely, or in large part, by the transportation agency itself. Furthermore, a review of any number of existing reports and audits that address the issue of in-house versus outsourced costs clearly demonstrates that often, some of the elements making up the total agency cost of an activity are not properly considered or, in some instances, are not included. In particular, the cost elements most frequently missed or mishandled are those related to maintenance program and agency-wide (or enterprise) support. Project Objectives The primary objective of this research was to develop a practical and robust process for determining an agency's full costs associated with performing highway maintenance. The process needed to be flexible enough that it can be applied to any specific maintenance activity, and it needed to ensure that the resulting full cost incorporates a fair share of both maintenance program and enterprise support. A secondary objective of the research was to document the application of the full cost determination process for a number of different state DOTs and different maintenance activities. The documented examples were intended to supplement the detailed process description and provide real-world examples that could serve as guides to practitioners wanting to apply the full cost determination process in their agency. The examples would serve to demonstrate the types of options, exceptions, and decisions that would be needed in order to perform the full cost calculation. Findings At the highest level, a transportation agency's expenditures can be divided into two cat- egories of programs: line and support. A line program is one that delivers one or more of the primary work products of the agency, such as maintenance or construction. A support

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2 program is one that does not deliver any of the agency's main work products but serves in support of one or more of the line programs, such as the executive management, human resources, legal, and financial functions of an agency. The sum of an agency's support pro- gram costs can be referred to as the agency's enterprise support costs. Similarly, activities and expenditures within the line program that is maintenance can be subdivided into two categories: line and support. A line activity is one that involves the actual performance of work on one or more transportation infrastructure assets or work respond- ing to an unpredictable event, such as pothole patching, mowing, snow and ice control, and accident and disaster recovery. A support activity is one that serves in support of one or more line activities, such as maintenance program administration, training, and radio operations. The sum of a maintenance program's support activity costs can be referred to as its program support costs. In this context, the full cost of any line activity is comprised of three basic elements: 1. Line activity cost, 2. A share of program support cost, and 3. A share of enterprise support cost. Building from this full cost framework, the full cost determination process developed during this study consists of the following five steps: 1. Gather and classify maintenance program activities and expenditures, 2. Allocate maintenance support expenditures to line activities, 3. Gather and classify enterprise programs and expenditures, 4. Allocate a portion of enterprise support expenditures to the maintenance program, and 5. Combine cost categories to derive full cost. Step 1 identifies the cost elements that are directly related to the performance of a particular line activity [i.e., labor, equipment, material, and other (LEMO)]. Next, the sequence recog- nizes that certain maintenance activities and expenditures support one or more line activities and identifies a share of these expenditures that must be allocated to each line activity (Step 2). Furthermore, it recognizes that the maintenance program as a whole is supported by a variety of enterprise support programs and expenditures and identifies a share of these expenditures that must be allocated to the maintenance program (Steps 3 and 4). Finally, it combines the results of Steps 1 through 4 to determine the full cost of each line activity (Step 5). The full cost determination process requires an understanding of agency expenditures beyond the maintenance program itself. In addition, it requires data and information from multiple sources, including agency management systems and annual agency financial and maintenance program reports. As a consequence, its application by any state DOT will be significantly enhanced when maintenance practitioners collaborate with agency experts in agency finance and information systems. The full cost determination process leverages well-established Office of Management and Budget (OMB) guidelines for the identification and allocation of indirect costs and existing state DOT approaches to satisfying FHWA's indirect cost allocation requirements. The full cost determination process does not vary as a result of differences in agency, main- tenance program, and/or maintenance activity characteristics. The only variation between calculations relates to the inputs and sources of data that are leveraged in each step of the process. The full cost process developed is practical and robust, as demonstrated by its appli- cation to six state DOTs, with considerable variation in maintenance program structure, geographic location and characteristics, agency size, and information systems environment.

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3 The benefits of performing the full cost calculation go beyond providing a critical input into agency decisions regarding in-house versus contractor performance of any particular maintenance activity. Gathering the necessary data and performing the calculation requires a thoughtful review of the maintenance program structure and activities as well as the dis- tribution of expenditures between activities and between the different elements of cost. Additional applications and benefits of performing the full cost calculation may include The identification of potential improvements to the maintenance program structure and activities as well as the processes and management systems used for recording accomplishments and expenditures associated with each activity (e.g., identification of opportunities to establish separate in-house versus contractor activities in order to improve the allocation of contract support and administration expenditures, recording of accomplishment data, and full unit-cost calculations). Providing an ability to compare maintenance costs between different geographic areas and/or highway functional classes, which may in turn provide insight into the influences of other, external effects on costs (e.g., road characteristics, traffic volume and compo- sition, terrain altitude, and weather). Performing the calculation annually may help agencies improve level of service (LOS) based budgeting models and reduce reliance on prior-year expenditures during budget development cycles. Helping agencies to identify training needs for maintenance field personnel and supervi- sors in the area of recording man hours, equipment usage, and material consumption. Finally, the sole purpose of the full cost determination process described in this report is to enable an agency to estimate its full cost for performing any particular maintenance activity. The recommended process is provided in the attachment. It is supplemented with documented examples of the full cost calculation for six DOTs and examples of maintenance cost tracking activities at three DOTs. However, each agency differs with respect to over- all agency structure and scope, organizes its maintenance program differently, has differ- ent numbers and definitions of maintenance activities, and differs in its treatment and classification of different expenditure types based on these characteristics as well as its infor- mation systems environment. As a result, comparing full costs, full unit costs, program sup- port multipliers, enterprise support multipliers, and/or overhead rates of the calculations documented here or undertaken externally is meaningless and should not be attempted.