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These types of issues are resolved in this study in a con- agencies in both maintenance management and financial
sistent, understandable way by adopting concepts explained accounting, the categorization of costs between line and sup-
in the following two sections: port varies by agency, as does the further division of support
costs between program support and enterprise support. The
1. Additional nomenclature that distinguishes the different
subsequent discussion in this section, the example in Chap-
types of costs that are important to cost determination
ter 3, and the documented calculations in the attachment will
without using the terms "direct costs" and "indirect costs."
show, however, that minor differences in how costs are cate-
2. A hierarchy of cost attribution that helps guide managers in
gorized will not significantly affect the result of the full cost
handling different types of costs for purposes of cost deter-
determination process. Rather, it is much more important to
mination, without explicit resort to direct or indirect costs.
identify all relevant costs completely and to perform a fair and
reasonable allocation to maintenance. If cost identification
Nomenclature for Cost Determination and allocation are done properly, the result will be a reliable
indication of full maintenance costs.
The following terms are used in this report to provide gen-
eral guidance and avoid ambiguities due to possibly different
interpretations of direct costs and indirect costs among agen- Decision Structure for Cost Attribution
cies or within a single agency in different contexts. The notion
This section builds on an approach developed by Texas
of line costs and support costs is often evident in agencies'
analyses of their full costs, even though they do not use these DOT to guide the treatment of costs. The approach has been
particular terms. It is understood that agencies must continue adapted and modified to relate to highway maintenance
to use "direct costs" and "indirect costs" as part of the financial specifically and to use the cost determination nomenclature
accounting and management and in connection with the indi- introduced in this project, with examples added by the authors.
rect cost plans. Furthermore, "line costs" and "support costs" The resulting guidance is provided in Table 2.1.
are not to be taken as synonymous with "direct costs" and The value of this guidance for cost determination is that
"indirect costs," respectively. It is entirely possible that line it focuses on a systematic approach to relating all agency
costs, for example, will include a combination of direct costs costs to a particular cost objective--in this case, maintenance
and indirect costs, and that support costs will likewise include a jobs (although it applies equally to maintenance activities)--
mix of direct costs and indirect costs. without resorting to using terms such as "direct costs" or
"indirect costs." Rather, it essentially attempts to define
· Line costs: The labor (including fringe benefits), equip- how closely a particular agency cost relates to performing
ment, material, and other (LEMO) costs to perform actual and completing one or more maintenance jobs or if there is
maintenance work (i.e., line activities) on highway assets or a fair, reasonable, and practical method to attribute all or
to provide maintenance services to the public. For example, part of a given cost to these maintenance jobs. If there is a
pavement patching, mowing, snow and ice control, repair relationship or nexus between the cost and maintenance
of pavement markings, traffic sign and signal repairs, litter jobs, the guidance recommends allocating a fair, reasonable
pickup, rest area maintenance, and incident response. share of the cost in a practical, efficient way. If not, the cost
· Program support costs: The subset of support costs that
is regarded as relating to other agency line functions and
is closely associated with the maintenance function and can be excluded from the maintenance cost determination
program. Program support costs can be divided into two process.
types. The first type supports all line activities, such as the
costs associated with the headquarters- and district-level
maintenance organization, office supplies, office facilities, 2.3 Building the Full Cost
and utilities. The second type supports only a subset of line Determination Process
activities, for example, the fence inspection support activ-
This section explains how the cost determination process
ity supports the fence installation and repair line activities.
is built for a highway maintenance program. The explanation
· Enterprise support costs: Other expenditures of the trans-
is given in bottom-up order since line costs--the primary con-
portation agency that can reasonably and fairly be allocated
stituent of MMS calculations and reports--provide a familiar
to highway maintenance. For example, a portion of the costs
point of departure for DOT maintenance managers. Once line
of agency executive management, human resources, finance
costs are established, the explanation broadens and proceeds
and accounting, information technology, planning and
research, and legal counsel. up the cost structure hierarchy to program support costs and
enterprise support costs. This explanation is given in a logical,
These definitions provide a general guide to the nomencla- step-by-step fashion to facilitate understanding of the com-
ture used in this report. Recognizing different practices among position and the treatment of each category of cost. Figure 2.1
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Table 2.1. Hierarchy of decisions on cost attribution.
Action to Handle This Type of Example(s) of This Type of
Consider Different Types of Agency Expenses Expense with Respect to Maintenance Maintenance-Related Expense
Consider potential maintenance-related expenses reported
from various activities and locations, and analyze them in
the following way:
1. Is the expense reasonably attributable to a single (If yes from left column) Charge the expense to the individual Labor, equipment, and material charges reported for an individual
maintenance job? (If yes, see columns to right). maintenance job. maintenance job.
If answer to above is no, consider the following:
2. Is the expense reasonably attributable to more than one (If yes from left column) Subjectively prorate the expense Significant travel costs to one or more remote sites requiring multiple
maintenance job? (If yes, see columns to right). among individual maintenance jobs. maintenance jobs: distribute travel expenses among these jobs [e.g.,
equally (if jobs are roughly of same scale) or in proportion to some
basis (e.g., relative total cost of each job)].
If answer to above is no, consider the following:
3. Is the expense reasonably attributable to a (If yes from left column) Charge to the maintenance program A. Costs of district or field offices: maintenance personnel, office
maintenance program service center or clearing service center or clearing account for subsequent distribution facility, utilities and services, equipment, materials and supplies,
account? (If yes, see columns to right). to maintenance line costs or other service centers/accounts as and other operating expenses.
appropriate.
B. Costs of a sign fabrication shop.
If answer to above is no, do the following:
4. Consider the expense an enterprise support cost for Charge the expense to the appropriate enterprise support cost A. A share of costs associated with the executive office.
distribution across agency line functions or other account. Allocate a fair share of each cost account to
service centers/accounts as appropriate (see columns maintenance line costs. B. A share of costs of central agency functions (e.g., payroll, legal,
to right). accounting, human resources, planning, research).
Note: This guidance is adapted from a more general accounting approach developed by the Texas DOT. The approach has been modified to focus on maintenance expenses and Project 14-18
cost determination nomenclature. Maintenance-related examples in the right-hand column have been added by the report authors.
Figure 2.1. State DOT maintenance activity full cost context.
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illustrates how the three categories of cost included in the full have been excluded for the rental rate (e.g., depreciation
cost determination process relate to each other as well as to or shop overhead), it is important to determine how signifi-
other agency expenditures. The following descriptions should cant these excluded cost elements are and, if they are sig-
help explain how the complete set of line and support costs nificant, to ensure that the costs are picked up fully and
are identified and allocated to maintenance. correctly in either the maintenance program or the enter-
prise support categories.
· Material costs: The total charges for materials and supplies
Line Maintenance Costs
in performing maintenance jobs. These charges can be for
Line maintenance costs are the costs of accomplishing actual consumption of materials that are maintained in agency
work or services through line maintenance activities. The bulk inventories or stockpiles, the use of materials fabricated
of activity-related costs in an MMS report are typically line in agency shops, or materials purchased specifically from
costs. Line costs comprise costs related to labor, equipment, outside vendors to complete a particular maintenance job.
material, and other (including payments to contractors). The costs to be applied within the cost determination pro-
cess should be the costs of materials actually used in main-
· Labor costs: The sum of agency payments to (or on behalf tenance jobs and not the overall cost of bulk purchases.
of) employees for performing maintenance jobs. These pay- Agencies may use unit material prices that are determined
ments encompass compensation (wages, salaries, tempo- by their stockpile management or inventory stores manage-
rary or part-time payments, etc.), any overtime for hourly ment programs, where available, or other methods consis-
employees, Social Security and Medicare payments, and tent with their financial accounting and maintenance man-
applicable fringe benefits (e.g., vacation, sick time, other agement practices, so long as these reflect the raw material
leave, health and other insurance premiums, and retire- costs themselves. Additional costs such as overhead for
ment fund contributions). All of the DOTs interviewed in inventory stores/stockpile operation and management
this study included travel time as a legitimate part of activ- should be treated as support costs, not line costs.
ity labor costs. Labor costs for crews brought in to supple- · Other costs: Total charges for other items associated with
ment state DOT workers (but excluding contractors) also maintenance jobs that do not fit into the labor, equipment,
should be incorporated in the totals (e.g., costs of convict/ or material categories. For example, utility charges, private
inmate/correctional department labor and costs of any equipment rental (i.e., not part of the agency fleet), and
agency personnel from outside the maintenance organiza- the sum of payments made to contractors to complete
tion assigned to work on a maintenance activity). While maintenance jobs in cases where maintenance activities
volunteer programs such as Adopt-a-Highway may not are delivered through a combination of agency and con-
entail identifiable labor costs, it is useful to document the tractor resources. These jobs, which may be bid for work on
use of such programs for particular maintenance activities individual activities, for multiple activities within a given
as a matter of record and to help establish the context geographic area, or for multiple activities for a given length
within which the cost determination process is applied. of highway route, must be within the scope of the routine
The insertion of an equivalent agency labor cost for work maintenance program as the agency defines it and not within
accomplished by volunteers is not needed unless this other programs (e.g., construction or capital preservation).
equivalent cost is judged be a significant percentage of the A challenge that many agencies may face in treating con-
maintenance program or it is felt that a placeholder cost tract costs within a cost determination process is to iden-
should be estimated for other reasons. tify the maintenance units of accomplishment that relate
· Equipment costs: The total equipment charges incurred in to contract expenditures for each maintenance activity.
performing maintenance jobs, whether for agency-owned Ideally, total units of accomplishment would be calculated
equipment or use of equipment owned by other entities. before the contract is awarded rather than leaving the cal-
Typically these charges are structured as rental rates for culation as an afterthought that later becomes difficult to
each class of equipment. Some agencies have further organ- complete in a timely way. Accomplishment data enable
ized these rates to support an enterprise-fund operation, in contract costs to be combined with the costs of state-force
which the equipment function is financially self-supporting. maintenance work in calculating an overall unit cost for
In these cases the rental rates may be set for each individual each activity, thus satisfying the principle of considering
piece of equipment to cover the respective costs of depreci- the complete set of costs. Some agencies also have raised
ation of the initial purchase price, fuel and other operating the issue of the timing of contract payments as a potential
expenses, routine equipment maintenance, and repairs and issue (i.e., situations where payment of the entire contract
overhauls through an estimated service life. For purposes amount occurs at one time even though services are deliv-
of full cost determination, if any of these sources of cost ered incrementally over a period of time). In fact, this issue
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should not affect cost determination if all work performed priate when needed; it is more important to account for
and payments expended occur within the same fiscal year. all likely sources of line costs in a realistic way than to
In this case, the date of posting of the charge is immaterial spend excessive time determining every cost to the penny.
since it is recommended that cost determination be applied If the financial system does not address line mainte-
based on data for a completed fiscal year. If there are signifi- nance costs directly (e.g., it includes only a line item for
cant misalignments between work performance and con- "maintenance labor" that encompasses both line and
tract payments across two or more fiscal years, adjustments support costs), the MMS should then be used as the pri-
to posted charges can be made to bring work accomplish- mary source of line-cost data by activity. Regarding this
ment and payment to contractors into better alignment example, however, it would be advisable--once main-
within each fiscal year. tenance program costs also are computed--to compare
total estimated maintenance line labor plus mainte-
Information on maintenance line costs is typically avail- nance program support labor costs from the MMS and
able from an agency's MMS and potentially its financial man- other sources to the total "maintenance labor" item in
agement system. Steps in preparing this information for the the financial system to determine adjustments needed.
cost determination process are as follows: In all of these and subsequent calculations, it is recom-
mended that all analyses that are based on historical cost
· Identify which activities are properly considered as line cost data be conducted using fiscal year-end financial and
items (i.e., they involve the performance of actual work or MMS reports. The reason is that the data for such reports
services to the public that are the intended outcomes of the are typically adjusted to close out calculations for the fis-
agency's maintenance program). Other activities (e.g., train- cal year (some agencies employ a "13th-month adjust-
ing, maintenance management, building and yard mainte- ment," while others perform an adjustment based on
nance) should be included with program support costs. adding costs from the prior year's closing month and
· Develop a good understanding of the relationship between dropping costs from the just-completed year's closing
costs reported in the MMS and maintenance costs reported month). Furthermore, all month-to-month reconcilia-
in the financial accounting system. tions of indirect costs are cleared, ensuring that indirect
Agencies that have a well-integrated system architecture costs in the accounting system are treated such that they
and a financial system that tracks specific maintenance are closed out with, ideally, no gains or losses in actual
activities should consider using the financial system versus estimated items.
data for cost determination. An important prerequisite · Using the guidelines above, establish the maintenance line
for this decision is that financial system totals for the costs by activity.
maintenance program be close to, and preferably match
exactly, the corresponding MMS totals. If this is not the
Maintenance Program Support Costs
case, a reconciliation and adjustment review should
be done to bring the respective totals closer together. Transportation agency maintenance organizations perform
Typical reasons for such differences include variations a variety of planning, management, research, and other func-
between the two systems in how individual costs are tions that support the line activities. These functions occur at
recorded, inclusion of projects for which judgments several organizational levels encompassing headquarters and
differ on whether they are part of the agency's routine district and field offices. The maintenance program support
maintenance program, and errors by agency personnel cost category accumulates the costs of these maintenance-
in reporting work (and whether the MMS and the finan- related support functions. The types of costs to be included
cial system have isolated and corrected these errors). in this category include the following:
Once adjustments have been identified and agreed to, the
financial system data can be used in further calculations. · Program management and field supervision: Costs asso-
If the financial system does not break down maintenance ciated with the staff responsible for managing the mainte-
expenditures by activity, a hybrid approach should be nance program, including the state maintenance engineer;
investigated in which the financial system provides esti- district/regional managers; and area/shed/foreman-level
mates of overall line costs and the MMS is used to dis- managers, supervisors, and roving patrols. Only the time
aggregate these costs by line activity. A prerequisite is to used for general management functions is included here,
reconcile differences between financial and MMS data not any time spent directly supervising line activities.
before proceeding. The objective is to identify the full, · Program administration: Costs associated with office
complete set of line maintenance costs as closely as possi- personnel, equipment, and supplies at the several levels of
ble with a reasonable level of effort. Estimates are appro- maintenance management above.
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· Buildings, facilities, and grounds: Costs associated with program functional rate that is applied to all line maintenance
buildings, facilities, and grounds occupied by maintenance activity costs (e.g., Caltrans), to more complex allocations
personnel and items used by the maintenance function. where certain program support costs are allocated to the sub-
These costs include building leasing, rental, or deprecia- set of line activities that benefit from those costs. There also are
tion; grounds maintenance; utilities; and communications allocation procedures that impose an intermediate step before
(e.g., costs of radio system operation). extending to line maintenance activities. For example, Texas
· Training: Costs incurred by attendance of maintenance DOT does not allocate the costs of its sign fabrication shop
personnel at training, and the costs to prepare and provide directly to signage-related maintenance activities. Rather, it
training sessions and materials. allocates the fabrication shop direct and indirect costs to its
· Material stores/inventory operation: Costs associated materials and supplies inventory-management cost account.
with operating the agency's maintenance inventory, stores, These costs are then passed on to those maintenance line ac-
and stockpiles. tivities that use signs by including the costs in the amount
· Fabrication shops and laboratories: Costs associated charged for each sign by the materials and supplies inventory
with agency shops that fabricate items for use by mainte- system. All of these examples point to the need for mainte-
nance forces (e.g., signs), and laboratories whose work in nance managers to coordinate with financial accounting man-
research and testing supports line maintenance activities agers in ensuring that the cost determination procedures are
(e.g., a materials laboratory supporting pavement and pave- consistent with, and supported by, applicable calculations in
ment marking maintenance activities). the agency's financial management accounting system.
It is important to consider the guidance in OMB Circu-
Agencies recognize and deal with maintenance program lar A-87 regarding reasonable levels of effort in identifying
support costs in several ways: and treating cost items when considering how to allocate pro-
gram support costs. For example, while it may be theoreti-
· Maintenance activities capturing program support: A cally possible to allocate the costs of each individual training
number of agencies interviewed in this study identify pro- session to a particular set of line activities, it is not clear that
gram support activities explicitly within their maintenance the benefit gained by this exercise will warrant the time and
activity structure. Common examples include maintenance effort required. The preferable approach is to pool all train-
training; handling and management of material stockpiles; ing costs and allocate them across all maintenance activities
buildings and yard maintenance; and general support activ- using a suitable base (e.g., total expenditures or total labor
ities identified within particular categories or groups of costs) according to agency practice. In this context, the agency's
maintenance activity (e.g., pavement/road surface, bridge treatment of maintenance training costs should be consistent
and structures, roadside, traffic operations). with its treatment of training costs for its personnel in other
· Cost center/clearing accounts: Agencies also may establish functions.
program cost centers or clearing accounts where charges As a general rule, many maintenance program support items
associated with maintenance program support are accrued will be allocated completely (i.e., 100%) to maintenance line
for later allocation to maintenance line activities or poten- activities or a subset of those activities. Some agencies con-
tially other functions. sider certain program support items essentially as direct costs
· Inclusion within broader enterprise support: Some because of their close relationship to the performance of main-
agencies include costs associated with maintenance pro- tenance work. Even where program support costs are con-
gram management as part of agency-wide management, sidered as indirect costs, they are often allocated 100% to the
particularly for items like district-level and headquarters maintenance function because the cost determination result
management. Within cost determination, the maintenance will differ only a small amount from the case where they would
component of these costs must be identified and accumu- have been considered direct costs. As stated earlier, determin-
lated for allocation to maintenance line activities. ing the complete set of maintenance line and support costs
and the appropriate methods of allocating support costs to
Regardless of which method(s) are used by an agency, the line costs are more important than whether individual costs
cost determination process calls for (1) identification of the are classified as "support" or "line." Exceptions to this 100%
complete set of maintenance program support costs, and guideline are (1) where maintenance program support costs
(2) decisions on how to allocate these costs to maintenance are shared with other agency functions (e.g., materials labo-
line items or other functions/accounts as appropriate. Inter- ratory services are used by the construction program as well
views with several DOTs conducted in this study indicate that as the maintenance program, in which case these costs may be
a variety of allocation approaches are used. These approaches better treated as enterprise support costs), and (2) in situations
range from very straightforward development of a single such as those described for the Texas DOT sign shop above,
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in which program support costs are allocated to another cost It is important to seek complete cost coverage while avoid-
account (materials-and-stores inventory) rather than to main- ing double-counting when compiling enterprise support costs.
tenance line activities directly. For example, in cases where agencies include all vehicle-related
expenditures in developing equipment rental rates, the enter-
prise support costs should not include any equipment-related
Enterprise Support Costs
expenditures. However, in cases where certain vehicle expen-
Highway maintenance is one of a number of programs ditures are excluded from the equipment rental rate calcu-
and functions that are managed by a typical transportation lation, the enterprise support category should include an
agency. In the same way that a maintenance program comprises equipment component that covers these costs.
line and support activities, the operations of a transportation
agency comprise line and support programs and cost items.
Expressing Cost Determination Results
Typical agency line programs include construction, mainte-
nance, safety, environmental protection/mitigation, and other When all applicable support costs have been allocated to
investment and operations categories of work across different maintenance line costs, the cost determination process can
modes. These programs are supported by a number of enter- be completed. The recommendation from this study is that
prise support functions that typically include the following: results be expressed as the full unit costs of each maintenance
activity. A unit cost result is superior to an overhead percent-
· Agency executive management; age or other method of expressing full costs. In fact, DOTs that
· Planning, programming, and research; were interviewed for case study development and that have
· Financial accounting, budgeting, payroll, and procurement; well-developed financial accounting methods to support full
· Legal and audit divisions; cost determination strongly discourage the use of overhead
· Human resources; percentages for the following reasons:
· Information technology;
· Central office buildings, facilities, and grounds, including · A maintenance overhead percentage (indirect cost divided
utilities and communications services; by direct cost) depends on the cost basis used. For example,
· Shops, laboratories, and other support functions and cost an overhead rate on the basis of total direct costs (e.g., the
items that have not already been included in the program sum of labor, equipment, and material costs for mainte-
support category; and nance) will differ from one based on direct maintenance
· Support of the DOT provided by external agencies (e.g., the labor costs alone. Comparisons of overhead rates, say,
state attorney general's office or the state auditor's office). between the public and the private sector may thus be mis-
leading if different cost bases are used by the respective
As with the program support costs, the key objectives regard- parties.
ing enterprise support costs are (1) to identify the complete set · A maintenance overhead percentage depends on exter-
of enterprise support costs, and (2) to allocate an appropriate nal factors that are unrelated to maintenance. For exam-
share of these enterprise support costs to maintenance line costs ple, agencies with large highway construction programs,
to complete the cost determination process. As with program where the annual construction budget is a relatively large
support costs, current agency practices on how to compute portion of total agency budget, will exhibit relatively low
this allocation vary from a straightforward division of total maintenance overhead rates. This occurs because the dis-
enterprise support costs by total line program costs to produce tribution of indirect costs among programs is driven by
a single percentage rate allocation across all line programs their respective direct cost bases--assume them to be equal
(e.g., Caltrans), to more complex calculations that consider to the total direct expenditures for each program. A large
different enterprise initiatives and different categories of line construction program will thus attract a large percentage
programs, projects, and activities (e.g., Florida DOT). Those of enterprise-level indirect costs, depressing the overhead
agencies that have developed a financial management system percentages computed for all nonconstruction programs,
that is consistent with their approved indirect cost plan may including maintenance.
define the enterprise support costs within a number of indi- · Variability in maintenance overhead rates (e.g., between
rect cost pools. For each indirect cost pool, the plan identifies districts in a state DOT) may be misconstrued as indicat-
which of the other indirect cost pools and direct program ing variations in maintenance efficiency. Maintenance
pools (i.e., the line programs/functions) should bear a share of overhead rates are sensitive to the volume of work in other
its costs and what should be the basis of this allocation. Typical programs such as construction, as noted above, which in
bases of indirect cost allocation are total expenditures or total turn may be driven by differences in factors such as traffic
employee counts for each line program/function, respectively. volume/composition and degree of urbanization. If districts
