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10 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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11 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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12 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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13 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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14 · 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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15 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