Determining Highway Maintenance Costs (2011)

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20 This chapter describes and demonstrates the full cost deter- mination process developed during this project. The remain- der of the introduction summarizes the overall process and identifies the five steps involved. Sections 3.1 through 3.5 present the details of the benchmark approach for each step and illustrate their application using a simplified discussion example. The example includes a small number of mainte- nance activities in order that the complete full cost calcula- tion can be clearly presented within the confines of this report format. The benchmark approach is designed for ease of use—that is, to satisfy the practical requirement— and should be feasible/attainable in most, if not all, state DOTs. Section 3.6 includes a discussion of options and exceptions that draws upon the details of the documented full cost calculations for six agencies that are included as Appendix A of the attachment. Figure 3.1 illustrates the full cost determination process. The sequence is deliberate and starts out in Step 1 by iden- tifying the cost elements that are directly related to the per- formance of a particular line activity (i.e., LEMO). Next, it recognizes that certain maintenance activities and expendi- tures 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 it identifies a share of these expenditures that must be allo- cated 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 of any particular line activity can be considered to be composed of three discrete categories of cost: • Line activity expenditures (LEMO); • An allocation of maintenance program support expendi- tures; and • An allocation of enterprise support program expenditures. The full cost calculation requires an in-depth understanding of agency organization, activities, and financial and other infor- mation that goes beyond the maintenance program. As a result, it is critical that input be sought from agency experts in the areas of the agency finance and information systems as well as the maintenance program itself. Such a team approach will ensure full cost coverage, ease the computational task, and enhance the credibility of the calculation. The following sections describe each step of the calculation in more detail and present an illustrative example. 3.1 Step 1: Gather and Classify Maintenance Program Activities and Expenditures Objective The objective of Step 1 is to collect information on all maintenance program activities and expenditures and to clas- sify them as either line or support. Sources of Information and Key Considerations The source of maintenance activity expenditure information varies by agency and depends on the information systems in place and agency reporting procedures and infrastructure. The most common sources of expenditure data include main- tenance and/or financial management systems as well as annual maintenance program reports that often summarize program accomplishments and expenditures in a number of ways (e.g., by activity, activity group, geographic areas, highway functional class). In most cases, maintenance activity expenditures are broken down into the four LEMO components of labor, equip- ment, material, and other for each activity. In order to ensure the validity of the full cost calculation, there are a number of key considerations: C H A P T E R 3 Full Cost Determination Process

• Labor expenditures must include regular and overtime, as well as being fully burdened—that is, salary plus fringe benefits. • Agency rental rates must account for all equipment charges. – Any excluded charges must be identified and included in either program or enterprise support. • Sign installation and maintenance costs must be calculated based on all sign shop expenditures. – Any excluded charges must be identified and included in either program or enterprise support. • Material charges must be based on material consumption. • All expenditures associated with maintenance and operation of maintenance facilities, including utilities, stores operation, and others, must be identified. – Any missing expenditures must be included in enter- prise support. • All maintenance program management expenditures must be identified, including the costs associated with state and regional maintenance engineers and managers, which are sometimes excluded from maintenance management systems. – Any missing management expenditures must be obtained from another source, for example, the financial manage- ment system, and included in program support. Classification of Maintenance Expenditures Once all of the maintenance program activities and expen- ditures have been gathered, they must be classified as either line or support activities according to the following definitions. Line activity. An activity that involves the actual perform- ance of work on, or inspection of (if required by law), one or more transportation infrastructure assets, as well as work responding to an unpredictable event. Examples of line activ- ities include pothole patching, mowing, snow and ice control, bridge inspection, and accident and disaster recovery. Support activity. An activity that is done in support of one or more line activities. Examples of support activities include administrative support, training, inspection and patrol activi- ties that identify locations where line activities must be per- formed, radio operations, maintenance program management, and stores operations. In most cases, the classification of a particular activity is obvious from its name; however, activity descriptions provided in agency maintenance and procedure manuals can guide the classification where there is any question. Illustrative Example Table 3.1 identifies the set of maintenance activities, total expenditures and associated accomplishment, and the classifi- cation of expenditures as either line or support for the example. For this example, the total line activity expenditure is $17,800,000 and the total support activity expenditure is $2,200,000. 3.2 Step 2: Allocate Maintenance Support Expenditures to Line Activities Objective The objective of Step 2 is to establish the relationship between support and line activities in order to allocate an appropriate portion of maintenance program support expenditures to each line activity. Sources of Information and Key Considerations The best source of information regarding the relationships between maintenance support and line activities is the agency’s maintenance personnel. This can be supplemented by doc- umentation about agency maintenance procedures and def- initions, which can often be found in agency maintenance manuals, maintenance management system documentation, and training materials. The effort required to establish the relationships between activities depends on both the number of activities and the clarity of definition. A key consideration for this step in the process is the objec- tive that the full cost determination process be as practical as possible. To satisfy this objective it is recommended that unless 21 Figure 3.1. Full cost determination process. Step 1 Gather and Classify Maintenance Program Activities and Expenditures Step 2 Allocate Maintenance Support Expenditures to Line Activities Step 3 Gather and Classify Enterprise Programs and Expenditures Step 4 Allocate a Portion of Enterprise Support Expenditures to the Maintenance Program Step 5 Combine Cost Categories to Derive Full Cost

a particular maintenance support expenditure is unambigu- ously associated with only a subset of the line activities, it should be associated with all line activities. Examples of support activities that are only associated with a subset of line activities (drawn from Appendix A of the attachment) include • Inspection and patrol support activities that result in the initiation of one or more line activities (e.g., a fence inspec- tion support activity and fence repair, maintenance, and installation line activities). • Sign shop support activities in cases where material-related line activity sign charges do not capture all sign shop expen- ditures. Sign shop support activities should be allocated to sign repair, maintenance, and installation line activities. • Nonspecific, other activities that are a catchall for adminis- trative and/or other activities that cannot be classified as one of the specific line activities within a particular group of related activities (e.g., the Other Paved Surface Maintenance activity that supports 14 specific line activities) (Arizona DOT, 2002). • Support activities that are exclusively in support of its Snow and Ice Control Operations line activities (e.g., Winter Field Maintenance and Dining Room and Dormitory Operations) (Washington State DOT, 2007). • Contract solicitation and administration support activities, which should only be allocated to contractor line activities when separate line activities exist for in-house and contrac- tor performance of a particular activity. The other key consideration for this step is selecting the basis by which each support activity expenditure is allocated to the line activities. The benchmark approach allocates sup- port activity expenditures to all supported line activities on the basis of the line activity costs identified in Step 1. Illustrative Example Table 3.2 presents a crosswalk between maintenance line and support activities for the example. Line activities are rep- resented by the rows, and support activities are represented by the columns. In the event that a particular line activity is sup- ported by a particular support activity, an X is displayed in the corresponding cell. In this case, three of the four support activ- ities provide support to all four line activities. However, as might reasonably be interpreted from its name, the mix-deicer support activity is only related to the deicing line activity. Table 3.3 illustrates the results of applying the benchmark approach to allocate support activity expenditures to the line 22 Activity Name Type Total Expenditure Accomplishment Units Crack sealing Line $500,000 75,000 Pounds Deicing Line $10,000,000 9,000,000 Pounds Sign washing Line $300,000 20,000 Each Striping Line $7,000,000 18,000 Linear feet Subtotal $17,800,000 Mix deicer Support $250,000 N/A None Training Support $200,000 N/A None Management Support $1,500,000 N/A None Stores Support $250,000 N/A None Subtotal $2,200,000 Total $20,000,000 Table 3.1. Example classification of maintenance activities and expenditures. Line Activities Support Activities Mix Deicer Training Management Stores Crack sealing X X X Deicing X X X X Sign washing X X X Striping X X X Table 3.2. Example line and support activity crosswalk.

activities. The allocation calculation is performed for each valid combination of line and support activities—that is, for each X in Table 3.2. The support activity allocation is equal to: Where $LAIQ = line cost of line activity in question, $ASLA = line cost of all supported line activities, and $SAIQ = cost of support activity in question. For example, the allocation of the mix deicer support activ- ity to deicing equals 3.3 Step 3: Gather and Classify Enterprise Programs and Expenditures Objective The objectives of Step 3 are to collect information on all enterprise programs and expenditures and to classify them as line, support, or special/pass-through. Sources of Information and Key Considerations In most agencies there are multiple sources of information on enterprise program expenditures. The most common sources of this data include agency and/or state financial management systems and data warehouses, as well as annual agency reports. For example, a number of state DOTs prepare a comprehensive annual financial report (CAFR). A CAFR presents detailed financial information, including changes in asset values, sources and amounts of revenue, expenditures broken down in a variety of ways, and associated notes and commentary. Other potential sources include agency indirect cost allocation plans and reports detailing annual budgets, as well as budget versus expenditure reports. $10,000,000 $10,000,000 50,000 250,000.( ) = $ $2 $LAIQ $ASLA SAIQ( ) $ In order to ensure the validity of the full cost calculation, there are a number of key issues that must be considered. For example: • If enterprise expenditure data is obtained from a CAFR or other financial report, care must be taken to ensure that all expenditure categories are fully accounted for and that no expenditures are double counted. • If enterprise expenditure data is extracted from an FMS, it is important to understand whether any expenditures are automatically allocated, and if so, which ones, on what basis, and to which other expenditures they are allocated. Classification of Enterprise Expenditures Once all of the enterprise expenditures have been gathered, they must be categorized as line, support, or special/pass- through according to the following definitions. Line program. A line program is a logical grouping of simi- lar activities or projects that are primarily focused on actually delivering the main work products of a state DOT. For exam- ple, construction projects make up a construction program, and maintenance activities and projects make up a maintenance program. Support program. A support program is one that supports the delivery of one or more line programs (e.g., agency exec- utive management, information systems, human resources, legal, and finance). Special/pass-through. Many state DOTs report expendi- tures that do not fit nicely into either the line or support cat- egories (e.g., debt-related expenditures associated with past bond issuance, or direct payments or pass-throughs to other state and local agencies). Debt-related expenditures are, in most cases, the result of agency efforts to advance larger construction programs sooner than traditional revenues would permit. In this case, debt- related expenditures have nothing whatsoever to do with the maintenance program. Furthermore, the guidance pro- vided in OMB Circular A-87 related to debt (Attachment B, cost item 23) is that in virtually all cases it is considered unallowable 23 Line Activities Allocation of Support Activity Expenditures Tot al Support Activity Allocation Mix Deicer Training Management Stores Crack sealing $5,618 $42,135 $7,022 $54,775 Deicing $250,000 $112,359 $842,697 $140,449 $1,345,506 Sign washing $3,371 $25,281 $4,213 $32,865 Str iping $78,652 $589,887 $98,315 $766,854 Totals $250,000 $200,000 $1,500,000 $250,000 $2,200,000 Note: Some totals rounded to the nearest dollar. Table 3.3. Example allocation of support activity expenditures to line activities.

to classify debt expenditures as an enterprise support program allocable to maintenance because this would falsely increase the allocation of enterprise support expenditures to line activities. Direct payments or pass-throughs to other state or local government agencies, unlike construction and maintenance programs, do not involve DOT personnel administering, over- seeing, or performing work, nor do they benefit the agency in any way. The classification of direct payments or pass-throughs as a line program would falsely reduce the allocation of enter- prise support expenditures to line activities. The examples described, or any similar expenditures, must be excluded from the calculation. The full cost determination process therefore identifies a third category of enterprise expen- ditures, special/pass-through, and any expenditure identified as such is indeed excluded. In most cases, the classification of a program is obvious from its name; however, program descriptions provided in agency annual reports and budget documents can guide the classification where there is any question. Illustrative Example Table 3.4 lists the set of enterprise programs, total expendi- tures, and classification of programs as line, support, or special/pass-through for the example. In this case, the equip- ment fund is classified as special/pass-through because it rep- resents all expenditures associated with the agency vehicle fleet, which are in turn charged in their entirety to the line programs through rental rates. In this case, classifying the equipment fund as a special/pass-through expenditure ensures that these charges are not double counted. For the purposes of this example, therefore, total line pro- gram expenditure is $127,500,000, total support program expenditure is $8,000,000, and $7,500,000 associated with the equipment fund is excluded from the calculation. 3.4 Step 4: Allocate a Portion of Enterprise Support Expenditures to the Maintenance Program Objective The objective of Step 4 is to establish the relationship between enterprise support and line programs in order to allocate an appropriate portion of enterprise support expen- ditures to the maintenance program. Sources of Information and Key Considerations The best source of information regarding the relationships between enterprise support and line programs is the agency’s personnel. This can be supplemented by documentation about agency programs, which can usually be found in agency annual reports and budget documents. As with Step 2, a key consideration for this step in the process is the objective that the full cost determination process be as practical as possible. To satisfy this objective, it is recom- mended that unless a particular enterprise support program is unambiguously associated with only a subset of the line pro- grams, it should be associated with all line programs. The full cost calculations for both Alabama DOT and Washington State DOT, documented in Appendix A of the attachment, include real-world examples of enterprise support programs that support only a subset of line programs. In the case of Alabama DOT, there are separate central office administration and geo- graphically focused (division and district) supervisory expen- ditures for both the construction and maintenance programs. In the case of Washington State DOT, its program H, Program Delivery Management and Support, only provides support to its Maintenance, Preservation, and Improvement programs. 24 Program Name Type Total Expenditure Maintenance Line $20,000,000 Construction Line $100,000,000 Traffic operations Line $2,500,000 Public transportation Line $5,000,000 Subtotal $127,500,000 Administration Support $5,000,000 Program delivery support Support $3,000,000 Subtotal $8,000,000 Equipment fund Special/pass-through $7,500,000 Total $143,000,000 Table 3.4. Example classification of enterprise programs and expenditures.

The other key consideration for this step is selecting the basis by which expenditures in each enterprise support program are allocated to the line programs. The benchmark approach allo- cates support program expenditures to line programs on the basis of the line program costs identified in Step 3. Illustrative Example Table 3.5 presents a crosswalk between the enterprise line and support programs for the example. Line programs are represented by the rows, and support programs are rep- resented by the columns. In the event that a particular line program is supported by a particular support program, an X is displayed. In this case, the program delivery support program is only related to the maintenance and construc- tion line programs. Table 3.6 illustrates the results of applying the benchmark approach to allocate support program expenditures to the line programs. The allocation calculation is performed for each valid combination of line and support programs (i.e., for each X in Table 3.5). The support program allocation is equal to: Where $LPIQ = line cost of line program in question, $ASLP = line cost of all supported line programs, and $SPIQ = cost of support program in question. $LPIQ $ASLP SPIQ( ) $ For example, the allocation of the program delivery support program to maintenance is The share of enterprise support that must be allocated to the maintenance program is therefore $1,284,314. 3.5 Step 5: Combine Cost Categories to Derive Full Cost Objective The objective of Step 5 is to combine the line activity cost with the appropriate allocations of both maintenance pro- gram and enterprise support expenditures to determine the full cost of the line activities. Sources of Information and Key Considerations All of the information required to complete the full cost cal- culation is produced through Steps 1 through 4. At this point, the process has identified the line activity expenditures, an allocation of maintenance program support expenditures for each line activity, and the allocation of enterprise sup- port expenditures that must be applied to the maintenance program. The next step, therefore, is to allocate the mainte- nance program share of enterprise support expenditures to the line activities themselves. Consistent with the approach $20,000,000 $120,000,000 ,000 500,0( ) = $ , $3 000 00. 25 Line Programs Support Programs Program Delivery Support Administration Maintenance X X Construction X X Traffic operations X Public transportation X Table 3.5. Example line and support program crosswalk. Line Programs Allocation of Support Program Expenditure Total Support Program Allocation Program Delivery Support Administration Maintenance $500,000 $784,314 $1,284,314 Construction $2,500,000 $3,921,569 $6,421,569 Traffic operations N/A $98,039 $98,039 Public transportation N/A $196,078 $196,078 Total $3,000,000 $5,000,000 $8,000,000 Table 3.6. Example allocation of support program expenditures to line programs.

for program support expenditures, the benchmark approach involves doing this on the basis of line activity cost. The result of this calculation is the total cost for each line activity. Dividing this amount by the accomplishment recorded by the agency for each activity (where available) provides the full cost per unit of production, which now incorporates a fair share of both maintenance program and enterprise support expenditures. Illustrative Example Table 3.7 draws upon Tables 3.1 and 3.3 and the results of the enterprise support cost allocation calculations. It shows the breakdown of the full cost between the three cost categories: line, program support, and enterprise support. The allocation of enterprise support to each line activity is Where $LAIQ = line cost of line activity in question, $ALA = line cost of all line activities, and $AESM = allocation of enterprise support to the mainte- nance program. For example, the allocation of enterprise support to sign washing equals Table 3.8 presents the full unit costs for production of each of the line activities in the example. $300,000 $17,800,000 ,314 21,646.( ) = $ , $1 284 $LAIQ $ALA AESM( ) $ 3.6 Calculation Options and Exceptions The preceding sections describe and illustrate the bench- mark approach to the full cost calculation. The benchmark approach is specifically designed for ease of use (i.e., to meet the practical requirement) and should therefore be feasible/attainable in most, if not all, state DOTs. A funda- mental finding of this research is that although the input data used and the details of each step may vary, the overall full cost determination process can and must be the same for all activities and all agencies. Depending on the data available, the knowledge of the personnel performing the calculation, and the resources/time available, there are options at each step that should be considered and are described in the remainder of this section. Simplified Benchmark Approach (All to All) The benchmark calculation described in the previous sec- tions accounts for two different types of maintenance pro- gram and enterprise support expenditures. The first type is general in nature and effectively supports all line activities and all line programs, respectively—for example, the main- tenance program and agency executive management. The second type of support expenditure is for more focused sup- port activities and programs that only support a subset of line activities and line programs, respectively. For example, sign shop activities not recouped through sign material expenditures support only sign installation and mainte- nance activities. The second type of support expenditure 26 Line Activity Cost Categories Full Cost Line Program Support Enterprise Support Crack sealing $500,000 $54,775 $36,076 $590,851 Deicing $10,000,000 $1,345,506 $721,525 $12,067,031 Sign washing $300,000 $32,865 $21,646 $354,511 Striping $7,000,000 $766,854 $505,067 $8,271,921 Total $17,800,000 $2,200,000 $1,284,314 $21,284,314 Table 3.7. Example full cost breakdown for line activities. Line Activity Full Cost Accomplishment Units Full Unit Cost Crack sealing $590,851 75,000 Pounds $7.88 Deicing $12,067,031 9,000,000 Pounds $1.34 Sign washing $354,511 20,000 Each $17.73 Striping $8,271,921 18,000 Linear feet $459.55 Table 3.8. Example full unit costs for line activities.

can occur at both the maintenance program and enterprise levels; however, on the basis of the full cost calculations per- formed in this study, it is more common within the mainte- nance program itself. The number of maintenance activities and enterprise pro- grams varies by agency and in some cases can be quite large. As the number increases, so does the effort required to relate line and support activities and programs. In addition, activity and program definitions tend to become closer and differences more nuanced, which further increases the knowledge, time, and effort that can be expended developing the line and sup- port crosswalks in Steps 2 and 4. Finally, although it is recom- mended that the full cost calculation be undertaken by a team with representatives from the maintenance program or finance division or office, as well as people knowledgeable in agency information systems, there may be circumstances where such a team approach is not possible. In any of these situations, the simplified benchmark approach can be used to determine the full cost of maintenance activities. As its name suggests, this benchmark approach simplifies Steps 2 and 4 with the assumption that all maintenance pro- gram and enterprise support expenditures support all line activities and all line programs, respectively, essentially placing Xs in every cell of the crosswalk matrices in Steps 2 and 4. Step 2. Table 3.9 illustrates the results of applying the simpli- fied benchmark approach to allocate support activity expendi- tures to the line activities for the example described previously. The allocation calculation is now performed for every com- bination of line and support activities. The support activity allocation is equal to: Where $LAIQ = line cost of line activity in question, $ASLA = line cost of all supported line activities, and $SAIQ = cost of support activity in question. Using the simplified benchmark approach, now the alloca- tion of the mix deicer support activity to deicing equals Step 4. Table 3.10 illustrates the results of applying the sim- plified benchmark approach to allocate support program expenditures to the line programs. The allocation calculation is now performed for every combination of line and support programs. The support program allocation is equal to: Where $LPIQ = cost of line program in question, $ASLP = cost of all supported line programs, and $SPIQ = cost of support program in question. $LPIQ $ASLP SPIQ( ) $ $10,000,000 $17,800,000 140,449 v ( ) = $ , $250 000 ersus calculated previously$ , .250 000( ) $LAIQ $ASLA SAIQ( ) $ 27 Line Activities Allocation of Support Activity Expenditures Total Support Activity Allocation Mix Deicer Training Management Stores Crack sealing $7,023 $5,618 $42,135 $7,022 $61,798 Deicing $140,449 $112,359 $842,697 $140,449 $1,235,954 Sign washing $4,213 $3,371 $25,281 $4,214 $37,079 Striping $98,315 $78,652 $589,887 $98,315 $865,169 Totals $250,000 $200,000 $1,500,000 $250,000 $2,200,000 Table 3.9. Example simplified allocation of support activity expenditures to line activities. Line Programs Allocation of Support Program Expenditure Total Support Program Allocation Program Delivery Support Administration Maintenance $470,588 $784,314 $1,254,902 Construction $2,352,941 $3,921,569 $6,274,510 Traffic operations $58,824 $98,039 $156,863 Public transportation $117,647 $196,078 $313,725 Total $3,000,000 $5,000,000 $8,000,000 Table 3.10. Example simplified allocation of support program expenditures to line programs.

Using the simplified benchmark approach, now the alloca- tion of the program delivery support program to mainte- nance is Now the allocation of enterprise support expenditures to the maintenance program is $1,254,902 (versus $1,284,314 calculated previously). Step 5. Table 3.11 draws upon Tables 3.1 and 3.9 and the results of the simplified enterprise support cost allocation cal- culation just completed, whereby the maintenance program share of enterprise support is now $1,254,902. It shows the breakdown of the full cost between the three cost categories: line, program support, and enterprise support that results from using the simplified benchmark approach. The allocation of enterprise support to each line activity is $LAIQ $ALA AESM( ) $ $20,000,000 $127,500,000 470,5( ) = $ , , $3 000 000 88 versus calculated previously$ , .500 000( ) Where $LAIQ = line cost of line activity in question, $ALA = line cost of all line activities, and $AESM = allocation of enterprise support to the mainte- nance program. Using the simplified benchmark approach, now the alloca- tion of the enterprise support to sign washing equals Table 3.12 presents the full unit costs for production of each of the line activities in the example using the simplified benchmark approach. Table 3.13 shows a comparison of the full unit costs for the example calculated using the benchmark and simplified benchmark approaches. The difference in this case is very modest. However, comparisons of full unit costs for selected activities using the benchmark and simplified benchmark $300,000 $17,800,000 21,150 ver ( ) = $ , , $1 254 902 sus calculated previously$ , .21 646( ) 28 Line Activity Cost Categories Full Cost Line Program Support Enterprise Support Crack sealing $500,000 $61,798 $35,250 $597,048 Deicing $10,000,000 $1,235,955 $705,001 $11,940,956 Sign washing $300,000 $37,079 $21,150 $358,229 Striping $7,000,000 $865,168 $493,501 $8,358,669 Total $17,800,000 $2,200,000 $1,254,902 $21,254,902 Table 3.11. Example simplified full cost breakdown for line activities. Line Activity Full Cost Accomplishment Units Full Unit Cost Crack sealing $597,048 75,000 Pounds $7.96 Deicing $11,940,956 9,000,000 Pounds $1.33 Sign washing $358,229 20,000 Each $17.91 Striping $8,358,669 18,000 Linear feet $464.37 Table 3.12. Example simplified full unit costs for line activities. Line Activity Units Full Unit Cost Percent Difference Benchmark Simplified Benchmark Crack sealing Pounds $7.88 $7.96 1.01% Deicing Pounds $1.34 $1.33 -0.75% Sign washing Each $17.73 $17.91 1.01% Striping Linear feet $459.55 $464.37 1.04% Table 3.13. Example comparison of benchmark and simplified benchmark full unit cost.

approaches are made at the end of the calculations for Arizona DOT and Missouri DOT in Appendix A of the attachment, and in these real and complete examples, the impacts are more significant. Forward-Looking or Budgetary Approximation The sources, calculation, and tracking details for the line activity, program support, and enterprise support expenditures vary by agency. However, irrespective of these variations, the full cost calculation requires that these costs be obtained from somewhere. The prior descriptions of Steps 1 and 3 focus on a backward-looking, accounting approach to determining the contributions to full cost for each category of cost. If such a forensic approach is possible, combining actual expenditures would appear to be the most straightforward and practical solu- tion. However, it is also possible to make a forward-looking cost projection of the type that is done during the budget develop- ment process. Step 1: Gather and Classify Maintenance Program Activities and Expenditures The following steps provide an example of a forward- looking or budgetary approximation for determining the cost of maintenance activities. The example is based on the way the Alabama DOT’s Maintenance Bureau uses its mainte- nance management system to prepare line activity budgets for each year. The basic steps in the process are as follows: 1. Estimate the number of crew days of a particular mainte- nance activity that will be required during the next budget year; 2. Determine the crew profile that will be required to perform each activity (i.e., number and classes of maintenance personnel); 3. Estimate the average daily crew cost using current average loaded rates by personnel class as well as any cost-of-living or other adjustments; 4. Multiply the results of Steps 1 and 3 to estimate the pro- jected labor cost for the activity; 5. Review past expenditures on the activity in question and calculate the percentage of the total cost contributed by LEMO; and 6. Estimate equipment, material, and other costs using the results of Steps 4 and 5 and combine them with the labor estimate—this gives an estimate of the sum of line cost ele- ments for the activity. The process must be completed for all activities prior to moving on to Step 2. In addition, it is important to under- stand the extent to which maintenance program support is covered by the budget activities. In the event that certain support expenditures are not covered—say, for example, expenditures for the state maintenance engineer and other maintenance program support and administration—these must either be added as additional activities here and their expenditures estimated, or they must be identified as a maintenance-program–specific enterprise support expen- diture in Step 3. Step 2: Gather and Classify Enterprise Programs and Expenditures As with Step 1, the preferred approach to obtaining this information is to extract it from agency information systems and/or financial reports for a complete fiscal year in the past (i.e., actual expenditure information). However, just as for maintenance program activities and expenditures, another option is to use forward-looking budgetary information as the principal input for this step. Allocation Basis Step 3: Allocate Maintenance Support Expenditures to Line Activities In order to help ensure the practicality of the full cost determination process, both the benchmark and simplified benchmark approaches described and illustrated in this report consistently use the line cost as the basis for allocating all program support expenditures to line activities. However, an agency may choose a different basis for allocating all pro- gram support expenditures, or even choose different bases for different support activities. Beyond line activity cost, the most obvious alternative allo- cation basis can be found within the elements of line cost as follows: • Workman’s compensation support activity expenditures (or other support activity expenditures reasonably related to labor expended) could be allocated on the basis of labor expenditure for each line activity; • Material stores and handling support activities expenditures could be allocated on the basis of material expenditure for each line activity; • Unused equipment and other equipment support activity expenditures could be allocated on the basis of equipment expenditure for each activity; and • Contractor solicitation, administration, and oversight sup- port activities could be allocated on the basis of other expen- ditures for each activity (provided other expenditures are predominantly contractor payments). 29

In addition, labor hours and equipment hours could be used as the basis of allocating support activity expenditures. Step 4: Allocate a Portion of Enterprise Support Expenditures to the Maintenance Program As with the allocation of program support expenditures, both the benchmark and simplified benchmark approaches described and illustrated in this report consistently use the line cost as the basis for allocating all enterprise support expenditures to line programs. However, an agency may choose a different basis for allocating all enterprise support expenditures, or even choose different bases for different support programs. For example, Florida DOT’s Indirect Cost Allocation Plan (Florida Department of Transportation, 2008) identifies 25 different bases of allocation. Each of these bases is used for allocating one or more of its 34 indirect cost pools (support programs) to 21 direct programs (line pro- grams). Examples of the different bases include total depart- ment expenditures, total district expenditures, consulting services expenditures, federal construction expenditures, nonlabor expenditures, total number of employees, total number of headquarters building employees, total right-of- way expenditures, total construction charges, and mainte- nance charges. Step 5: Combine Cost Categories to Derive Full Cost All allocations of enterprise support expenditures to line activities so far have been made on the basis of the line activ- ity expenditures identified in Step 1. However, alternative approaches to allocating the maintenance program’s share of enterprise support expenditures can be considered in much the same way as has been discussed for Steps 2 and 4. In addi- tion to the various allocation bases previously discussed (some of which might similarly be candidates here), another candidate for consideration is the line activity plus program support cost basis, whereby the allocation of enterprise sup- port to each line activity is Where $LAIQ = line cost of line activity in question, $PSLAIQ = program support cost of line activity in question, $ALA = line cost of all line activities, $PSALA = program support cost of all line activities, and $AESM = allocation of enterprise support to maintenance program. $ $ $ $ $LAIQ PSLAIQ ALA PSALA AESM+( ) +( )[ ] Applying this approach to the benchmark example, the allocation of the enterprise support to sign washing equals Allocation Basis Considerations Provided that the data is available for all activities and/or programs, there are clearly a number of allocation bases for an agency to choose from. However, before pursuing alloca- tion bases other than line activity costs, agencies must con- sider two important issues: 1. Calculation complexity and level of effort: If an agency chooses to use different bases for allocation for different support activities, the complexity of the calculation will increase, as will the level of effort required and the poten- tial for error. 2. Potential for disagreement: By introducing multiple bases for allocation, an agency opens the door for debate about which basis should be used for which support activities, which may ultimately weaken the perception of the validity/ correctness of the full cost determination processes results. Maintenance Program Expenditure Reconciliation Step 4 of the full cost process involves allocating a share of enterprise support expenditures to the maintenance program on the basis of maintenance program expenditure. As a result, in any case where the expenditure data for the full cost calcu- lation is drawn from both agency maintenance and financial management systems, the total maintenance program expen- ditures from both sources must be compared. In the event that there is a significant discrepancy (say greater than or equal to 10%), a reasonable attempt must be undertaken to identify its source, and a fair assessment of total maintenance program expenditures is used as the basis for determining the enterprise support expenditure allocation. The full cost calculations doc- umented in Appendix A of the attachment indicate that the enterprise support component of any line activity’s full cost ranges between 2% and 10%. At 10%, a 10% discrepancy in the enterprise support allocation to maintenance will result in only a 1% difference in full cost. The documented full cost calculation for Arizona DOT described in Appendix A of the attachment provides an exam- ple of this situation. In this case, the total maintenance pro- gram expenditure from the maintenance management system $ , $ , $ , , $ , ,300 000 32 865 17 800 000 2 200 000+( ) +( )[ ] = $ , , $ $ , 1 284 314 21 646 21,375 versus calculated previously( ). 30

is $152,617,001, versus $135,629,139 from the financial man- agement system. Discussion about the reasons for the discrep- ancy with agency personnel resulted in the determination that the higher expenditure amount is the better value, and thus the decision was made to scale up the allocation enterprise support cost to maintenance by the same factor as between total maintenance program expenditures from both sources. In this way, the calculation ensured that the maintenance pro- gram received a fair, and in this case higher, allocation of enter- prise support expenditures than would have resulted from using the financial management system data alone. Full Cost Versus Full Unit Cost of Production The full cost calculations result in both a total full cost for each activity considered and a full unit cost, derived by dividing the full cost by reported accomplishment. Although there is value in both figures, from a practical standpoint, the full unit cost is more useful and therefore more valuable. The calculation of full unit cost relies on the agency selecting useful units of accomplishment for line activities (for example, tons, yards, square feet, linear feet, each), and then capturing and recording this data accurately. Based on per- forming these calculations with data from six different state DOTs and discussions with personnel from these agencies, it is clear that adherence to these requirements is mixed. As a consequence and at a minimum, any agency undertaking the full cost calculation should consider its level of confidence in its accomplishment data and treat full unit costs accordingly. In addition, in the event that a single line activity is performed by a combination of in-house personnel and contractors, it is critical to understand whether accomplishment data is being recorded consistently in both cases. If, as it appears to some- times be the case, contractor accomplishment data is either questionable or absent, then full unit costs calculated will be skewed. Implications of Automatic Indirect Cost Allocation A number of the state DOTs interviewed for this study have implemented indirect cost allocation procedures of different types directly within their financial management systems. If expenditure data for the full cost determination process is extracted from the financial management system, it is important to understand what, if any, indirect cost allo- cations already have occurred. Depending on the agency, indirect cost allocation plans can be quite complex and it can take considerable effort to understand them. It is therefore recommended that, whenever possible, raw and unallocated agency expenditure data be used as the point of departure for the full cost determination process. In this way, all classifica- tion and allocation activities for both program and enterprise support expenditures occur through the full cost determina- tion process itself, increasing the transparency of the calcula- tion. Of course, if automatic indirect cost allocations are performed in a way that is entirely consistent with the full cost determination process described in this report, the full cost of activities can be obtained directly from the financial manage- ment system. However, it is paramount that the allocation procedures used to derive the full cost be reviewed, under- stood, and confirmed as being consistent with the full cost determination process. Full Cost Calculation for Network and Geographic Subsets The full cost determination process described in this report was developed in order to calculate the full unit cost of mainte- nance activities on a statewide basis. However, there is nothing to prevent its application to a subset of a state (e.g., a particular functional class or another geographic designation such as a district or region), provided that the requisite portion of total line expenditure and accomplishment data for a particular maintenance activity can be readily identified. The approach for allocating program and enterprise support expenditures to a subset of total line activity expenditure is no different than to the statewide line activity total—that is, based on the line cost amount. It must be noted, however, that from a prac- tical standpoint there are limits to how finely the line cost data can be sliced. At some point, it is possible that a particular main- tenance activity has not been performed in the selected geo- graphic subset within the timeframe for which cost and accomplishment data has been obtained. It is therefore rec- ommended that the full cost process be applied at higher lev- els of aggregation—for example, by functional class or by district, and not, for example, from milepost A to milepost B on a specific highway. 3.7 Additional Considerations The full cost determination process described in this report enables the calculation of an agency’s full cost to perform a particular maintenance activity. However, in order to sup- port the use of the resulting dollar amount in any other analy- sis or comparison, it is critical that it be placed into context. At a minimum and as previously stated, this context should include a combination of cost and units of measure for the particular activity, in order to derive an agency’s total (or full) unit price for the activity. In addition, it is critical to consider the impact on level of service resulting from this expenditure. In other words, what was the condition or level of service 31

associated with the maintenance activity at the beginning and end of the analysis period? Did the level of service fall or rise (and if so by how much) or remain flat as a result of the expenditure? In addition, if the resulting cost is intended for use as an input for a forward-looking decision and it has been derived from a backward-looking analysis (i.e., a forensic accounting exercise), inflation must be considered. Although historically inflation has been relatively modest in the area of highway construction and maintenance, more recently agencies have experienced periods of much higher inflation. This is particularly important in the area of oil and petroleum products, which are important to most maintenance activities in that they drive the price of the fuel that is used by all of the equipment. For this reason and depending on the purpose of determining the agency’s full cost for performing a particular line activity, it will be important to ensure appropriate consideration for inflation and apply a fac- tor to the resulting full unit cost. 32