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

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27 Table 3.9. Example simplified allocation of support activity expenditures to line activities. Allocation of Support Activity Expenditures Total Support Line Activities Mix Deicer Training Management Stores Activity Allocation 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 $2,200,000 can occur at both the maintenance program and enterprise The allocation calculation is now performed for every com- levels; however, on the basis of the full cost calculations per- bination of line and support activities. The support activity formed in this study, it is more common within the mainte- allocation is equal to: nance program itself. The number of maintenance activities and enterprise pro- ($LAIQ $ASLA ) $SAIQ grams varies by agency and in some cases can be quite large. As the number increases, so does the effort required to relate line Where $LAIQ = line cost of line activity in question, and support activities and programs. In addition, activity and $ASLA = line cost of all supported line activities, and program definitions tend to become closer and differences $SAIQ = cost of support activity in question. more nuanced, which further increases the knowledge, time, and effort that can be expended developing the line and sup- Using the simplified benchmark approach, now the alloca- port crosswalks in Steps 2 and 4. Finally, although it is recom- tion of the mix deicer support activity to deicing equals mended that the full cost calculation be undertaken by a team with representatives from the maintenance program or finance ($10,000,000 $17,800,000 ) $250, 000 = $140,449 division or office, as well as people knowledgeable in agency ( versus $250, 000 calculated previously ). information systems, there may be circumstances where such a team approach is not possible. In any of these situations, the Step 4. Table 3.10 illustrates the results of applying the sim- simplified benchmark approach can be used to determine the plified benchmark approach to allocate support program full cost of maintenance activities. expenditures to the line programs. The allocation calculation is now performed for every combination of line and support As its name suggests, this benchmark approach simplifies programs. The support program allocation is equal to: Steps 2 and 4 with the assumption that all maintenance pro- gram and enterprise support expenditures support all line ($LPIQ $ASLP ) $SPIQ activities and all line programs, respectively, essentially placing Xs in every cell of the crosswalk matrices in Steps 2 and 4. Where Step 2. Table 3.9 illustrates the results of applying the simpli- $LPIQ = cost of line program in question, fied benchmark approach to allocate support activity expendi- $ASLP = cost of all supported line programs, and tures to the line activities for the example described previously. $SPIQ = cost of support program in question. Table 3.10. Example simplified allocation of support program expenditures to line programs. Allocation of Support Program Expenditure Total Support Line Programs Program Delivery Support Administration Program Allocation 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

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28 Using the simplified benchmark approach, now the alloca- Where tion of the program delivery support program to mainte- $LAIQ = line cost of line activity in question, nance is $ALA = line cost of all line activities, and $AESM = allocation of enterprise support to the mainte- ($20,000,000 $127,500,000 ) $3, 000, 000 = $470,588 nance program. ( versus $500, 000 calculated previously ). Using the simplified benchmark approach, now the alloca- tion of the enterprise support to sign washing equals Now the allocation of enterprise support expenditures to the maintenance program is $1,254,902 (versus $1,284,314 ($300,000 $17,800,000 ) $1, 254, 902 = $21,150 calculated previously). Step 5. Table 3.11 draws upon Tables 3.1 and 3.9 and the ( versus $21, 646 calculated previously ). results of the simplified enterprise support cost allocation cal- culation just completed, whereby the maintenance program Table 3.12 presents the full unit costs for production of share of enterprise support is now $1,254,902. It shows the each of the line activities in the example using the simplified breakdown of the full cost between the three cost categories: benchmark approach. line, program support, and enterprise support that results Table 3.13 shows a comparison of the full unit costs for the from using the simplified benchmark approach. example calculated using the benchmark and simplified The allocation of enterprise support to each line activity is benchmark approaches. The difference in this case is very modest. However, comparisons of full unit costs for selected ($LAIQ $ALA ) $ AESM activities using the benchmark and simplified benchmark Table 3.11. Example simplified full cost breakdown for line activities. Cost Categories Line Activity Line Program Support Enterprise Support Full Cost 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 3.12. Example simplified full unit costs 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 3.13. Example comparison of benchmark and simplified benchmark full unit cost. Full Unit Cost Line Activity Units Benchmark Simplified Benchmark Percent Difference 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%

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

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