Determining Highway Maintenance Costs (2011)

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37 Allocation (also attribution or distribution or assignment): For the purposes of this report, the process of relating indirect costs to the maintenance jobs or organizational units that have benefitted from the expenditures of these indirect costs. For example, the indirect costs of a maintenance district office need to be related to mainte- nance jobs and units that benefit from the guidance, oversight, su- pervision, and assistance of the district office. This relationship is generally analytic (i.e., able to be computed) but also is informed by judgment since the relationship is not immediately obvious (i.e., if it were, the costs might be considered as direct costs). An accept- able relationship is one that is reasonable (i.e., its logic is under- standable) and felt to be fair by affected parties, but also efficient (i.e., not requiring excessive time and effort that is burdensome rel- ative to the magnitude and importance of the costs being consid- ered). Often an account or pool is created to accumulate indirect costs and allocate them efficiently to the maintenance jobs or orga- nizational units that benefit from the expenditure of these costs. Allowable cost: A cost, either direct or indirect, that is reimbursable by the federal government. State DOTs’ indirect cost allocation plans, which must be approved by FHWA, document how allowable in- direct costs are allocated to allowable direct costs for the purposes of federal reimbursement. Attachments A and B of OMB Circular A-87 provide definitions and guidance with respect to which costs are and are not allowable. Base or basis: The analytic quantity by which indirect costs are assigned pro rata to different functions, programs, groups, or activities. Many potential bases are available. For example, indirect costs could be allocated by the relative shares, respectively, of labor costs, total costs, number of employees, square footage of building space occupied by an organizational unit, or other metric that is felt to represent the relative benefit of the indirect cost expenditure. Benchmark approach: A form of the full cost determination process that is designed to be feasible/attainable in most, if not all, state DOTs. Cost base or basis: For purposes of this report, a basis that is expressed in the overall direct cost of maintenance for an activity, function, or pro- gram. The overall direct cost of maintenance in this context means the sum of all direct labor, including fringe benefits, equipment, materials, and other expenditures, including contractor payments, to perform and complete the specified maintenance work. Cost objective: A financial accounting term defined as “a function, organizational subdivision, contract, grant, or other activity for which cost data are needed and for which costs are incurred” (OMB, 2004). Unless otherwise indicated, a “cost objective” will refer in this report primarily to a maintenance job. Direct costs: Costs “that can be identified specifically with a particular final cost objective” (OMB, 2004). In a road maintenance context, typical direct costs include wages or salaries paid to employees for work performed on a maintenance job, costs of materials acquired for or consumed on a maintenance job, costs of equipment used on a maintenance job, and costs of travel to and from a maintenance job. Where maintenance is performed by contract, direct costs refer to contractor payments. Enterprise: Another way of referring to the entire agency (i.e., the com- bination of all line and support programs). Enterprise support: The combination of all agency (or enterprise) sup- port programs and functions. Enterprise support cost/expenditure: The sum of all agency (or enter- prise) support programs’ and functions’ costs/expenditures. Equipment cost/expenditure: The second element of line and support activity costs. This is the total equipment charges associated with a particular activity. In most cases this is derived by multiplying some measure of equipment usage (hours, days, miles) by an agency- developed equipment rental rate for each piece or type of equipment in the agency’s fleet. Full cost determination process: For purposes of this report, the process of determining the full costs of maintenance for an activ- ity, function, or program, whether statewide, by district, or other geographical or organizational coverage. Full cost: For purposes of this report, the combination of line activity costs/ expenditures, a fair share of program support costs/expenditures, and a fair share of enterprise support costs/expenditures. Indirect cost plan: For purposes of this study, a document prepared and submitted by a state DOT and approved by the FHWA, accord- ing to the requirements of OMB Circular A-87, for use in admin- istering reimbursements of the federal share of costs for federal-aid highway work. Indirect cost: Costs that are: “a) incurred for a common or joint pur- pose benefiting more than one cost objective; and b) are not read- ily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved” (OMB, 2004). For example, the guidance, oversight, supervision, and assistance of a district maintenance office may be said to benefit all maintenance crews and jobs within its jurisdiction, but there is no direct connec- tion or nexus between the district office personnel and each indi- vidual maintenance job. A reasonable but efficient method must be found, often informed by judgment, to relate district office costs to all the maintenance jobs under its responsibility. Refer to the fol- lowing definition. Glossary

Labor cost/expenditure: The first element of line and support activity costs. This is the product of labor hours and fully burdened (i.e., salary plus fringe benefits) labor rates associated with a particular activity. Depending on the agency, it also may include charges for third party labor such as other state or local agencies performing certain maintenance services and/or convict labor charges. LEMO: A shorthand way of referring to the four elements of line and support activity costs (i.e., labor, equipment, material, and other). Line activity: A maintenance program activity that involves the actual per- formance 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 activities include pothole patching, mowing, snow and ice control, bridge inspection, and acci- dent and disaster recovery. Line activity cost/expenditure: The sum of labor (including fringe benefits), equipment, material and other (including contractor) costs/expenditures incurred in the performance of a particular line activity. Line program: A logical grouping of similar activities or projects that are primarily focused on actually delivering the primary work products of a state DOT. For example, construction projects make up a construction program, and maintenance activities and proj- ects make up a maintenance program. Line program cost/expenditure: The sum of all costs/expenditures associated with a particular line program. Maintenance activity: A specific classification of maintenance work or service that is defined in the agency’s maintenance program and maintenance management system (MMS) and/or financial man- agement system (FMS). The full cost determination process deals with all defined activities that relate to maintenance, regardless of number or detail. Cost data are required and accomplishment units are preferred for each activity to be considered. Maintenance job: The performance of a maintenance activity at a par- ticular highway location (or on a particular length of highway) at a particular date and time. Material cost/expenditure: The third element of line and support ac- tivity costs. This is the total material charges associated with a par- ticular activity. In most cases this is derived by multiplying the quantity of each unit of material consumed by a unit price that is calculated and maintained by the agency’s stores operation. OMB Circular A-87: A document issued by the Office of Management and Budget (last revised on May 10, 2004) that establishes princi- ples and standards for treating costs in connection with federal awards, including discussions of direct and indirect costs, and ex- planations of allowable and unallowable costs. Other cost/expenditure: The fourth and final element of line and sup- port activity costs. This element of activity cost is used to collect all other activity costs that do not fit in the first three elements. Sources for this element include contractor payments, private equipment rental, utility charges, and, depending on the agency, payments for services by other state and/or local agency personnel and/or con- vict labor charges. Program support: The combination of maintenance program support activities and functions. Program support cost/expenditure: The sum of all maintenance pro- gram support activities’ and functions’ costs/expenditures. Simplified benchmark approach: A simplified form of the full cost determination process that eliminates the need for developing crosswalks of line and support activity and program expenditures by assuming that all line activities and programs are supported by all support activities and programs, respectively. Special/pass-through: A classification for agency/enterprise programs that must be excluded from the full cost determination process. For example, debt-related expenditures associated with past bond is- suance, or direct payments or pass-throughs to other state and local agencies. Support activity: A maintenance program activity or function that is done in support of one or more line activities. Examples of support activities include administrative support, training, inspection and patrol activities that identify locations where line activities must be performed, radio operations, maintenance program management, and stores operations. Support activity cost/expenditure: The sum of labor (including fringe benefits), equipment, material, and other costs/expenditures incurred in the performance of a particular support activity or function. Support program: A program that supports the delivery of one or more line programs. For example, agency executive management, infor- mation systems, human resources, legal, and finance. Support program cost/expenditure: The sum of all costs/expenditures associated with a particular support program. 38