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16 vary in the relative volume of their construction work, Among these capabilities are maintenance management and if the unit cost of construction in each district is fur- systems; financial management and accounting systems; pro- ther influenced by local factors such as geography, climate, cedures and/or systems for payroll, equipment management, traffic, and degree of urbanization, it is easy to see that materials-and-stores/inventory management, and maintenance the observed variability in maintenance overhead rates contract management; and approved indirect cost plans ac- may have nothing to do with relative maintenance effi- cording to FHWA requirements for federal-aid reimburse- ciency. Additional influences such as the geographic size ment, based on OMB Circular A-87. The recommended cost of a district and the density of the road network may determination approach can be structured to be consistent have similar distorting effects. with an agency's cost data and computational methods such · Results expressed as overhead rates are more sensitive to as those included in its maintenance and other applicable the categorization of costs as direct or indirect than are management systems and to conform to the general princi- results in terms of full unit costs. The problem arises because ples, methods, and assumptions in its approved indirect cost this categorization can be subjective, with variability in re- plan. The guidelines and examples in Chapter 3 and the at- sults among agencies--a fact recognized in OMB Circular tachment identify the types of data needed from these systems A-87. This issue is highly unlikely to affect costs that are and explain the computations involved. Case studies devel- referred to as line costs in the recommended process, but it oped for several DOTs illustrate applications of the method- can occur with respect to support costs, particularly the pro- ology under different conditions and assumptions. Where gram support costs. Given uncertainty in what costs are con- certain systems or data are not available, the descriptions in sidered direct versus indirect, the ratio of indirect to direct Chapter 3 identify options for obtaining information from maintenance costs--the maintenance overhead rate--may other sources and estimating or approximating values. vary solely due to how costs have been categorized and not to meaningful distinctions in how maintenance has been 2. The focus of the process is state departments of trans- performed. portation; however, it may be useful to any transportation · Results expressed as unit costs are less prone to categoriza- agency with a maintenance program. tion problems. The reason is that regardless of how program Identifying state DOTs as the target of this research estab- support costs might be categorized as direct or indirect, these lishes an explicit context for designing an effective mainte- costs tend to be 100% attributable to maintenance line costs nance cost determination process. Key factors defining this or a subset thereof. For example, it would be reasonable to context are as follows: distribute the support costs related to a district maintenance office to all maintenance activity line costs on a prorated · Capabilities in planning, tracking, and managing agency basis. Program support costs related to sign fabrication, functions such as highway maintenance, financial account- however, would be reasonable to distribute to sign-related ing, equipment and material usage, and other functions activity line costs, again on a prorated basis. In each of these described below. These management capabilities play key cases, the attribution of program support costs remains com- roles in developing and supporting a viable cost determi- pletely within the sphere of maintenance line costs. There- nation process. Moreover, personnel in these disciplines-- fore, regardless of how one might categorize them as direct particularly in maintenance management and financial or indirect, these program support costs are fully captured accounting management--need to work cooperatively in within the total unit maintenance costs that result from the conducting analyses and reconciling cost data. cost determination process. · A funding environment that includes federal-aid program requirements governing reimbursement of applicable 2.4 Tenets of Full Cost highway-related expenditures, including indirect costs. Determination Admittedly, many routine maintenance activities and main- tenance work on non-federal-aid highways are not directly Several tenets that have guided the development of this cost affected by these FHWA provisions. However, agency proce- determination process were listed in Chapter 1. The items dures and data needed to conform to FHWA requirements below elaborate on each tenet and provide its rationale and for federal-aid program reimbursements--including an implications for study findings and recommendations in later indirect cost plan approved by the FHWA--can assist greatly sections. in developing and implementing a maintenance cost deter- mination process, particularly if DOT cost analyses and 1. The recommended full cost determination process reporting are comprehensive and disciplined. should build on the existing management practices, procedures, data, and systems typically found within This study has adopted the model comprising typical state state DOTs. DOT management capabilities, interdisciplinary collabora-
17 tion in analyzing agency costs, and joint state DOTFHWA This tenet is important because the purpose, analytic basis, program funding as the context for designing and developing a and results of a cost determination process are sometimes maintenance cost determination process. Chapter 3 and the at- misunderstood, with the potential for misuse. Expressing tachment provide guidelines with several examples of how the the full costs of a maintenance activity as a computed unit cost determination process can be applied to state DOTs with cost provides the most correct and reliable metric. For a given different characteristics and situations. Other transportation activity, the numerator of the unit cost is the sum of all line agencies also may find the cost determination process to be and support costs attributable to that activity; the denom- helpful if they also are trying to estimate the full costs of main- inator is the accomplishment unit assigned to that activity tenance. They would, of course, need to adjust and compen- in the maintenance management system (e.g., area of pave- sate for differences in their own operating context, whether ment, length of guardrail, acres of mowable grass). Only those in the availability of management tools and data or in the activities that have defined, physical measures of accom- documentation of their own direct and indirect cost analyses. plishment can have these unit cost results. Expressing results as overhead percentages is unreliable and potentially mis- 3. The focus of the process is highway maintenance pro- leading and is therefore discouraged because such percent- grams; however, the basic principles of full cost determi- ages depend on several factors having nothing to do with the nation may be applied to any of an agency's line programs. efficiency of agency maintenance. Highway maintenance is the focus of this cost determination 6. The results of the full cost determination process apply study. The main objectives of the research were to develop a to each agency individually; comparisons of full costs process for determining the full cost associated with per- between agencies are not meaningful for several reasons, forming highway maintenance and to document its appli- and should be avoided. cation using a number of real-world examples. However, the principles and fundamental procedures in cost determi- The logic and implications of this tenet are similar to those nation are general in scope and can be applied conceptually of the previous one. Comparisons among peers based on over- to any program or transportation mode once appropriate head percentages are inappropriate for all the reasons discussed adjustments are made for the different activities and cost previously. Even comparisons based on unit costs may not be elements involved. The generality of the approach strength- meaningful because of effects similar to those already discussed ens the rationale that if a department is considering out- as well as differences in items such as program structure (i.e., sourcing road maintenance services, it should commit the the number of maintenance activities and how they are de- resources needed to conduct cost determination compre- fined) and the overall size of the maintenance program as com- hensively but efficiently. pared with that of construction and other programs. These dif- ferences can affect the values of line costs and the distribution 4. The recommended full cost determination process of prorated support costs, complicating comparisons with should encompass all activities performed by an agency's other agencies. Comparisons with private-sector costs should, maintenance organization and program. therefore, be done on the basis of the existing agency mainte- nance activity specification, units of accomplishment, level of The general approach to assigning full maintenance costs by activity is fundamentally the same across all line activities. service achieved, and the associated full unit costs. In addition, Straightforward procedures also are available for support if agency full costs are derived from a review of past expendi- activities. There are variations in the details of specific activ- tures, appropriate consideration for inflation must be incorpo- ities, but these do not fundamentally affect the methodology rated into the comparison. involved. For example, if a materials laboratory supports maintenance work in pavement repair and pavement mark- 7. The recommended full cost determination process should ings, those activities may bear a share of the cost of the labo- ensure complete coverage of an agency's expenditures, ratory. Similarly, the costs of a sign fabrication shop may be with no overlaps, duplicates, or gaps. borne by activities related to signage, and the costs of salt sheds may be attributed to winter maintenance activities. Once The cost determination process must account for all rel- these distributions have been calculated and assigned properly, evant line and support (or direct and indirect) costs so that the distribution of other program support costs to individual they can be part of the calculation, even if values and percent- activities can be done on a prorated basis. age distributions must be estimated. Overlapping or dupli- cated costs lead to double-counting and must be avoided. 5. Maintenance activity full cost results should be ex- Gaps or incomplete tallies of relevant costs likewise must be pressed as either total or unit cost rather than overhead corrected to prevent distorted results. Care in assembling cost percentages. data according to the categories recommended in this report
18 (i.e., line costs, program support costs, and enterprise support how costs are categorized; in the programs, functions, or activ- costs) will help eliminate these errors. Some examples follow: ities to which they are assigned or distributed; and in the analytic bases by which they are distributed). · Check the totals of corresponding line and support items be- tween the MMS and the financial system to ensure that they 9. Agency application of the full cost determination process are reasonably close or that variances can be accounted for. will benefit significantly from the collaboration of main- Differences may be due to errors in data reporting, varying tenance with other units within the DOT. cost calculations and analyses between the two systems, use of different sets of data implied by queries of the two systems At a minimum, a team involving representatives of main- (e.g., number and location of personnel identified as belong- tenance and financial accounting is needed to ensure that ing to the maintenance organization), or other factors. Un- costs are fully identified; that the cost determination com- derstanding the reasons for these differences can help deter- putations are consistent as much as possible with general mine exactly what costs have or have not been considered. agency accounting practices, including the approved indi- · Since agency practices differ on what cost items to include rect cost plan; and that the needed computations can be in equipment rental rates, these costs need to be understood done correctly and efficiently. Other groups may be needed within each agency to avoid gaps or overlapping costs. For to check on details and to provide cost-related information example, if agency equipment rental rates include depreci- in particular instances. These units may include, for example, ation, and other identified costs include equipment capi- equipment management, materials-and-stores-inventory/ tal purchases, this is a cost overlap. Removal of one of these stockpile management, payroll, and other functions classified overlapping categories of cost before proceeding with the as support (e.g., information technology, research, training). analysis is necessary. The effort needed to account for the contributions of these · Similar categories of costs should be scrutinized to ensure support units to the cost analysis may be minimized by basing that they do not duplicate one another. For example, a analyses on completed fiscal year data. materials research lab may be included as either a program- 10. Utilization of year-end reports and data simplifies the support cost (if it serves primarily maintenance) or an full cost determination process and reduces the chances enterprise-support cost (if it supports functions besides of errors and inconsistencies. maintenance, such as construction, safety, and traffic operations). There also may be a general research expen- Agencies routinely close out fiscal years by completing ad- diture item in enterprise support costs, representing a justments to reported costs, reconciling cost variances, and broad set of sponsored research projects, studies, and re- closing indirect cost accounts to zero out inadvertent gains or ports on behalf of the agency. Determining whether the losses due to differences in estimated versus actual monthly research lab costs are included in the research item and, totals. It therefore makes sense to base a cost determination if so, eliminating the duplication by removing the redun- study on the most recent fiscal year-end results, when cost tal- dant costs, would be necessary. lies are complete and correct, rather than to try to conduct the analysis mid-year. Using year-end results ensures complete 8. A practical and consistent full cost determination process and consistent data across all agency units and largely elimi- is more useful than one that is complex and variable, even nates the need to deal with cost reconciliations, revenue-to- if the latter delivers greater accuracy in some cases. cost adjustments, and direct versus indirect cost flows within individual support functions (e.g., materials and stores, sign Nowhere is there a requirement that estimates of the full fabrication shops, central office functions) and enterprise funds costs of highway maintenance must be accurate to the penny. where they exist (e.g., in equipment management). However, a rule of reason should apply in arriving at realistic but sensible treatments of costs using calculations that are 11. The full cost determination process will provide only practical and efficient. Agencies having well-developed, well- one input to an agency's decision making regarding integrated management systems for maintenance and finan- maintenance delivery. cial accounting can and in fact do come close (if not exactly) on cost totals. In other situations, estimates of costs are per- The focuses of this research effort are maintenance cost de- missible so long as they are realistic. Moreover, distributions termination and the process of identifying the full costs of of indirect costs necessarily involve subjective judgments, a agency highway maintenance. The project does not deal with fact recognized in OMB Circular A-87. Guidelines in OMB contractors' costs to provide highway maintenance, nor does it Circular A-87 further emphasize the importance of consistency address cost comparisons between public- and private-sector in treating similar types of costs in a similar way. Consistency delivery of maintenance services. The study's recommenda- applies in a number of ways within cost determination (e.g., in tions do not attempt to provide guidance in making main-
19 tenance contracting decisions. The project does not address · Documentation of the cost determination procedure iden- other factors and criteria that may enter a contracting deci- tifies general procedures and sources of data, underlying sion such as legislative requirements for outsourcing, limits assumptions (e.g., cost items to be treated as line, program on agency staffing levels, and need for specialized labor skills support, or enterprise support), bases to be used in cost and other resources. attribution/allocation, and special notes. A general docu- ment with annual supplements (e.g., similar to program- 12. The full cost determination process should incorporate ming and budgeting instructions issued annually/biennially general principles of good analytic technique, including by agencies) should be considered. transparency and repeatability. · A library of useful references such as annual maintenance and financial reports, the indirect cost plan, and the gen- Cost determination is a wide-ranging analytic process that eral and annual documentation recommended previously involves agency-wide cost data and several stages of cost dis- should be maintained. tribution and summation. Good practices that have been · Archiving procedures and identified repositories to maintain identified for analytic techniques in general apply here as well, cost determination records, reports, and other documents including should be established. · Transparency: The ease of understanding the basic calcu- 13. Performing full cost calculations requires care and at- lations and assumptions involved and the specific assump- tention to detail; however, the data and tools needed tions, adjustments, or exceptions that have been made in to do it can and have been assembled successfully by particular years. state DOTs. · Replicability: The principle that reasonable, knowledge- able people, presented with the same data, assumptions, Appendix A of the attachment illustrates the application and objectives, could perform the analysis and arrive at the of the recommended cost determination process to DOTs of same result. varying characteristics with different maintenance programs. · Repeatability: Application of tried-and-true management Some of these computations are relatively straightforward, systems, data sources, and other analytic tools such that while others are more detailed and sophisticated, taking full the same data, when subjected to repeated analyses, yield advantage of the capabilities of the agency's financial account- the same results. ing system and maintenance management system. One of these Satisfying these principles of good practice suggests that cost agencies (Texas DOT) applies a state-of-the-art approach char- determination be supported by the appropriate resources and acterized by the following properties: capabilities: · Full cost coverage, encompassing all agency programs, · Designation of a team with the appropriate knowledge, accounts, and cost centers, with a scope extending depart- experience, and analytic resources to organize and con- ment wide. · Cost elements organized in a way that supports full cost duct the cost determination process when needed. Experts from financial management and maintenance management determination, including explicit representation of high- should form the core of this team. way maintenance activities within the financial accounting · The performing of key computations by recognized agency system. management systems (particularly in financial account- · Fully integrated management systems--including the finan- ing management and maintenance management) that cial accounting system, maintenance management system, demonstrate verifiable performance in terms of accuracy, payroll system, equipment management system, and system consistency, and data integrity. Resorting to informal spread- for managing materials-and-stores inventories and stock- sheets and back-of-the-envelope calculations for other than piles--in which the cost elements are unified and communi- simple analyses/summaries is discouraged. Where supple- cated among all systems using a common language. mentary calculations are needed (e.g., in spreadsheets or · A defined and clear cost analysis methodology that is docu- custom programs), they should at a minimum be verified by mented within, and consistent with, the agency's approved other team members. If they are a significant part of the indirect cost plan. process, the tools should be formalized within agency prac- · Complete, up-to-date cost data available for the most recent tice (i.e., as named procedures with identified responsibilities completed fiscal year, and accomplishment data for the set for custody, system maintenance and support, and periodic of key activities performed by state employees as well as upgrades assigned to a specific agency unit). private-sector contractors.