Guide to Calculating Ownership and Operating Costs of Department of Transportation Vehicles and Equipment: An Accounting Perspective (2020)

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1 1. MOTIVATION OF GUIDE State DOTs exist in part to support the movement of people and goods within and across states. DOTs have an obligation to serve as effective stewards of public resources. It can be challenging to manage fleets in a resource-constrained agency without access to clear and accurate cost information. There are four specific challenges to performing a rigorous fleet accounting exercise: • Challenge #1: Identifying costs. Many of the costs within a DOT are related—but not central—to the fleet’s activities. It is challenging to identify which costs should reasonably be included in a fleet cost accounting process because there is often little official guidance. For example, many administrative costs are paid for using non-fleet budgets, such as fringe benefits, IT support, and facility costs. • Challenge #2: Collecting and harmonizing data from multiple systems. Fleets use computerized systems to track transactional data related to equipment, parts, and personnel. However, other groups or computerized systems within the DOT may have cost data needed for the fleet cost accounting. To compile a holistic view of costs, data must be collected from multiple sources, at multiple organizational levels, and over multiple time periods. • Challenge #3: Classifying costs. Placing costs into the correct category is foundational for any subsequent analysis and decision making. For example, upfitting, customization, and make-ready costs are sometimes included in first-year operating costs rather than being amortized over the life of the equipment. This overstates first-year costs while understating ownership costs over time. Similarly, when the proceeds from selling equipment are not returned to the fleet budget, ownership costs are inflated. • Challenge #4: Aggregating and allocating cost information. Indirect costs (such as utility costs) require a basis of allocation to determine the amount of resources going to a given activity, piece of equipment, or category of vehicle. This basis can differ between managerial units. Furthermore, several methods can be used to allocate equipment costs to a given managerial unit, including time based, usage based, and service based. Lastly, wage scales sometimes vary between managerial units within a given state DOT (especially when the cost of living varies widely within a state). If wages are not standardized before estimating a per-unit cost, certain districts may incorrectly appear to be poorly performing. Ultimately, users of fleet cost information need confidence that costs are calculated in an appropriate and consistent fashion. A set of guiding principles for how to collect, track, classify, aggregate, allocate, and present cost information is important and is the focus of this Guide.

2 2. FUNDAMENTALS OF FLEET COST ACCOUNTING 2.1. Lifecycle Costing Discussions about fleet cost accounting inevitably begin with the concept of lifecycle costing, an analysis method that involves estimating the full set of costs associated with acquiring, maintaining, and disposing of vehicles over various replacement cycles. This full set of costs is typically referred to as the true cost or total cost of ownership. Costs occur at different time periods during the equipment life. For example, acquisition costs occur upfront, while fuel costs occur throughout the use of the equipment. For this reason, lifecycle costing generally uses the net present value of all costs to place all costs in today’s values. Another key concept for fleet cost accounting is optimal replacement cycles. To summarize, fleet managers classify equipment costs as “owning” or “operating.” Owning costs (such as depreciation) are associated with keeping equipment in the fleet; these costs decrease with age (see the orange line in Figure 1). Operating costs (such as for repair) are linked to use of the equipment; these costs increase with age (see the blue line in Figure 1). Owning and operating costs drive numerous key decisions for fleet managers. From an economic perspective, it is most advantageous to replace a piece of equipment when its total cost curve is lowest. Another basic concept for fleet cost accounting is the fleet replacement plan, which projects future replacement dates and costs for each vehicle in a fleet. The purpose is to identify long- term spending needs and associated budgetary requirements. In most fleet operations, vehicle replacement practices are dictated primarily by the availability of replacement funds rather Operating Costs Owning Costs Total Cost s Optimal Replacement Period Figure 1. Equipment operating, owning, and total costs Time

3 than by objectives such as minimizing vehicle lifecycle costs. Consequently, inadequate replacement spending not only increases the age and operating costs of a fleet but results in the accumulation of replacement needs. If the vehicle replacement need is not met, then significant fleet downsizing may become unavoidable. 2.2. Users of Fleet Cost Information A variety of stakeholders are potential users of fleet cost information. Figure 2 provides an example of a typical state DOT fleet management structure. The figure’s solid lines represent direct supervision, while dashed lines represent partial supervision or collaboration. This figure demonstrates the multi-layered nature of DOT fleets and outlines the various roles and responsibilities of different users of fleet cost information. Politicians and senior state DOT officials use high-level, aggregate fleet cost information to set budget priorities, advance political agendas, and ensure public accountability of the DOT. They Transportation Commission Senior State DOT Officials Central Fleet Manager District Engineers Resident Maintenance Engineers Shop Managers Financial Accountants District Mechanical Engineers Direct Line of Reporting Indirect Line of Report Figure 2. Example organizational chart of state DOT fleet District Maintenance i r