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

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30 The amount of money to accumulated to pay for future assets is a matter of expert judgement. One approach is to set aside cash equal to the accumulated depreciation of the fleet assets. However, if the fleet is large and its equipment long lived, fully funding replacement could result in a large amount of idle cash in the fleet fund. Some of the costs discussed above are for shared services, requiring a separate allocation method. A classic example is when a building facility is shared by fleet staff and other DOT offices: the DOT may use an allocation system based on square footage or the relative number of staff members, or some other system. 5.4. Applying Indirect Costs to Rates A manager may need to determine when to apply indirect costs to the mechanic labor rate, versus an external and internal rental rate, based on how the rate is being used. Chapter 2.3 above describes six situations in which a fleet manager uses cost information. Five of these decisions require a metric that includes all traceable indirect costs. Only one decision— regarding fleet cost-recovery rates—should limit which indirect costs are included, as shown in Table 11. Table 11. Guidance on which indirect costs to include in cost-related decisions Cost-Related Decision Guidance on which Indirect Costs to Include Equipment Replacement Decision Include all traceable indirect costs. Outsource Decision Include all traceable indirect costs. Equipment Retention or Removal Decision Include all traceable indirect costs. Justifying Costs to Stakeholders Include all traceable indirect costs. Determining Fleet Cost Recovery Rates For internal rates, include all traceable indirect costs. For external rates (such as for federal reimbursement), include all indirect costs allowed under federal reimbursement policies. Identifying Program Strengths and Weaknesses Include all traceable indirect costs. 5.5. Capitalizing all Equipment and Associated Make-Ready Costs All costs associated with purchasing and preparing equipment for deployment should be capitalized and amortized over the target replacement life of the vehicle as a monthly cost. These costs include the vehicle purchase cost plus all upfitting or make-ready costs, which typically includes installing additional lighting, decals, and communication equipment, among other additions. Parts and labor costs should also be included, whether performed by internal personnel or by a vendor.

31 The above practice is important for ensuring that maintenance and repair costs are accurate and only reflect the actual wear and tear costs of using the vehicle. The accuracy of this maintenance and repair information is critical when calculating equipment lifecycle ownership costs and determining the optimal equipment replacement criteria. 5.6. Segregating Accident and Operator-Caused Repair Costs As with make-ready costs, it is important to segregate accident costs and costs for repairs caused by operator misuse/abuse from other normal maintenance and repair costs. Normal maintenance and repair costs are part of the ownership costs of a unit, while accidents and repair costs caused by operator error or abuse are not part of ownership costs. 5.7. Segregating Preventive Maintenance Costs from Repairs Preventive maintenance represents planned work, while repairs represent unplanned work. Best practice is for fleets to operate such that preventive maintenance is the primary focus of the shop operations. This makes shop demand predictable and work can be scheduled to minimize the impact on fleet users. The percentage of preventative maintenance work versus unplanned (repair) work is a key indicator of the effectiveness of a fleet’s preventive maintenance program. In best practice shops, preventative maintenance exceeds 80% of the total work volume. To track this performance measure, segregate preventive maintenance work from repairs, then track and report the results. 5.8. Segregating Corrosion Repair Costs DOTs increasingly face significant repair costs associated with corrosion from chemicals associated with performing winter weather operations. It is DOT fleet best practice to separate corrosion repairs from other types of repairs in order to examine these costs and causes and address them separately through design changes or operator instructions. 5.9. Creating Standard Operating Procedures for Collecting and Entering Fleet Data A key challenge is to standardize how to capture and use fleet information. This requires documentation, training, organizational commitment, and quality control. It is important that DOTs educate users on the objectives of the revised processes (to improve fleet data quality, detail, and consistency) and the desired outcomes (to have better information used to make better decisions). It is also important that good quality control practices be in place to make sure the revised processes are being followed.

32 5.10. Using Vehicle Equivalency Units A related concept for cost comparisons is the VEUs, which is a logical basis for allocating indirect costs by vehicle. A VEU of 1.0 represents the amount of labor needed to provide preventative maintenance on a typical full-sized passenger car used in the general fleet service (excluding law enforcement). One mechanic should be able to support between 135 and 150 average full-size passenger cars. Larger and more complex vehicles have greater preventative maintenance requirements than passenger cars, which means they have a larger VEU. For example, a half-ton pickup truck may have a 2.9 VEU while a trailer might have a 0.6 VEU. The total VEUs is determined by multiplying the number of units of each type by its VEU then summing this for all units. This number can be divided by 135 or 150 to estimate the total number of mechanics needed. The key point is that the VEUs methodology is ratio-based, typically measured by the annual level of maintenance required to support the average full-size car. The core weakness of using VEU ratios is that they are based on assuming that each respective piece of equipment will be replaced at its target replacement points. In reality, equipment may experience non-linear maintenance demands, making the VEU-based indirect cost allocation non-reflective of actual financial needs. 5.11. Relationship of Federal Equipment Rental Rates to this Guidebook Federal equipment rental rates provide the basis for state DOTs to seek federal aid reimbursement for the use of DOT-owned equipment. While this can be a significant source of funds, per FHWA regulation (23 CFR 635.120), this program is not intended to reflect the full lifecycle costs of operating DOT equipment. As such, federal rental rates do not comply with the fleet costing guidance provided in this Guide. Federal equipment rental rates should not be considered a proxy for performing fleet costing. 5.12. Estimating Federal Equipment Rental Rates A final consideration related to fleet cost accounting is federal reimbursement for equipment rental. Fleet managers often confuse the federal equipment rental rate with the rental rate set as part of an internal service fund rate. These two separate concepts are calculated using two separate methods. Historical context is needed to explain federal equipment rental rates. Congress established the Highway Trust Fund in 1956 for building the interstate system. This fund continues to provide a monies for a steady source of surface transportation projects using fuel taxes, set at 18.4 cents

33 per gallon of gasoline and 24.4 cents per of gallon diesel. Federal aid funds are distributed to states using formulas specified in federal law. State DOTs oversee decisions for selecting projects to fund and are responsible for meeting federal requirements, including those for funds eligibility. This federal aid is both reimbursable and matching. The aid is reimbursable in that the FHWA pays for the state DOT eligible expenses on a progress payment basis, after the state DOT initially finances and conducts the work. The aid is matching in that federal funds typically provide 80% of a project’s eligible cost, with the remaining 20% provided by state or local agency funding. The two key eligibility requirements are that (1) funds must be used on eligible highways, often termed “federal aid highways” and that (2) funds must be used for capital improvements and planned upkeep of highway assets. The funds cannot be used for routine maintenance, such as pothole patching, mowing, snow removal, or graffiti removal. Specific requirements under FHWA’s regulation regarding equipment rental rates comes from 23 CFR 635.120: • Overview. The federal cost principles applicable to rental rates for contractor-furnished equipment are contained in 48 CFR, Part 31. The provisions in Office of Management and Budget Circular A-87 apply when state-owned equipment is used. A state DOT may adopt the Kelley Blue Book rental rate or another industry rate guide or can develop its own guide. However, the rate cannot exceed the Kelley Blue Book rental rate. The DOT must determine that the equipment rental rates developed or adopted are a fair estimate of a contractor’s actual cost to own and operate the equipment. FHWA will review each state’s rates for compliance with the policy. • Hourly Rates. When equipment is rented for less than one-month, federal aid is limited to the hourly rate, obtained by dividing the monthly rate by 176 (hours per month). • Standby Equipment Rates. While there is no industry standard for rented equipment that sits idle, the courts normally reduce published ownership rental guide rates by 50%. No operating costs can be included, and standby time cannot exceed eight hours per day, 40 hours per week (or the annual usage hours as established by the rate guide). • Mobilization. The costs required to mobilize and demobilize equipment not available on the project are eligible for reimbursement. Standby rates are used for equipment being hauled to and from the project, in addition to applicable rates for the hauling equipment. This category includes all costs associated with the assembly and disassembly of the equipment for transport.

34 • Overhead. Overhead includes certain equipment costs such as insurance, property taxes, storage, licenses, and recordkeeping. If a project or home office overhead rate is proposed to be applied to a Kelley Blue Book rate, the DOT must ensure that it contains no equipment overhead cost factors. • Profit. Profit on equipment rental is not outlined in the approved rate guides. There is no federal regulation that prevents the addition of a profit amount. Any state policy for the payment of profit should be followed on federal aid contracts. A profit amount’s reasonableness must be determined by the division administrator based on experience. To summarize, federal equipment rental rates are set by the federal government to reimburse DOTs for equipment used for federally funded road work. These rates are typically based on Kelley Blue Book values. DOTs also use the term equipment rental rate for the hourly or per mile rates associated with their internal service fund.

35 6. TRACKING COSTS While this Guide is intended to provide guidance on calculating ownership and operating costs for DOT vehicles and equipment, this chapter is included to explain this guidance information within the context of a typical DOT fleet environment. This will help the user translate the cost accounting guidance in this document to the context of existing DOT fleet support processes and systems. All state DOT fleets rely on some combination of fleet and accounting system information to support fleet management decision making. As described below, DOTs vary in the extent to which the fleet and accounting system are integrated are thus able to provide holistic fleet reporting. However, also described below, fleet best practice requires that managers have access to this consolidated information on ownership and operating costs in order to holistically understand fleet costs. Detailed and accurate data is needed to properly calculate fleet costs. When collecting data, two general rules apply: • “Automate when possible.” • “When it is not possible to automate, simplify.” (Bauer 2010) This chapter describes both automated and manual data tracking systems, processes, and technologies. 6.1. State DOT Management Information Systems 6.1.1. Fleet Management Information System Overview DOTs use a number of computerized systems to track costs, assets, equipment use, and personnel data. These systems are called management information systems (MISs). The fleet- specific system is the FMIS. Any discussion of DOT fleet cost accounting logically needs to include a description of the choice, configuration, and implementation of MISs. DOTs use different MISs for different DOT functions, including accounting, human resources, payroll, fleet management, infrastructure maintenance management, project scheduling, right- of way, and supply chains. The various MISs are sometimes integrated into a single system. Other times, each function has its own MIS, which must be manually linked with other MISs when there is a need to share data. DOT MISs typically use accounting codes (numeric designations) to associate costs (for labor, materials, vendors payments, and other) to organization units (such as districts, regions, counties, or maintenance sheds), activities (such as infrastructure maintenance, construction, planning, and design), or projects (such as for roadway capacity expansion).