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

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5 resources that can be applied elsewhere. Most decisions involving outsourcing are for the long run and cannot be easily reversed without incurring significant costs. Hence, outsourcing decisions should be based on a thorough cost analysis that compares the fully burdened costs of running the fleet to the costs of private-sector alternatives. NCHRP Report 692 discusses the outsourcing decision. • Equipment Retention or Removal Decision. Determining which assets to retain and which to remove from service entirely, as well as which assets to repair and which to replace. Again, a lifecycle cost approach is needed to answer these questions. The anticipated NCHRP Report 13-08 will discuss some of these topics. • Justifying Costs to Stakeholders. Assessing how to best communicate fleet costs to both internal and external stakeholders. Credible and dependable costing information is critical when justifying costs to internal stakeholders, such as the executive team, as well as to external stakeholders, such as elected officials. • Determining Fleet Cost Recovery Rates. Calculating what rate fleets should charge users for work performed, which may be the difference between a self-sustaining fleet and one that operates at a suboptimal level. • Identifying Program Strengths and Weaknesses. Identifying programs or elements of programs within a DOT that are most cost-effective or poorly performing. 2.4. Context for Fleet Cost Accounting When discussing fleet cost accounting in a DOT, it is important to consider that numerous historical, political, and geographic factors shape a DOT’s organizational structure, internal processes, and systems. These factors include the state’s population density and geographic size, the historic role of the local versus state government, the state’s approach to taxes versus user fees, the existing stock of transportation infrastructure, and many others. Often these factors are outside the control of a fleet manager yet still impact the DOT’s internal processes, workflow, and decision making, which all combine to impact fleet cost accounting. An example of the diversity of state DOT organizational structures comes with the budgeting process. State DOTs prepare budgets as part of their annual financial planning process. Budgetary information serves as a benchmark for management and planning. As the year progresses, actual costs and revenues are compared with those in the budget to identify variances (the difference between planned and actual). In turn, these variances become inputs to the next set of budget plans. In an ideal budgeting system, a fleet would operate a fully self- balanced fund that includes all revenue sources and costs. Income would enter the fund and be slowly withdrawn as expenditures are made. Excess funds at the end of the year would be rolled over to the next year or returned to the agency’s general fund.

6 However, funding of state DOT fleets is rarely this idealistic or simple. DOTs are typically organized into department functions—such as Transportation Planning, Highway Safety, and Maintenance—that share revenues and costs, so DOTs typically lack a dedicated fleet fund. Despite the functional hierarchy within most DOTs, the real decision-making power and personnel control resides with the districts. This highly decentralized approach reflects a geographic organizational structure. As an example, some DOT mechanics are in the Maintenance Department, not the fleet unit, but report to their own district. Further, the district fleet manager typically reports to either the district engineer (the top field staff in each district) or to the district maintenance manager (who reports to the district engineer). Adding to the complexity, fleet vehicles and equipment are typically purchased via a separate budget from the district Maintenance Department budget or the central fleet unit budget. In some cases, this capital equipment budget is distributed to the district and must be used to purchase equipment. Many state DOT fleets simply have a line item in their agency-wide budget for procuring vehicles and equipment. In most DOTs, the districts have significant latitude about the type of equipment purchased and can sometimes divert some of the Maintenance Department budget (which also pays for transportation infrastructure repairs) to purchase equipment. The district also typically purchases all non-capital equipment (such as chain saws, weed eaters, and other small equipment) directly from their own internal infrastructure maintenance budget. The cost of the central fleet management unit may or may not come from a separate cost center. In summary, DOTs have an intricate web of budgets and costs due to their organizational structures. These structures, in turn, are shaped by political, historical, and geographic factors that are often outside the control of a fleet manager.

7 3. METHODOLOGY FOR FLEET COST ACCOUNTING This chapter provides a detailed methodology and examples for fleet accounting in state DOTs. It begins with a discussion of direct and indirect costs then describes a framework for allocating and aggregating costs. Next, it describes a comprehensive eight-step process for cost accounting. 3.1. Background Information 3.1.1. Direct Costs Direct costs are typically “traceable to a specific item, such as a product” (AccountingTools 2017) or are a cost connected “directly to or identified with a specific cost center or cost object such as a department, process, or product” (BusinessDictionary 2018). For fleets, direct costs are typically tied to a piece of equipment and categorized as either a fixed or variable cost. Fixed costs are incurred whether or not an asset is used. For example, a vehicle has fixed costs regardless of whether it is driven or parked in long-term storage. Fixed costs can be capital costs (such as for acquisition and financing) or operational costs (such as for insurance, taxes, and fees). Capital costs tend to depreciate over multiple years, while operating costs tend to be paid for in a single accounting year, then reset the following year. Variable costs vary with use, such as fuel. Variable costs can be unavoidable (such as for fuel, tires, and maintenance) or avoidable (such as for accidents, traffic fines, and tolls; AFMC 2017). Table 1 defines and categorizes several direct costs applicable to a fleet.

8 Table 1. Summary of direct costs in fleets by category Cost Description Fixed Variable Capital Operational Avoidable Unavoidable Accessory equipment1 Costs of additional equipment after receipt (such as radios, emblems, warning lights, and GPS units). X Accidents Costs for traffic accidents including any obligated compensation to third parties. X Depreciation Depreciation of a vehicle, complimentary equipment, or fitting bodies. Depending on the financing option, this depreciation will equal the amortization during its service life or be for a shorter period (if chosen to reduce unamortized costs associated with total loss accidents). X Financing Annual interest rate if vehicles and equipment are acquired through credit or a loan. X Fuel Cost of fuel for the vehicles. X Insurance Cost of insurance for vehicles and equipment. X Preventive maintenance Cost of routine maintenance activities. X Repair/unscheduled maintenance Cost of unscheduled repairs. X Taxes Taxes and other fees associated with the vehicles such as inspections. X Tires Cost of acquiring and repairing tires. X 1 This category typically only includes accessory equipment and upfitting costs for accessories added as part of the original upfitting.