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A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan (2023)

Chapter: Chapter 6 - Incorporating Maintenance into Financial Plans

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Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
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Page 48
Page 49
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 49
Page 50
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 50
Page 51
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 51
Page 52
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 52
Page 53
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 53
Page 54
Suggested Citation:"Chapter 6 - Incorporating Maintenance into Financial Plans." National Academies of Sciences, Engineering, and Medicine. 2023. A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan. Washington, DC: The National Academies Press. doi: 10.17226/27291.
×
Page 54

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48 Incorporating Maintenance into Financial Plans The Purpose of a Financial Plan A financial plan is a key component of a TAMP. State DOTs are required to include financial plans in their federally compliant TAMPs (23 USC 119). As defined by federal regulation: “Financial plan means a long-term plan spanning 10 years or longer, pre- senting a State DOT’s estimates of projected available financial resources and predicted expenditures in major asset categories that can be used to achieve State DOT targets for asset condition during the plan period, and highlighting how resources are expected to be allocated based on asset strategies, needs, shortfalls, and agency policies . . .” (23 CFR 515.5). Financial plans are closely tied to investment strategies, which are described in Chapter 8 of this Guide. Annual costs to deliver the planned investment strategies by work type are required to be included in the financial plan [23 CFR 515.7(d)(1)]. Maintenance plays a critical role in reducing life-cycle costs, managing risks, and keeping the highway system operating safely. Therefore, it is essential that maintenance costs are included in TAMPs to provide a complete picture of the agency’s financial situation and planned investment strategies. An effective financial plan describes an agency’s financial state by presenting funding needed to achieve asset management targets compared to available funding. The financial plan is also an important communication tool. It informs external stakeholders and the public of the agency’s financial situation, explains how the agency intends to manage its assets, and conveys what the agency could do if its financial situation were to improve or worsen. Financial Plan Development Process The process of developing TAMP financial plans and investment strategies has been estab- lished through several major documents including the following: • Guide for Transportation Asset Management: A Focus on Implementation (AASHTO 2020). • NCHRP Research Report 898: A Guide to Developing Financial Plans and Performance Measures for Transportation Asset Management (Spy Pond Partners et al. 2019). • Developing TAMP Financial Plans (FHWA 2017a). While these documents vary in their intended audiences and specific guidelines, they are gen- erally consistent in the approaches they present. Figure 6-1 shows a financial plan development C H A P T E R 6 Financial plans are critical components of a TAMP. They establish the financial context within which the TAMP was developed and will be implemented. Most funding for highway infrastructure is dedicated to capital projects. Therefore, the fund sources and types of work delivered by contract are generally the focus of TAMP financial plans. This chapter discusses key aspects of incorporating maintenance costs into a TAMP financial plan.

Incorporating Maintenance into Financial Plans 49   process that can be used to incorporate maintenance costs into a TAMP. It is modified from NCHRP Research Report 898, recognizing that the scope of this effort only includes maintenance costs within the broader process presented in the report (Spy Pond Partners et al. 2019). The process shown in Figure 6-1 provides an overview of the financial plan development steps but does not provide details specific to incorporating maintenance costs. The following sections build details related to incorporating maintenance costs built on the guidelines provided in NCHRP Research Report 898. Step 1—Determine the Scope of the TAM Program The TAMP scope will determine the types of maintenance costs to be included. State DOTs must develop and maintain TAMPs that address pavements and bridges on the NHS [23 USC 119(e)]. However, state DOTs may also include additional assets or additional parts of their highway networks in their TAMPs. California, Connecticut, Colorado, Minnesota, Nevada, Ohio, and Washington State are examples of DOTs that included assets other than pavements and bridges in their 2019 TAMPs. As additional assets are included in future TAMPs, more maintenance activities will need to be included to address all applicable uses of the maintenance funding. Maintenance costs for different asset classes or different parts of the highway system may be funded from different sources. In some cases, the agency developing the TAMP may not own or maintain all the assets included in the TAMP. For example, many state DOTs do not maintain the entire NHS in their states. Instead, portions of the NHS are maintained by a local agency or toll authority. At this stage, the agency will need to determine the level of detail to which the main- tenance costs of these other owners should be included in the TAMP. Agencies that maintain a significant portion of the TAMP may be requested to provide financial information to support the TAMP. Agencies that only maintain a few miles of highway may be addressed by assumptions. 1. Determine the scope of the TAM program 2. Identify maintenance fund sources 3. Establish maintenance fund uses 4. Structure maintenance sources and uses list 5. Validate the list 6. Document constraints 7. Document assumptions about fixed costs Figure 6-1. Financial plan development process for maintenance costs.

50 A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan Step 2—Identify Maintenance Fund Sources The TAMP financial plan is likely to include a high-level list of revenue sources, such as those identified in NCHRP Research Report 898 (Spy Pond Partners et al. 2019). In some cases, there may be one or more specific revenue streams that are dedicated to maintenance. However, most commonly, maintenance is funded by a combination of budgeted activities and construc- tion contracts. Budgeted activities tend to be established on a short-term, 1- to 2-year basis, while construction contracts are developed and delivered following the same programmatic require- ments as other work types utilizing the same sources of funding. It is important to establish a comprehensive list of revenue sources that support maintenance. Documenting sources in the TAMP ensures the list is comprehensive and that no source is being double counted. According to NCHRP Research Report 898, “the financial plan need not be limited to show only sources and uses related to the assets included in the TAM program (though these sources and uses must, at minimum, be included)” (Spy Pond Partners et al. 2019). Often it is useful to provide a comprehensive picture of an agency’s financial position that includes additional information. An agency may wish to prepare a financial plan that addresses all of its assets while preparing a TAMP that includes only the information required to support compliance with federal requirements (Spy Pond Partners et al. 2019). This note is particularly relevant to main- tenance sources that may not be allocated to specific assets or portions of the network in advance. Examples of revenue sources are provided in NCHRP Research Report 898 and listed below. • Federal aid highway programs – National Highway Performance Program (NHPP) – Highway Safety Improvement Program (HSIP) – Other federal aid sources • State sources – Motor fuel tax – Licenses, permits, and fees – State general fund allocation – Toll revenues – Bond proceeds Step 3—Establish Maintenance Funding Uses Chapter 2 of this Guide discusses the identification of activities that are considered to be maintenance. These activities typically use maintenance funding to maintain assets in opera- tional condition. As discussed earlier in the Guide, the costs related to these activities must be linked to specific assets and locations. Step 4—Structure Maintenance Sources and Uses List Before estimating and forecasting the cost of maintenance work, it can be useful to organize the list of sources and uses. One aspect of highway maintenance that makes incorporating its costs into a TAMP challenging is that the work may be performed by DOT crews or delivered by contract. This is true for all of the maintenance categories defined in Chapter 2 of this Guide. Structuring the sources and uses can help highlight priorities as well as identify relationships between the various groups and specific sources or uses. Maintenance funding sources can be grouped into categories such as federal, state, tolls, or local agencies. Uses may be grouped by asset class, location, network, or activity type. Categorizing maintenance uses into fixed costs and variable costs can help incorporate those uses into asset management investment strategies. This is particularly true if variable costs can

Incorporating Maintenance into Financial Plans 51   be related to performance, as described in Chapters 3 and 4. Table 6-1 provides some examples of how sources and uses can be grouped. Something to keep in mind when grouping sources and uses is that often there are relation- ships between the two. In other words, the method through which the activities are delivered or the location where the activities are performed can play a role in how the maintenance uses are included in the TAMP financial plan. Maintenance activities may be conducted by maintenance crews or through contracts. Often a given activity may be delivered through both means, with funding coming from multiple sources. For example, an agency may perform pavement crack sealing using its own maintenance crews, maintenance agreements with other jurisdictions that maintain state-owned highways, contracts funded from the state maintenance budget, or federal aid construction contracts. Step 5—Validate the List At this stage, the list can be populated with the most recent year’s data. This will require coordination between the offices that manage budgets/finance, accounting, maintenance crew work, and construction project funding. This is commonly three or more different units within a state DOT. Budget officers will generally provide an overview of the revenues provided to the agency and how those revenues are allocated to different units. However, the budget office will generally not track specific expenditures in sufficient detail to understand uses as specific as maintenance activities directed at different asset classes or subnetworks. Tracking uses in this detail will likely require involvement of the other groups. This is also the step where different cost types will need to be combined to establish the full maintenance costs. For example, an agency may only try to capture costs related to construction contracts in its first attempt at a TAMP. To capture maintenance costs, the agency needs to identify which contracts delivered work determined to be maintenance as defined in the TAMP. As agencies mature, incorporating maintenance costs expended through other contracting mechanisms, maintenance agreements with other agencies, and maintenance crew costs can be incorporated to provide a fuller view of total maintenance costs. When combining the costs of contracts and field crews, it is important to capture the full cost of the field crew work. This includes the cost of not only labor but also equipment and materials. NCHRP Research Report 898 recommends TAMP leaders use the following questions when validating the list of sources and uses in the financial plan (Spy Pond Partners et al. 2019). These questions are also applicable to maintenance costs. As these questions are answered, it may lead to changes that impact the answers to other questions. This commonly results in an iterative process to validate and populate the initial year’s list of sources and uses. • Do the sources and uses balance? Should they? What is the difference? Do you need to explain this difference? Sources Uses • Federal aid • State construction budget • State maintenance budget • Other agency budgets • Asset class • Geography (e.g., DOT District) • Network (e.g., Interstate or NHS) • Fixed (e.g., overhead) versus variable (e.g., performance-based) • Contracted versus crews Table 6-1. Potential groups for maintenance sources and uses.

52 A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan • Is the detail sufficient? Are the categories clear? Can your audience understand each row? • How many footnotes did you need to describe exceptions or special cases (e.g., one-time funds not addressed in the list)? If there are more than several such exceptions, this may suggest a need to revise the list. • Were there any aberrations for the sample year? Sun-setting legislation? One-time appropriations? • How should these be handled in subsequent years? • If you included more than only TAM sources and uses, did you appropriately emphasize the relevant rows? (Spy Pond Partners et al. 2019). Step 6—Document Constraints Once the list of TAM sources and uses is defined, and annual costs are defined, an agency should document any constraints on the funding sources. This step will need to be performed for the financial plan as a whole. When incorporating maintenance costs in a financial plan, the funding sources could introduce constraints that are specific to maintenance funding sources and uses. Constraints on the Use of Capital Construction Funds for Maintenance by Contract Funding used to support construction contracts, be it federal aid or state funding, generally come with eligibility requirements that limit the type of work and locations for which the fund- ing can be applied. The constraints on this funding are generally developed to direct the funding toward a specific objective or program. Program eligibility can be changed with new legislation, so care should be taken when updating the TAMP to review and update these requirements. In general, federal aid cannot be used for routine maintenance (such as mowing or filling potholes) or operations (such as state DOT salaries that are not project-related) (W 2016). How- ever, some federal aid programs do allow for work that impacts asset conditions, even if it is categorized as maintenance by the receiving agency. Constraints on Labor, Equipment, and Materials Budgets Funding sources that support field maintenance crew work also have constraints on the types of expenditures that are allowed. In some cases, the agency may have the ability to fund labor, equipment, and materials from the same source. In other cases, each of these may have one or more specific fund source that may not be used for the other two. Asset managers need to work closely with agency budget staff to understand the relationships between the fund source con- straints and asset management uses. Step 7—Document Assumptions About Fixed Costs Maintenance costs will typically include a number of fixed costs. Generally, fixed costs such as facilities and training are included as planned expenses outside of the investment strategy work types. Showing costs this way allows an agency to illustrate the different ways the maintenance budgets are used. Agencies at earlier stages of maturity in their asset management programs may choose to represent all maintenance costs as fixed. This is not a preferred approach, but the process of separating maintenance costs into those directed to maintain specific asset classes in the TAMP could be a first step toward including maintenance costs in the financial plan. Even for mature agencies, there will likely be a considerable number of fixed maintenance costs, such as orga- nizational strengthening activities or operational needs. An example of this latter type of fixed

Incorporating Maintenance into Financial Plans 53   cost would be mowing or snow and ice control. Although the actual expenditures for these activities may vary greatly from year to year, the budgets for these activities can be treated as xed costs that are not available to achieve TAM objectives. Forecasting Maintenance Costs Once the list of maintenance sources and uses is established, the next step is to forecast the future cost of maintenance uses. As described in earlier chapters, forecasted variable costs will be related to the expected level of maintenance eort and accomplishment to implement life- cycle and risk mitigation strategies. Forecasted xed costs will tend to support routine maintenance and organizational strengthening activities that are not easily tied to asset management perfor- mance measures. is means the maintenance cost forecasts include both xed costs and performance-driven variable costs related to delivering a maintenance work plan. Figure 6-2 shows a simplied view of how xed and variable costs are combined to make up a maintenance budget. Several states reported following this budgeting practice on an annual basis. To support TAMP nancial planning, the practice can be expanded to cover the full TAMP time period. Forecasting Fixed Maintenance Costs Certain costs may be considered xed for several reasons such as the following examples. • Costs representing amounts of the budget set aside for activities that cannot be planned (e.g., emergency response). • Costs for activities that are needed to deliver the rest of the program (e.g., organizational strengthening and overhead). • Costs that are mandated or set aside to support mandated activities. Forecasting xed costs within the nancial plan supports estimating the funding available in future years. Fixed costs are typically forecast based on historical expenditures with consider- ation for assumptions, ination, and uncertainty (Spy Pond Partners et al. 2019). While xed costs are represented as xed in budgets and the TAMP nancial plan, the actual costs will likely vary from year to year. erefore, it is important to review historical trends when forecasting xed costs. Assumptions will need to be made regarding the relationship between past trends and future forecasts. For example, agencies should consider whether material costs are trending up or down. Additionally, agencies have to determine whether assets are outdated and being replaced with something dierent. For example, in the past, most trac signal lanterns were incandescent bulbs that needed to be replaced relatively frequently. Newer signals use light-emitting diode (LED) bulbs that are more energy ecient and last much longer. While material costs are higher for LED bulbs, labor and equipment costs should be lower due to the reduced frequency of replacements. is type of obsolescence and substitution is common among technology assets such as trac signals and ITS. Costs associated with emergency maintenance work oen form a large proportion of xed costs. Figure 6-2. Building a work program by aggregating activity quantities.

54 A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan A common practice for forecasting a fixed cost is to start with an average of the expenditures for that item over the 3 most recently completed years. That 3-year average may then be adjusted in future years to account for inflation, other trends, or uncertainties as described above. Using a 3-year average helps reduce the impact of annual variability on the forecasting process. Forecasting Maintenance Costs to Support TAM Investment Strategies Variable costs are typically related to asset performance and are programmed based on distributing funds to achieve specific performance goals. These costs can be estimated using the relationship between investment levels and asset conditions, as described in Chapter 3. This is commonly performed as part of the annual maintenance budgeting process. To expand this approach to a TAMP financial plan, inflation and risk should be considered. In this approach to cost forecasting, maintenance cost forecasts are primarily based on the amount of work expected to be performed, the unit cost of performing the work, and the expected increase in that unit cost over the forecast period. Understanding the relationship between investment level and resulting conditions allows for developing a work program for each asset that will deliver an expected level of accomplishment and resulting LOS for a known budget. The accomplishments (e.g., feet of guardrail replaced or acres of turf mowed) can be based on any of the four maintenance approaches described in Chapter 2. The costs for each activity are typically based on the type of activity standards discussed earlier that specify crew sizes, work duration, equipment used, and material required to com- plete each work activity. The availability of these cost factors in a maintenance management system simplifies work planning and financial planning. Developing a forecast of maintenance costs and resulting conditions allows agencies to eval- uate and understand the trade-offs related to changes in priorities. With a fixed level of funding available, increases in one variable cost will require reductions in one or more others. This type of analysis and decision-making allows agencies to develop alternate investment strategies and ultimately assists in selecting the long-term investment strategy that makes the best use of available funding. This process is described in greater detail in Chapter 7.

Next: Chapter 7 - Incorporating Maintenance into Investment Strategies »
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Since 2018, State departments of transportation (DOTs) have been required to develop risk-based transportation asset management plans (TAMPs) and to update processes for developing these plans every four years. To date, several DOTs have described challenges in showing clear connections between maintenance investments and asset condition.

NCHRP Research Report 1076: A Guide to Incorporating Maintenance Costs into a Transportation Asset Management Plan, from TRB's National Cooperative Highway Research Program, leads practitioners through a six-part framework designed to tackle the biggest challenges agencies face in projecting future maintenance costs in TAMP activities. Supplemental to the report is a pocket guide.

Supplemental to the report are NCHRP Web-Only Document 372: Incorporating Maintenance Costs into a Transportation Asset Management Plan, an Executive Summary, an Implementation Memorandum, an Overview Presentation, and a Publication Announcement.

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