To the extent an organization is focused on preserving its existing transportation assets, ideally it will make investments consistent with the life cycle management approach for its assets as described in Chapter 4. However, organizations often lack the funding, staff, or other resources needed to achieve all of their goals and objectives, and must make hard decisions about how to divide resources while considering competing needs. If resources for existing assets are systematically constrained such that the life cycle management approach is simply not achievable, the resource allocation process may need to revise life cycle strategies or the overall life cycle management approach.

The approaches used for resource allocation vary. For instance, in considering how to allocate capital funding over multiple years, an organization may need to either prioritize projects or establish an overall budget for certain types of investment, depending on the specific context. In day-to-day allocation of operations and maintenance resources, the challenge is more tactical, as a manager assesses what staff, materials and equipment are immediately available, considers both internal forces and contract capacity, and puts these to the best possible use considering current conditions and challenges.

The output of the resource allocation process could be a specific assignment of resources or a plan for what capital projects to fund. In addition, the results of the resource allocation process may impact other plans and decisions related to TAM. To the extent the process involves allocating money, a financial plan may serve both as an input to the process (by specifying what funds are available) and an output of the process that details how funds will be spent. TAM financial planning is discussed further in Section 5.3.

Once an initial set of resource allocation decisions has been made, an organization may need to reconsider the best delivery option for planned work. Issues related to work planning and delivery are discussed further in Section 5.4.

All organizations practice resource allocation in some manner, whether formally or informally. By using a structured and repeatable approach for resource allocation, an organization improves its own resilience and ensures that it will continue to succeed even as new challenges arise and personnel changes over time. This chapter outlines an idealized approach to resource allocation an organization can use to help assess how it allocates resources, and how best to improve its process.

It also describes various processes closely related to resource allocation, such as risk management, financial planning and work planning and delivery.

Since the early 1970s, U.S. Metropolitan Planning Organizations (MPOs) and state Departments of Transportation (DOTs) have been required to develop long-range transportation plans (LRTPs). These plans establish the goals and objectives of an agency and detail its high-level investment plan (not necessarily listing specific projects) over a period of at least 20 years.

Requirements initiated by MAP-21 further specify that an LRTP should be performance-based, detailing forecasted performance using a set of federally specified performance measures, and additional “locally significant performance measures” if desired. These measures include summaries of good/fair/ poor condition for National Highway System (NHS) pavements and bridges. MPOs include performance measures and targets in their LRTPs. State DOTs have additional requirements to report shorter-term performance targets in different areas, including two- and four- year targets for NHS pavement and bridge condition.

In addition to developing LRTPs, MPOs and state DOTs are required to develop investment plans: each MPO develops a Transportation Improvement Program (TIP), while each state DOT develops a Statewide TIP (STIP). A TIP or STIP is a four-year (or more), fiscally constrained program of projects, including those that use federal funds (with some exceptions), additional “regionally significant” projects, and other projects the agency wishes to include. Because TIPs and STIPs are fiscally constrained, an agency must project its available revenue for the investments (typically capital) covered by the program over a period of at least four years, and many agencies have developed revenue projection models extending further into the future to support longer-range planning.

Beginning in 2018, again as a result of MAP-21, state DOTs are required to prepare TAMPs addressing pavements and bridges on the NHS at a minimum, while potentially including other asset classes and road systems. An agency’s TAMP describes the asset inventory and its conditions, how assets are managed over their life cycles, and a 10-year financial plan for how to best maintain assets in a “desired state of good repair.”

The various plans and programs cover different time periods and are intended to comply with different requirements. However, all of them may impact the resource allocation process, particularly with respect to allocation of funding for capital projects.

While these requirements are specific to the U.S., other countries have established their own planning and programming requirements, resulting in different—though frequently analogous—impacts to their resource allocation processes. Lessons learned from asset management experience in the U.S. and abroad include:

• In some cases organizations have implemented asset management programs and prepared asset management plans in response to legal requirements, while in others efforts to implement asset management concepts have been motivated by a desire to improve decision-making. While it is difficult to generalize, it appears that jurisdictions that adopt asset management planning by choice tend to realize the benefits much more quickly, improve service delivery, and allocate resources more effectively.
• Alignment of resource allocation to achieve goals and objectives is very important to ensure an agency advances from a traditional maintenance management approach, in which targets for asset conditions result from the available budget, to a performance-based approach in which an organization’s goals and objectives help define the required level of service (LOS) for its assets, which in turn drives resource allocation decisions.
• Organizational goals ideally should not focus on assets, or their condition, but the outcomes that are desired, such as improved mobility, safety and infrastructure resilience. Changing technology (CAV, communications), social (graying populations, work from home patterns, ridesharing), economic (integrated transportation modes), may be very relevant to how resource allocation should be conducted. Agencies that make resource allocations based largely on the condition and life cycle strategies of only the existing portfolio, may face greater challenges achieving their goals, and adapting to the changing needs of their economies
• International, and US DOT agencies that have focused resource allocation on their goals and objectives, rather than on the existing assets they are responsible for, tend to be more readily able to leverage alternative service delivery models that may present service enhancement or cost saving opportunities. These agencies agree that “We don’t need to build it or own it or maintain it, to deliver mobility.”

This section describes a basic resource allocation process. The resource allocation process can be used to answer three key questions:

1. What resources are required and how should they be distributed over time to best meet the long-term goals and objectives?
2. What performance targets are achievable given available resources?
3. How should resources be used in the short term to best support the goals and objectives?

The details of the process differ depending on what resources are being allocated to what investments, the timeframe and the particular circumstances faced by the organization.

A generic process is presented here as a framework for assessing the different allocation processes used by different organizations, as well as to help structure the discussion of issues related to resource allocation presented in subsequent sections of this chapter. The process is iterative; it is frequently necessary to walk through the process in order to establish a proposed allocation, review the proposed solution, and then revisit the assumptions made earlier, altogether resulting in a revised outcome.

In applying the prototypical process, it is important to consider that organizations typically have different resource allocation processes for allocating different resources over different time periods. The basic steps in the process are the same regardless of the specific context, but the details of how each step is performed may vary.

For example, in considering how to allocate resources over a period of 10 years or more, an organization might consider what funding is needed and how best to allocate funds across multiple investment categories while setting aside decisions about specific projects. In this case, the key resource being allocated is money, and the emphasis of the process will be on Step 1 – Establish Goals and Objectives and 3 – Quantify Targets. Further, in this case there may be less emphasis on Step 2 – Determine Constraints, and the prioritization performed in Step 5 may yield identification of high-level priorities rather than a prioritization of specific projects.

On the other hand, when considering how best to use staff resources and materials to perform maintenance work in the short term (less than one year), the organization would apply the process differently. In this case, the resources being allocated would include time and materials. The emphasis on the process will be on Step 2 – Determine Constraints, Step 5 – Prioritize Investments, and Step 7 – Finalize Allocation and Plans. In this case the specific allocation may not have a significant impact on the goals and objectives established in Step 1, and the prediction of future performance in Step 6 is less relevant than in the case of a longer-term allocation.

The practice examples in this section show how agencies have implemented this basic process to address different resource allocation challenges.

There are Seven Basic Steps in the Resource Allocation Process

1. Establish Goals and Objectives. The mission, vision and broad agency goals are meant to guide decision-making across an organization. Goals and objectives may be articulated in an organization’s LRTP and/or TAMP. Ideally, the resource allocation process should support achieving these.
2. Determine Constraints. Establish what resources must be allocated, and what the constraints on them are. Typically this will include constraints on available funds, but may include constraints on staff, contractor capacity, equipment, materials, or other resources. Further, there may be other constraints relevant to the process, such as constraints to distribute funds equitably between different regions or areas, or constraints on exactly how certain resources can be used.
3. Quantify Targets. Translate goals and objectives into specific criteria for supporting allocation decisions. Where feasible, define performance measures that quantify the level of achievement. Set target values for key measures and establish a target level of service as discussed in Section 5.4.
4. Allocate Resources. Split the budget and other resources to the set of program categories or types of work. The allocation specifies the distribution of resources between different categories or work types. The details of how this step is performed are dependent on the details of the resources being allocated, assets being analyzed, and types of investments under consideration.
5. Prioritize Investments. Determine what specific investments to make given the overall allocation of resources. This determination may be made within an asset class, across asset classes or across asset management and other investment objectives (e.g. safety or mobility) depending on how the process is structured. The prioritization should maximize achievement of the organization’s goals and objectives as quantified using the measures and targets set in Step 3 subject to the constraints established in Step 4.
6. Project Performance. Predict future performance given the assumed allocation and priorities, and compare the predicted performance to previously established targets. This may result in revisions to the constraints, targets or outcomes of other steps described above. To the extent that the targets are set for asset conditions, use the life cycle analysis methods described in Chapter 4 to predict future asset condition.
7. Finalize Allocation and Plans. Once allocation is complete, document the resulting targets, projections and investment priorities and communicate these to stakeholders. Further work may be required following completion of the formal process, such as developing maintenance plans based on the set of approved projects.

Factors Impacting the Resource Allocation Process

The specifics of how an organization can and should approach resource allocation depend upon a number of different factors. Understanding these factors is key in developing a successful approach to resource allocation.

Overview

All transportation decision-makers must contend with uncertainty. In regards to resource allocation, uncertainty is inherent in variables such as data on asset conditions and performance, future funding levels and costs, how a transportation system and specific assets will perform, and what external events or other factors may require reallocating resources. This uncertainty complicates efforts to make decisions about the future and forces agencies to be nimble so as to effectively respond to unpredictable events and evolving conditions.

In recent years, transportation and other industries have made significant progress developing improved approaches for managing uncertainty to minimize negative and leverage positive impacts. An area of focus in transportation has been in managing the risk of project cost and schedule overruns; a number of agencies have established enterprise risk management programs in order to address risk and uncertainty across their organizations. Likewise in TAM, there is increased interest in identifying and assessing risk so as to comply with both the best practices and the FHWA requirement for state DOTs to consider risk in developing their NHS TAMP.

The word ‘risk’ can be very context specific, meaning very different things depending on the industry and application. For instance, a financial analyst is primarily concerned with uncertainty in financial returns and the risk of incurring a significant financial loss. In the nuclear power industry, however, the focus of managing risk is on minimizing the potential for catastrophic loss that might occur from damage to a nuclear facility. As discussed in Chapter 2, in this guide risk is defined as the “effect of uncertainty on objectives” consistent with the ISO definition. This definition captures the full range of applications of risk management, and acknowledges the possibility for both positive and negative consequences of uncertainty.

The term ‘risk management’ is used to capture the set of business processes associated with identifying and managing uncertainty and risk. The overall risk management process is described in Chapter 2. The remainder of this section describes how this process relates to resource allocation.

Implications for Resource Allocation

While the scope of risk management may be very broad, an organization’s approach to risk management and the outcomes resulting from a risk assessment may nonetheless have important implications for TAM resource allocation. Consequently, it is important to establish a risk management approach and integrate consideration of risk with the resource allocation process.

Specific possible implications of risk management on resource allocation may include, but are not limited to:

• An organization may identify through its risk management approach areas where better data or improved processes are needed to best address a given risk, in turn impacting the resource allocation process. For instance, if uncertainty concerning future asset conditions is found to be a significant risk, this may result in efforts to improve the deterioration models in an agency’s asset management systems and/or motivate data collection improvements to reduce uncertainty.
• An organization may identify specific investments of staff time and/or agency funds required to mitigate negative or leverage positive risk. Once specific investments are identified, they can be assessed along with investments in other asset/investment categories. For example, Caltrans defined a separate program for seismic retrofits as described in the Practice Example.
• If an agency’s allocation of resources hinges on uncertain future values for one or more parameters, it may be necessary to incorporate consideration of uncertainty formally in the decision-making process. This can be accomplished using Monte Carlo simulation or other quantitative approaches to establish the predicted distribution of outcomes. For instance, in performing a life cycle cost analysis to select between project alternatives for a given facility, Monte Carlo simulation can calculate the range of life cycle costs predicted depending on future values for cost escalation, deterioration, or other parameters.
• In approaching formal accounting for uncertainty, an organization may define different scenarios representing the possible range of outcomes and then determine how best to allocate resources in each scenario before establishing a preferred resource allocation approach. For example, if an agency’s future capital budget is unknown, a decision-maker may wish to define a high, medium and low budget scenario and determine what investments would be made in each scenario in order to most effectively prioritize given uncertainty. Likewise, a scenario analysis approach can be useful in assessing how to allocate resources for improving infrastructure resilience given uncertainty concerning future sea level rise. Typically, the decision maker will review results for different scenarios and make a subjective determination of how to allocate resources considering the relevant factors. The Practice Example describing the analysis of harbor-wide barrier systems for the City of Boston shows one such approach. Recent research in the area of Robust Decision Making (RDM) has focused on developing quantitative approaches to select optimal investments between different scenarios.

Practice Example
Seismic Risk Management

Caltrans

Caltrans initiated its Seismic Safety Retrofit Program in the wake of bridge failures experienced in the 1989 Loma Prieta Earthquake. Through this program Caltrans evaluated the retrofit needs for all of the over 12,400 bridges on the State Highway System (SHS). Retrofit needs were prioritized using a multi-attribute procedure that calculated a score for each bridge considering the likelihood of an earthquake at the bridge site, the vulnerability of the bridge to collapse in the event of an earthquake, and the impact of a collapse considering the traffic using the bridge and detour distance in the event of a collapse. Through 2014 the program resulted in retrofit of 2,202 state highway bridges at a cost of over $12.2 billion.

Sources:

2018 Caltrans TAMP

Practical Lessons from the Loma Prieta Earthquake (1994), p. 174-180 https://www.nap.edu/catalog/2269/ practical-lessons-from-the-loma-prieta-earthquake

Practice Example
Analysis of Harbor-Wide Barrier Systems

University of Massachusetts

The Sustainable Solutions Lab at the University of Massachusetts Boston used a scenario-based approach to analyze the feasibility and potential risk reduction of Boston Harbor barrier systems to protect the Boston area from future flooding due to sea level rise. The report included an economic analysis in which costs and benefits were predicted for 32 scenarios considering:

• Two barrier system alternatives
• Two construction time scenarios
• Two scenarios for effectiveness of “shore-based solutions”
• Low and high construction cost estimates
• Discount rates of 3% and 7%

The analysis indicated that the benefits of the proposed barrier system would exceed their cost for both systems evaluated, but only in the case that one assumed a low discount rate, accelerated construction schedule, and failure of other shore-based solutions for mitigating sea level rise. Also, the analysis indicated that beyond a certain point sea level rise would be such that a barrier system would no longer prove effective (since the barrier would have to be closed at all times rather than only during flood events). The report further predicted costs and benefits for two alternative scenarios involving incremental adoption of a variety of shore-based mitigation approaches, and recommended an initial focus on shore-based adaption as the most promising strategy for the City of Boston to address sea level rise.

Source: https://www.greenribboncommission.org/wp-content/uploads/2018/05/Feasibility-of-Harbor-wide-Barriers-Report.pdf

Practice Example
Risk Management

Regional Municipality of Peel (Canada)

The Region of Peel is the second largest municipality in Ontario, just west of Toronto and supports two cities and a town. Peel assesses needs and priorities across a diverse portfolio of Infrastructure that supports a variety of programs and services including an arterial roads network, solid waste management, water and wastewater treatment distribution and a variety of social, health and emergency services. The Region integrated a number of inputs to enable an optimized investment methodology including a Risk Management, Level of Service, and Life cycle Management Strategies and priortize needs across diverse infrastructure, as illustrated in the figure. The integration of these three strategies was possible through three enablers and working with all of the programs and services to model their infrastructure:

1. Establishing a consistent approach to quantifying risk – The Region evaluates the degree of risk that is currently being accepted associated with delivering service levels. Inherent risk (similar to asset criticality) and residual risk (the Region’s risk objective) are established and the current level of risk that an asset presents to service delivery is also determined. The gap between current and residual risk represents the unmet funding and asset needs.
2. Establishing a normalized method to determine current level of service to assist the cross-asset funding allocation task. The adopted normalized indicator was determined to be: LOS=% of Assets Meeting LOS + (% of Assets Not meeting LOS x Average Condition of Assets not meeting).
3. Adopting a direct relationship between LOS and risk that allows for an analysis of alternative investment scenarios, and modeling techniques to optimize investment allocation. It also allows annual infrastructure evaluation based on the most current condition information and annual Asset Management Reporting.

Peel’s risk-based approach to asset management is integrated with the Region’s Strategic Plan and the Long-Term Financial Planning Strategy, and supports the desired service outcomes by evaluating risk against the Council approved asset levels of service. This approach provides senior decision-makers an objective way to consider resource allocation alternatives and communicate in a common language when evaluating between service areas and different asset portfolios.

Peel Enterprise Asset Management Plan. 2019. http://www.peelregion.ca/council/agendas/2016/2016-04-07-arc-agenda.pdf. http://www.peelregion.ca/finance/_media/2019-enterprise-asset-management-plan.pdf

In determining what work to perform across all assets, an agency is faced with the basic problem of multi-objective, cross-asset decision-making. Typically an agency must, either implicitly or explicitly, determine how to divide scarce resources between different asset types, and in so doing try to accomplish a variety of different objectives.

The basic process described in Section 5.1 is applicable whether the resource allocation process concerns a single asset or multiple assets. However, there are extra challenges inherent when dividing resources among multiple types of assets or types of investments. Making resource allocation decisions considering multiple objectives is made more difficult by a variety of challenges, including but not limited to:

Competing Objectives. Fundamentally, a transportation agency seeks to improve mobility while maximizing the safety of the transportation system, minimizing negative impacts to the environment and society, and making best use of limited funds and other resources. It is difficult to quantify these as well as other competing objectives and often hard to reach consensus on what achievements should be prioritized when determining how an agency measures the progress of different areas to support a decision.

Data Limitations. A structured approach to resource allocation requires data. Ideally, an agency has detailed, quantitative data on existing conditions, the scope of a proposed investment, and what the effects of an investment are likely to be. However, obtaining data and projecting future conditions can be costly, and the decision to proceed with an investment must sometimes be made before detailed data is available. Often it is necessary to use qualitative data or estimates in lieu of quantitative data.

Uncertainty. Transportation investments are intended to make improvements in the future, but there is always uncertainty concerning future asset and system conditions as well as how assets will perform and what external risks may impact the system.

Structuring the resource allocation process to address multiple types of assets or investments requires particular focus on two of the steps illustrated in Figure 5-1: Step 3 - Quantify Targets and Step 5 – Prioritize Investments. Different approaches to cross-asset resource allocation tend to focus on one or the other of these steps.

For instance, a process focused on defining targets is premised on the fact that most asset management systems model different asset classes separately, using different deterioration models, treatment rules and benefit calculations. Different systems and approaches are also used to analyze different types of investments. It is possible to perform separate analyses for each asset or investment type that consider what results will be obtained depending on the overall investment level or other variations in resource allocation. Decision makers can then review the results of the different analyses to determine how to allocate resources at a high level. Once an overall allocation is established, different approaches can be used for prioritizing investments by asset or investment type.

In contrast, with a process emphasizing prioritization, the focus is on identifying and prioritizing specific candidate investments. The prioritization approach helps determine which investment is most desirable considering the organization’s goals and objectives, and the predicted outcomes of the investment. In this case it is not necessary to perform asset-specific analyses, and it is possible to define projects that address multiple types of assets and investments that cut across predefined types. For example, a corridor project could include work on existing pavement and bridges, as well as intersection improvements that improve safety and mobility. However, an organization implementing a cross-asset prioritization approach must consider how to quantify its different goals and objectives, and explicitly weigh progress in one area versus another.

In practice, most agencies use an approach that involves both setting performance targets and prioritizing specific investments. The following subsections provide additional details on use of performance targets and multi-objective approaches, and provide examples illustrating emphasis on each of these areas.

Target-setting is the process of setting specific values that an organization expects to achieve for a set of performance measures. Target-setting is important within the broader area of performance management, introduced in Chapter 2. Setting performance targets is consistent with best practice in asset and performance management. In its Transportation Performance Management (TPM) Toolbox, FHWA describes the benefits of setting performance targets:

• Driving a conversation about current conditions and how to achieve future outcomes
• Creating a method for evaluating processes currently in place, particularly data quality and measurement definitions used by the agency
• Guiding the prioritization and allocation of resources
• Enabling assessment of strategy effectiveness by focusing on linking goals, objectives, and measures to policy and investment decisions
• Forming a powerful argument for additional or alternative investments
• Managing expectations by clarifying what outcomes are desired

It is important to note that an organization may set targets at a strategic, tactical or operational level to support different applications:

• A strategic target is one which an organization expects to meet at some future time and reflects the agency’s overall goals and objectives. For instance, an agency’s long-term target for overall pavement condition is an example of a strategic target.
• A tactical target is a value an organization needs to meet to help support its strategic targets. For instance, to support a high-level target for pavement condition, an agency might set a tactical target to perform a specific amount of repaving work per year in each district.
• An operational target is one that helps track the day-to-day performance of an organization, such as the average time to respond to an incident. Operational targets are often used to support continuous improvement in standard operating procedures and process improvement tracking and monitoring.

The TPM regulations initiated by MAP-21 have specific requirements for state DOTs and MPOs to set performance targets for NHS pavement and bridge conditions, as well as for other areas outside of TAM, such as mobility and safety. In these regulations, a target is defined as the value for a performance measure the agency expects to achieve given available funding, rather than a desired or aspirational value. The benefits of target-setting are equally applicable regardless of whether an agency is setting targets specifically to comply with FHWA requirements or for other purposes.

There is as strong tie between target-setting and resource allocation. A target can both inform what investments an agency needs to make and help communicate the expected results of an investment strategy.

When an agency sets strategic targets to support allocating resources, the process is typically iterative. For instance, an agency might first determine the desired level of performance that best supports its goals and objectives, such as the overall performance that would result from maintaining all assets in good repair or the desired level of service for a set of assets. It would then be necessary to determine the level of investment (or allocation of other scarce resources) required to support this level of performance. At least one—and potentially many—iterations are required for an agency to determine a target performance that is not only consistent with its goals and objectives but also attainable given available resources. At each step, it can be helpful to use predicted performance given a certain allocation of resources to help communicate investment trade-offs and guide decision making.

Once an agency sets its strategic targets, it can then set tactical and operational targets. Developing and tracking such targets allows for better assessment of the actions to be performed at different levels of the organization to support strategic targets, and whether the agency is on track to meet its strategic targets – also termed “line-of-sight integration of decision making.”

Key points in setting performance targets to support TAM resource allocation include:

• Targets should be consistent with agency goals and objectives. Absent a specific constraint on resources, an organization should allocate resources as required to support its goals and objectives. For investments in existing assets, this should follow the life cycle plans developed as described in Chapter 4. If resources are constrained, it may be necessary to revise the life cycle strategy followed for one or more asset classes to focus investment on specific areas, although this may result in higher costs or worse performance in other areas over time.
• Use management systems to support target development. Pavement, bridge, and other asset management systems provide robust tools for summarizing current conditions and predicting future conditions and performance. In setting performance targets, it is important an agency use the analytical capabilities these systems offer in order to develop targets supported by data using a documented, repeatable process. Management systems are useful tools to help the decision-making process, but should support the process, not define it. Establish the allocation process the agency wants, and find tools that help implement it.
• An agency may have different targets for different subsets of a network. Particularly with strategic targets set at a network level, it will generally be the case for some subsets of the network or different geographic areas that performance will exceed the overall target, while others will lag behind the target.
• Factors not considered in management systems can impact performance. While management systems can help determine realistic targets, a decision maker should note the simplifying assumptions these systems make and thus remain aware of additional factors that may impact performance. For instance, management systems typically assume treatment on an asset can be performed in a single decision period, and the resulting impact on performance is immediately observed. In reality, projects often require multiple years to complete and there may be significant lag between when funds are committed and a resulting change in performance is observed. Factors outside the scope of management systems may also impact performance, such as diversions for emergency events or variability in condition assessment data and deterioration rates.

In recent years, interest has increased in using MODA to improve approaches for prioritizing investments across asset classes and investment categories. The basic benefit of this approach is that it provides a structure for prioritizing investments outside the scope of any one management system, such as projects combining pavement, bridge and safety improvements. It also provides a means to compare asset management investments with other investments to improve mobility and achieve other objectives outside the scope of a typical asset management system.

This approach is, however, more data intensive and may result in simplification of the asset-specific modeling performed in a pavement or bridge management system. MODA tools and approaches are typically intended for application in analyzing specific candidate projects, and used for prioritizing investments for a single decision period. However, it is possible to adapt a MODA approach for cases where data are sparse or where groups of investments are analyzed rather than specific investments, or where longer decision periods are considered.

NCHRP Report 806: Guide to Cross Asset Resource Allocation and the Impact on Transportation System Performance presents a framework and prototype tool for implementing a MODA-based approach. Additional research through NCHRP Project 08-103 extended the framework and updated the tool. A checklist based on this work is included in this section; it outlines key issues for an agency considering improvements to its resource allocation approach to better account for multiple objectives across asset classes or investment categories.

MPOs are required to prepare financial plans as part of LRTP and TIP development. DOTs also have to prepare financial plans for their NHS TAMPs. The federal requirements help guide practice in many agencies. However, there are often additional state-level requirements for financial planning and reporting that may impact the preparation of financial plans.

The financial plan prepared for an MPO LRTP requires system-level estimation of costs and revenue sources with reasonably expected availability to adequately operate and maintain the federal-aid highways included in the plan. LRTPs have a planning horizon of 20 years or more, but beyond the first 10 years of the plan the costs may be specified using aggregate cost ranges. MPOs, transit operators and states are required to work together to develop the financial plan. Requirements for LRTP financial plans are listed in 23 CFR 450.324 (f)(11).

The financial plan for a MPO TIP serves a similar purpose as for an LRTP: to show that funding is reasonably expected to be available for projects within the plan. Funds must be estimated by year for over a period of at least four years. A TIP financial plan does not need to include funding for other activities outside of the projects included, but should include some form of system-level estimation of costs of operating and maintaining federal-aid highways, as well as confirmation that sufficient funds are available for implementing, operating and maintaining the system. As in the case of LRTP financial plans, MPOs, transit operators and states are required to work together to develop the plan. Requirements for TIP financial plans are listed in 23 CFR 450.326 (j).

For SLRTP and STIPs, the elements of a financial plan are similar to those for LRTPs and TIPs, respectively. However, the financial plan for these documents is an optional element. SLRTP requirements are described in 23 CFR 450.216 and STIP requirements are described in 23 CFR 450.218.

Separate requirements specify the contents of a financial plan prepared for a State’s NHS TAMP. 23 CFR 515 specifies that a TAMP financial plan is a “long-term plan spanning 10 years or longer, presenting a State DOT’s estimates of projected available financial resources and predicted expenditures in major asset categories...”

Regulations further stipulate that the process for preparing a financial plan must include:

• Estimating the cost of expected future work to implement the investment strategies in the TAMP by fiscal year and work type
• Estimating funding levels that are expected to be reasonably available by fiscal year
• Identifying anticipated funding sources
• Estimating the value of the agency’s NHS pavement and bridge assets
• Estimating the needed investment on an annual basis to maintain asset value

In addition to preparing financial plans in the documents described above, state DOTs and other organizations typically prepare annual financial statements. The U.S. Governmental Accounting Standards Board (GASB) establishes standards for state and local governments to use in following Generally Accepted Accounting Principles (GAAP). These standards describe how governments should perform their accounting and prepare financial statements. A financial statement prepared based on GAAP describes an organization’s financial position for a given reporting period, such as a fiscal year, and typically does not include detailed projections of future funding and work. A financial statement prepared to comply with GASB standards and a financial plan prepared to support an LRTP, TIP or TAMP are meant to serve different purposes, but the same underlying concepts inform the development of all these products.

Financial statements and Federally-compliant NHS TAMPs both include calculations of asset value. Reporting asset value in a TAM financial plan helps communicate what assets an organization manages in a common unit applicable to all assets: dollars. Estimates of asset value in a TAM financial plan are typically based on asset replacement cost. The value of an asset may be depreciated on remaining asset life or current asset condition. Where a depreciated asset value is calculated the cost to maintain asset value is equal to annual depreciation. This can provide a useful benchmark for the minimum spending required to maintain an inventory of assets.

The asset value reported in a financial statement is prepared in compliance with GASB requirements, and is often prepared differently than that in a TAMP. For financial statements agencies typically apply straight-line deprecation to historic capital costs to estimate the current book value of their assets. The historic cost of constructing an asset is different from the cost to replace an asset in today’s dollars, and the annual depreciation calculated using this approach is different from the cost of actually maintaining asset condition. GASB requirements allow for addressing this issue using a “modified approach” for calculating asset value. This alternative approach involves calculating a cost to maintain assets using an organization’s management systems in lieu of calculating straight-line depreciation. Where this approach is used it provides a calculation of asset value that can be used in both a TAM financial plan and an organization’s GASB-compliant financial statement.

Development of a financial plan is separate from, but closely related to, the resource allocation process. Thus, there must be a high level of coordination between financial planning and resource allocation, particularly with respect to TIP and TAMP financial plans.

Although different financial plans are required for different applications, for practical purposes an organization should use consistent assumptions in developing its financial and strategic plans to the fullest extent possible, including the plans described above and other related documents.

Areas where integrated approaches and assumptions between different planning documents are most beneficial are:

• Revenue projections. Ideally, a single office or group should take responsibility for projecting future revenues incorporating the organizations best estimates of revenue sources, demographic trends and other factors.
• Inflation assumptions. To predict how much it will cost to perform work in current dollars it is necessary to apply an appropriate inflation assumption. Predicting future inflation is challenging and results of the resource allocation process may be highly sensitive to the assumed inflation rate. Thus, it is important for an organization to make a consistent set of assumptions concerning inflation in its different financial plans. Often, the same unit responsible for revenue projections also predicts future inflation.
• Operating and maintenance costs (O&M). Costs of operating and maintaining existing assets may be components of the different federally-required plans, but they typically are not a focal point of the planned use of capital funds. From an asset management perspective, it is important to accurately predict these costs and include them as part of any financial plan.

While integrating approaches is highly desirable, the varying scopes and requirements for different financial plans and statements may lead to different results even when approaches are integrated. Financial planners should still carefully document and communicate any areas where different financial plans and statements appear to diverge.

Such instances can result from:

• Timing of plan preparation. A transportation agency’s financial situation may change from year-to-year or even day-to-day. A financial plan captures an agency’s best estimates at a given point in time, and it is not uncommon that the financial assumptions made for a given plan will be different when revisited for another plan at a later time.
• Different planning horizons. Long-range plans, TIPS and TAMPs all have different planning horizons. The length of the planning horizon can impact how numbers are presented in a plan and how they are communicated. For instance, the aver- age annual O&M cost for the Federal-aid system, stated in current dollars, will be different over a 20-year period than over a 10- or 4- year period due to the effects of inflation and changing system conditions.
• Different contexts. Although using consistent assumptions and approaches between different financial plans and statements is desirable, in some cases the varying contexts and requirements demand the use of different approaches. An example of this issue is in asset valuation described in the previous section.

Typically, U.S. transportation agencies perform some or most of their maintenance work internally, and contract out a large portion – if not all – of their capital projects. The line between the types work performed as maintenance and capital projects varies by organization and is often blurred. Agencies can often use maintenance forces in a flexible manner to perform a wide variety of activities, including preservation activities on pavements, bridges and other assets. However, in the near term, an organization’s maintenance resources – staff and equipment, in particular – are fixed. Consequently, the asset owner is challenged to optimize use of these resources to meet immediate needs, such as winter maintenance and incident response, while performing additional work to improve asset conditions wherever possible.

The ability to contract out maintenance work, such as through Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, provides an agency with flexibility in meeting near-term needs. Other approaches for contracting out maintenance work include use of portfolio or program management contracts in which certain operations and maintenance responsibilities for some group of assets is delegated to a contractor over a specified period of time. Section 4.3.3 provides additional details on considerations involved in outsourcing asset maintenance.

Regarding contracting approaches for capital projects, in the U.S., most transportation agencies rely on Design-Bid-Build (DBB) model for delivering their capital programs. With this approach, the project owner designs a project (or contracts for a private sector firm to prepare a design) and solicits bids for project construction following completion of the design. This provides the project owner with control over the process, but can be time consuming and can result in cases where bids for project construction exceed the expected cost developed during design. In recent years, many transportation agencies in the U.S. and abroad have explored improved approaches to work planning and delivery to accelerate completion of needed work, leverage alternative financing approaches and transfer program and project risk.

All of these approaches are intended to reduce the time from initial conception of a project to its completion, and in many cases transfer risks associated with project completion from the public sector to the private sector. As these examples help illustrate, major trends in this area include:

• Group work together by geographic location or type of work to develop fewer, larger, and more easily contracted projects
• Use Design-Build (DB), Design-Build-Finance-Operate-Maintain (DBFOM) and other contracting strategies, wherein a single contract is awarded to design and complete a project, as opposed to separate contracts for design and construction
• Encourage development of Alternative Technical Concepts (ATCs), wherein a contractor proposes an alternative approach to meeting a contract requirement in the bidding phase
• Select contractors earlier in program/project development through use of Construction Manager-General Contractor (CM-GC) arrangements, where a contractor is selected as Construction Manager while design is still underway
• Use IDIQ contracts and other flexible contracts to provide a more efficient mechanism for performing smaller projects
• Incorporate performance-based specifications, time-based incentives and other specifications in contracts to improve project outcomes
• Outsource operations and maintenance of an asset using program or portfolio management contracts.

Both in the U.S. and abroad there are many examples of public agencies making extensive use of alternative contracting strategies, such as Public-Private Partnerships (P3s) and performance-based contracts to speed project delivery and transfer risk.

While alternate strategies for work planning and delivery hold great promise, all of the approaches described here have advantages and disadvantages and carry their own risks. Use of alternative approaches can save taxpayers money and provide improvements more quickly than a traditional model. Success stories typically result from improving the efficiency of the process and incentivizing the use of better technology and methods, but there are also many cautionary examples in which these strategies have failed to achieve cost savings, time savings or risk transfers as desired. Asset owners should consult the separate body of research in this area (referenced at the end of this section) when exploring the use of alternative approaches and carefully weigh the expected return, advantages and disadvantages of whatever delivery approaches they consider.

The availability of alternative approaches for work delivery creates opportunities for organizations to improve asset conditions and address other needs in a more efficient manner, thereby performing needed work sooner, at a lower overall cost and/or with less risk to the organization. It is important to consider different work delivery strategies both early in the resource allocation process (as part of Step 2 – Determine Constraints) and at the end of the process (in Step 7 – Finalize Allocation and Plans).

Considering alternative delivery approaches early on as investment needs are identified helps identify options and determine approaches that an organization can use to achieve the best results. For instance, in determining how to allocate resources for asset maintenance an organization may wish to explore the potential for outsourcing additional maintenance work if there are specific constraints on staff or materials that could be relaxed using an alternative delivery approach. To properly assess the alternatives it may be necessary to define multiple scenarios, such as a scenario in which a “business as usual” approach is used for delivery, and a second scenario in which increased flexibility is assumed regarding use of different delivery methods.

Once an initial allocation of resources has been made, it is important to review options for delivery to revisit prior assumptions and identify opportunity to lower costs and improve outcomes. For instance, once overall budget levels have been established by asset and/or work type in a financial plan, an organization may need to revisit delivery options when scoping specific maintenance activities or capital projects.

The practice examples describe improved delivery approaches used in the U.S. and abroad, and discuss their impacts on resource allocation.

The Work Planning and Delivery checklist lists factors to consider during the resource allocation process for maintenance and capital projects to leverage opportunities for improved work planning and delivery.

Asset Valuation and Asset Management

Knowing what a physical asset is worth – its value – can be very useful both for financial reporting and for supporting asset management. Even if the notion of asset value is somewhat abstract, an asset owner generally prefers that the value of their assets increases or at least remains constant over time. Fundamentally, tracking and reporting asset value helps a transportation agency monitor the state of its assets and provides a sense of whether the inventory is improving or in a state of decline. Transportation agencies use data on asset value in a variety of ways to support asset management. There are four major applications of asset value aiding an overall asset management program as described below.

• Communicating the Asset Inventory–Asset value is used to communicate what assets an agency owns, their extent, and the agency’s responsibility for maintaining the asset inventory. Each asset has its own unit of measure: pavements may be summarized in terms of lane miles, bridges in terms of deck area, and other assets in terms of a count. However, it can be hard to relate these different units and to summarize the asset portfolio as a whole.
• Demonstrating Fiscal Responsibility–Various measures have been formulated that use asset value and changes in value to demonstrate that an agency is managing its assets responsibly. The basic premise is that as assets deteriorate or depreciate, an agency should invest to maintain their value. Public agencies in Australia and New Zealand have used asset value in this manner for over a decade. In the U.S., several agencies have calculated similar measures such as the Washington State Department of Transportation (WSDOT) Gray Book, which includes several long-term measures for pavement assets related to asset value.
• Testing Investment Strategies–Asset value can be used to help illustrate the difference between alternative investment strategies, such as when comparing a strategy of performing recommended preservation treatments on an asset over its life to an alternative strategy in which preservation treatments are deferred, resulting in worse relative condition and potentially a shorter asset life.
• Prioritizing Investments–Another potential application of asset value for supporting TAM is helping compare and understand asset investment options. While asset value alone is insufficient for prioritizing investments, when used in conjunction with life cycle cost analyses it can provide a complete view of the asset’s worth. In particular, asset value can help prioritize decisions such as: Resilience investments; Reconstruction; or Decommissioning. Asset value provides insights for assets identified for decommission or reconstruction by pitting their intrinsic value (including the replacement cost and socio-economic importance) against the costs necessary to maintain or replace the asset.

Practice Example
Gray Notebook: Quarterly Performance Report

Washington State DOT

Washington State DOT (WSDOT) uses asset value-related performance measures for pavement assets to support responsible management of those assets as they deteriorate or depreciate. The WSDOT Gray Notebook, a quarterly performance report of the agency’s assets, includes several long-term measures for pavement assets, including Asset Sustainability Ratio (ASR), Remaining Service Life (RSL), and Deferred Preservation Liability (backlog).

ASR measures the agency’s investments in pavement against the lost value due to depreciation. RSL is a measure of remaining useful life before rehabilitation or replacement is needed due to deterioration. Backlog is the cost incurred due to delayed rehabilitation work. The agency sets targets and monitors trends for these measures, using them to communicate fiscal responsibility and allowing for improved asset management decision-making. In the 2021 Gray Notebook, for example, the RSL target is met, but the ASR fell short of the target, indicating that pavement investment was outpaced by deterioration in that year.

Source: Gray Notebook: Pavement Conditions & Performance. 2021. Washington State DOT. https://wsdot.wa.gov/about/data/gray-notebook/gnbhome/preservation/pavement/conditionperformance.htm

Defining Asset Value

The Organization for Economic Co-Operation and Development (OECD), states that a physical asset has no intrinsic value. Instead, its value results from the benefits it yields, be they to the asset owner, a set of transportation system users, society as a whole, or some combination thereof. As an asset ages, it depreciates, or loses value as its benefits are consumed. The OECD defines three different perspectives to consider asset value: Cost Perspective, Market Perspective, and Economic Perspective. The following provides a brief synopsis of these three perspectives.

• Cost Perspective–The cost perspective focuses on capital costs incurred by the asset owner. When establishing value from this perspective the question is “How much does it cost us to acquire this asset and operate it over time?” The basic issue with the cost perspective is that it leaves no daylight between cost and value; these are one and the same. If one asks what value will be derived from spending $1 million to reconstruct a road, from the cost perspective the answer is “$1 million, of course.” Consequently, the cost perspective can help answer questions about how best to manage assets, but it is ill-suited for addressing questions concerning the underlying value of transportation assets to society. To answer that question requires an economic perspective.
• Market Perspective–The market perspective focuses on the price of an asset on the open market. When establishing value from this perspective the question becomes "How much would this asset sell for on the open market?” For example, the value an automobile might be the resale value should the car be sold through an auction or to a reseller. The virtue of this perspective is that it leverages the behavior of free markets to determine how much value an asset is expected to yield in the future. If the market for an asset is competitive, then the asset’s market value should theoretically account for the future benefits provided to the buyer. The competitive nature of the market should ensure that no asset is sold at less than this value. This perspective is extremely valuable where a well-defined market exists for an asset. The market value of an asset is viewed as the best representation of asset value based on international accounting guidance.
• Economic Perspective–The economic perspective focuses on the benefits generated by an asset. When establishing value from this perspective the question is “What are the benefits of the asset to travelers and society?” In general guidance for asset value, this perspective is also called the “income perspective,” as it involves calculating the income generated by not just an asset, but by its existence. An economic measure of asset value stems from a more comprehensive value, based on the use of a facility. Economic asset valuation is an analytical exercise that establishes a rationale on whether and when a facility ought to be constructed or improved.

The cost, market, and economic perspectives on asset value differ in subtle and important ways. For example, a cost perspective generally starts from an implicit assumption that a facility is worth maintaining at the level of service for which it was originally planned and constructed. The actual use of the facility does not factor into the assessment except when it is used to indirectly estimate the rate of deterioration and maintenance schedule. In comparison, the market approach directly considers the value of the facility to users in addition to the cost to maintain it. The market approach can be considered from the perspective of a concessionaire who could evaluate the facility based on the opportunity to recover the costs to date and earn a profit, perhaps through revenue collection or the value of the land.

Each asset value perspective emphasizes a specific aspect of how transportation assets are constructed and utilized. All three perspectives are valid and can provide insights that help communicate information about assets and support decision-making. While each of the perspectives supports some of the applications described in Section 5.5.1, many public agencies rely on the cost perspective for their calculation of asset value. The cost perspective helps an agency directly relate its expenditures on assets to changes in their value, and it supports a large number of TAM-related applications. Also, where a market exists, the cost of replacing the asset, depreciated based on its age or use, tends to correlate closely to its price. Where no market exists, the depreciated replacement cost serves as a proxy for its market price.

6 Key Summarizing Questions

1. What is the overall value of the asset inventory? This is the most fundamental question about asset value. What exactly is the value of a given inventory of assets?
2. What is the cost to maintain current asset value? Establishing overall asset value for each asset classification is a prelude to this follow up question. An agency would need to determine how much value is lost each year as assets age, and what investments are needed to offset depreciation and optimize the assets’ lifespans.
3. How much should an agency invest in existing assets? This question is closely related to the second question, but the two questions may have different answers. If the measure of value is meaningful, then an agency should ideally spend enough money to maintain or increase asset value over time. However, it is inevitable that the value of a given asset will decline following construction or renewal of the asset: it is simply not realistic to expect assets to remain in a “like new” condition indefinitely. On the other hand, if the value of the asset inventory has declined to the point that is demonstrably suboptimal (e.g., a case in which assets are in such poor condition that users experience increased costs from delay and the agency incurs increased costs from emergency maintenance) then merely maintaining existing condition is undesirable. Answering this question requires additional analysis to determine the asset value associated with achieving an agency’s “desired state of good repair,” and the cost to achieve this value. Once obtained, the answer supports decisions about how much to invest in the asset inventory.
4. How should funds be allocated between different assets or networks? To the extent that funds are insufficient for addressing all of an agency’s investment needs, it may be necessary to prioritize between different asset classes or networks (e.g., the Interstate System, Non-Interstate NHS, and Non-NHS). Information on asset value helps communicate the size of the inventory expressed in a single unit of measure – dollars.
5. What’s the best life cycle strategy for our assets? Information on asset value, together with supporting management systems, can be used to test different asset life cycle strategies and illustrate the effectiveness of different strategies for maximizing value. Doing this requires predicting asset value assuming different strategies and comparing their results.
6. What is the value generated by the asset? Much of the discussion thus far has revolved around the value of the asset, as it relates to construction and maintenance costs. However, two assets of the same type, length, and roadway characteristics may generate strikingly different value for the communities that use them. Variations in the volume of traffic, the availability of alternative routes, and the accessibility offered by these roads are only some of the factors affecting how road users perceive their value. When considering investment decisions, it is important to account for the road user’s perspective.