Incorporating environmental factors into a highway maintenance cost model

Available online at http://www.idealibrary.com ondoi: 10.1006/mare.2000.0133Management Accounting Research, 2000, 11, 363–384

Incorporating environmental factors into ahighway maintenance cost model

Paul Rouse and Martin Putterill*

As infrastructure ages, the maintenance cost of highways is becoming a major inter-national concern that hitherto has been overlooked by public sector researchers.This paper begins to fill this gap by focusing on the nature and extent of theimpact of environmental cost drivers on costs of highway maintenance. By linkinga cost driver framework with engineering theory, and using geographic informationsystems methodology, it has been possible to demonstrate that the physical geologicalenvironment has a significant effect on the cost of highway maintenance activity.

In addition to advancing highway maintenance cost behaviour understanding, theresearch illustrates that to gain new insights, researchers must be prepared to basecausality enquiries on theoretical foundations advanced by other disciplines and to workwith data and methods of analysis which are appropriate to each situation.

From a strategic cost management perspective, this study elevates environmentalfactors in importance as major drivers of cost and in particular, highlights theirrelated interaction with management strategy and policy. The paper discusses aspectsof the cost driver framework and application to planning and control accountability,describes dynamic inter-relationships between activity-based costing and activity-basedmanagement and suggests directions for further research.

c 2000 Academic Press

Key words: accountability; cost models; environmental studies; highways; maintenance;planning and control; transport.

1. Introduction

In recent years, accountability in the public sector context has received widerattention, a far cry from the tradition of annual reporting based on line item

Department of Accounting and Finance, The University of Auckland, Private Bag, Auckland 92019,New Zealand.�E-mail: [email protected]

Received 10 October 1999; accepted 16 February 2000.

1044–5005/00/030363+22 $35.00/0 c 2000 Academic Press

364 P. Rouse and M. Putterill

tabulations and incomprehensible fund accounting. Efforts of regulators, academicsand professional bodies have transformed the performance-reporting landscape,particularly those relating to external accounting statements. In addition to morecomprehensive financial reporting, there has been acceptance that non-financialmeasures have an essential part to play in the dialogue of accountability, i.e.the ongoing process of identification and explanation of results (Patton, 1992).Nonetheless, apart from situations where statute defines requirements and adherence(e.g. New Zealand), the pattern of service performance reporting is patchy. Hyndmanand Anderson (1995, p. 13) found ‘that there was a significant proportion of Agenciesreporting little or no information on efficiency and effectiveness and the variouscomponent parts of performance (i.e. inputs, outputs and results)’.

Although these results may be seen as a setback for proponents of wider publicsector accountability, the situation has all the hallmarks of a first-rate challengefor management accountants. There are new opportunities in the complex worldof the public sector to apply a wide range of management accounting practices toaid planning and control as well as report results. Management accountants havemore scope to concentrate on activity analysis and more incisive investigation ofcost behaviour, i.e. cost drivers. Contrary to the belief of many commercial peoplethat only the private sector is technically challenging, the public sector setting isarguably more demanding for several reasons. Functions are diverse, the range ofinterest groups is wide, in many cases outcomes unfold slowly and are potentiallycounter-intuitive, and the political and regulatory direction is complex and variable(Osborne et al., 1995).

This paper argues that management accounting needs to extend and sharpen itstools if it is to earn decision-support status in the public sector. Secondly, it challengesmanagement accounting practitioners in government settings to review existingreporting practices to identify and eliminate reports that are inappropriately shortterm, partial or unscientific, i.e. unsubstantiated by evidence of causal connections.Thirdly, the paper re-affirms the logic of Patton’s (1992) position that there must be abalance between the size of outlays and the amount of effort and experience directedto ongoing continuous improvement, benchmarking and accountability practices.Fourthly, the paper demonstrates empirically that the physical environment isa major omitted variable in highway performance reporting. Furthermore, it isprobable that similar appraisal limitations will be found in other settings (e.g.telecommunications).

Highways are pervasive artefacts in almost every country requiring significantmanagement responsibility for construction and maintenance. Highways are sub-stantial cost objects, both at the network and individual highway levels. In this pa-per, the maintenance setting covers sections of a single major highway with oper-ating expenditure comparable to a medium-sized manufacturing firm. This studyillustrates that to deal appropriately with a particular setting, management account-ing researchers must be prepared to reach across to other disciplines for methods ofmeasurement and analysis.

2. Expanding the scope of management accounting in the public sector

Identifying the underlying factors that drive costs is central to effective costmanagement (Porter, 1985; Shank, 1989; Shank and Govindarajan, 1992, 1993).

Incorporating Environmental Factors 365

‘Understanding cost behaviour means understanding the complex interplay of theset of ‘cost drivers’ at work in any given situation’ (Shank and Govindarajan,1992, p. 29). The search for cost drivers to model cost variability has sparked off agrowing research literature into the relationships between (overhead) costs and theirhypothesized underlying causes. Focusing primarily on manufacturing settings, theclasses of non-volume drivers have included complexity and efficiency (Foster andGupta, 1990); capacity, product and process variables (Banker and Johnson, 1993;Data et al., 1993); and product mix heterogeneity (Anderson, 1995).

While these are highly relevant, this listing of cost drivers is incomplete. Inparticular, environmental factors are candidates as component explanations of costvariability. Although location has been mentioned as a cost driver (Shank andGovindarajan, 1989), to date there has been meagre coverage of the impact ofphysical environmental factors on cost or performance.1 Environmental factorsare particularly pertinent to service activities such as telecommunications andtransport (Kaplan, 1993), since topology is a major influence on transmissionconfigurations, while in transportation geological and climatic factors are majorconsiderations.

Not only has cost management research given little regard to the impact on costs ofenvironmental factors, it has also been slow to recognize and incorporate the theoriesthat underpin other disciplines. Highway engineers, for example, regularly drawupon a rich body of technical data concerning environmental factors when specifyingand designing new installations. The message is clear for researchers wishing toadvance understanding of cost models: there is no room for discipline myopia or fora rigid distinction between theory-led or practice-led research. This paper confrontsa long-held public sector tradition of political and professional acceptance of ‘simple’cost-based performance measures. To deal with this challenge, this research followsan approach that lies somewhere between these two forms of analysis, suggesting anaffinity with the ‘third perspective’ approach alluded to by Keys (1997). Distinctivecharacteristics of the ‘third perspective’ are: ‘creativity, design, culture, power andlearning [which] emerge naturally as central to understanding process in thisapproach, and form a contrast to, and complement the emphasis upon, methodologyand behaviour that characterize the theory-led and practice-led approach’ (Keys,1997, p. 11).

This case study demonstrates the approach used in a highway maintenancesetting to explore the impact on cost of defined environmental factors. The settingchosen has a patent environmental connection underpinned by a strong theoreticalframework (i.e. engineering and geology) and is an issue of widespread importanceto governments and the private sector. Arguably, this single setting requires that costdriver theory building be approached cautiously. Nonetheless, it is a step towardsthe development of a general cost driver model and a bound towards the goal ofmodelling highway maintenance cost behaviour.

The paper makes three further contributions: first, it shows how the scope of costdrivers can be broadened to include physical (and market) environmental factors,which are identified as significant cost drivers in our highway application. Thisresearch opens the way to other transportation studies and has the potential to

1Environmental factors have been incorporated into the analyses in other literatures (e.g. Jesson et al.,1987; Cook et al., 1994; Lovell et al., 1994).


contribute generally to cost management discourse in manufacturing and servicesettings.

Second, the research employs data, methods and tools specifically adapted to thephysical environment. A geographic information system (GIS) approach was usedto associate geological characteristics located spatially along the highway with costand policy data organized around highway sections. In turn, the GIS output wastranslated via engineering maintenance theory into amenable representations forregression modelling.

Third, the paper shows how cost management interpretation in non-manufacturingsettings can produce new insights into operational and strategic issues for policymakers. In this regard, the results of the study have a wider audience comprisingengineers, managers and government officials responsible for resource allocationchoice.

3. A background to highway management

The provision of highways2 is an important public sector service activity worldwide,with significant economic and social impacts. Annual outlays by local and nationalhighway service providers are considerable, amounting to over $87 billion in theUSA in 1993 (Federal Highway Administration, 1996). Large volumes of goodsand passengers use highway networks with the consequence that serviceabilityand quality of the highway have a major impact on economic and social costs.Maintenance requirements have been steadily increasing in importance and as therate of new highway construction is declining, the bulk of expenditure will beconcentrated on counteracting the deterioration of the existing infrastructure. Forexample, since 1991 the USA National Transportation Policy has given priority tomaintenance and preservation of transportation facilities (Hudson and Hudson,1994).

Maintenance policy and actions are directed towards preserving and enhancingthe integrity, serviceability and safety of highways through timely and cost-effectiveintervention aimed at offsetting ongoing physical surface and sub-surface changes.Physical environmental factors feature significantly in highway engineering policies.For example, the sub-surface for both new construction and maintenance has longbeen recognized by engineers in terms of ‘the state of the soil, which determines theengineering characteristics’ (Croney and Croney, 1991, p. 104). Of particular concernis the combination of soil and moisture: ‘subgrade moisture conditions are moreimportant than traffic volumes in determining initial (and thus, to some extent, final)pavement performance’ (Haliburton, 1970, p. 61).

Clearly, within the broad confines of highway management, two important and re-lated topics requiring close attention are: (i) the maintenance of the existing highwaynetwork and (ii) ‘life-time cost’ planning and analysis for new highway investment.As mentioned above, maintenance responsibilities are of growing importance as gov-ernments face increasing demands for funds to maintain acceptable levels of serviceand safety across ageing networks.

2For the purpose of this paper, highway will be used as the generic term which covers roads, pavementsand streets.


In most countries, apart from relatively short sections of toll roads, the bulk ofhighway funding comes from taxation and other government-imposed road-userlicensing arrangements. Highway management is delegated to a broad range ofcentral- and local-government agencies, each of which is required not only to justifyrequests for funds, but also demonstrate that the money has been well spent. At botha political and engineering level, there is an ongoing search for ‘value for money’whether in maintenance of highways or new construction. Questions of efficiency,effectiveness and economy need to be answered if cost management is to be optimaland accountability obligations met in a responsible way. Within the value for moneyframework, there is a need for more incisive interpretations of input, output andoutcome relationships both generally3 and in the area of highway maintenance.

An example of a potential direction for this effort is the enhancement of awidely used service performance indicator ‘annual highway maintenance cost perkilometre’. The use of this simple form of maintenance cost indicator is arguablyinadequate even for longitudinal analysis of the same stretch of highway. Theproblem confronting the public sector is that simple measures, which do not takeinto account differences in environmental circumstances, are almost invariably usedas the basis for evaluating the performance of subordinate agencies and frequentlyas one of the components of a fund-allocation formula. The danger is that unlessthe process of highway maintenance is understood and appropriate measures aswell as characteristics captured, inadequate data on cost behaviour will seriouslyweaken overall planning and control objectives. Furthermore, this simplistic form ofcost model endangers the quality of analysis of capital investment proposals for newhighways.

Pervasive acceptance of ‘blunt’ performance measures in the public sector account-ability process has at least two possible explanations. It may be wilful, a calculatedploy to use misinformation to cloak poor performance or to avoid rigorous compara-tive appraisal. Alternatively, it may reflect ignorance of the nature and cost behaviourof the process under review, compounded by inadequate data and limited analyticalmethodology. In either event, cost management researchers should respond by artic-ulating a more rigorous theory of highway maintenance cost incidence, by reviewingdata requirements and by using appropriate analytical tools.

With a compelling engineering case for incorporating physical environmentalfactors into a cost model of highway maintenance, a first step in this research was toobtain relevant data using methods appropriate to the highway setting. It should benoted that there is no prior research which links cost changes to particular geologicalphenomena along any stretch of highway in either the engineering4 or accountingliterature. The specific motivation for this paper is to unravel the cost effect of thephysical environment on highway maintenance as one element of the constructionand testing of a theory of cost behaviour in this setting. Accordingly, the researchfocused on testing hypotheses concerning relationships between environmentalfactors and highway maintenance cost behaviour.

3Expectations for and weaknesses in the provision of service performance information in the public sectorare discussed in Buschor and Schedler (1994).4Although research has been reported in the highway engineering literature on physical aspects of roadperformance, these studies have a predominant technical focus (e.g. Croney and Croney, 1991).


Resources

Activities

Cost Objects

PerformanceMeasurement

CostDrivers

ProcessView ABM

ABC

Cost Assignment View

ActivityTrigger

Figure 1. A basic ABC/ABM cost framework. Source: (Raffish and Turney, 1991, pp. 20–25).

4. Recent developments in cost management and implications for public sectorservice delivery

This study of cost behaviour in a highway setting commences with the basic CAM-I cost management model in Figure 1. Adapted from Raffish and Turney (1991),the model shows the focal role of activities in the relationship among cost drivers,resources, cost objects and performance measurement.5 As explained below, thisrelationship can provide insights into a continuous improvement process, linkingactivity-based costing (ABC) and activity-based management (ABM).

ABC is the basis of the cost assignment view in which resources are assigned toactivities and thence to cost objects (products) in a two-stage process. While thisprocess can provide more accurate costing of products or services, it does not initself manage costs. Cost management is pursued via ABM, which is portrayed ina process view revealing the causes (cost drivers) of work or activities, and focusingattention through performance measurement on how well activities are conducted.The process by which activities are triggered by cost drivers is shown separatelyto recognize that the mere occurrence of a cost driver may not in itself initiate anactivity; management authorization may be required.

Knowledge of cost drivers provides opportunities to improve performance throughexploring the effects of changes in strategic policy on constraining factors. Perfor-mance measurement is not only a critical component for assessing the impact onactivities of changes in cost drivers but also for expanding knowledge of which costdrivers are critical levers of better performance. ‘Cost drivers are factors that deter-mine the work load and effort required to perform an activity. They tell you why anactivity is performed and how much effort must be expended to carry out the work’(Turney, 1992, p. 20).

5The model also helps to reconcile the use of cost drivers in a general sense as described by Shank andGovindarajan (1992, 1993), and Porter (1985), with the ‘cost assignment’ use in ABC (e.g. Cooper andKaplan, 1991). In the CAM-I model, the cost assignment or ABC view uses resource drivers to assign coststo activities and ‘activity drivers’ to assign activity costs to cost objects. The term ‘cost driver’ is reservedfor underlying causes of cost.


Cost Drivers*

MarketEnvironment

PhysicalEnvironment

PolicyEnvironment

Inputs

Activities

Cost objects

PerformanceMeasurement:

Outputs/Outcomes

ActivityTrigger

Figure 2. Extending the cost management framework. (�Supplementary to Shank and Govindarajan(1993, pp. 27–46) and Porter (1985)).

Cost drivers have been categorized by Shank and Govindarajan (1993) into:(i) structural (scale, scope, technology and complexity) and (ii) executional (work-force involvement, plant layout, product configuration and capacity utilization).A key attribute of these examples is that they are the result of managerial strate-gic choices and policies. These cost drivers relate closely to the fixed factorsor constraints faced by an organization,6 arising from internal choices affectingorganization structure and process.

Such cost drivers emanate from what can be called a policy environment.In contrast, other cost drivers, such as the physical environment in which theorganization operates, have a more ‘external flavour’ and provide possibly moredifficult challenges to management efforts to improve performance.7 Furthermore,an obvious but usually omitted cost driver is the market environment in whichthe organization operates. The intensity of price competition is a likely explanationfor performance variation in some industries (Wouters et al., 1999). The competitivenature of the supplier market affects not only the cost of resource inputs but alsothe quality of products and services provided and selection of the most appropriateproduction or activity mix.

Figure 2 classifies cost drivers into three groups comprising the ‘policy’, i.e.structural and executional cost drivers as suggested by Shank and Govindarajan(1992, 1993), and two generic groups embodying more exogenous, non-discretionaryfactors emanating from the market and physical environments.

Two further modifications of Figure 1 are reflected in Figure 2. The first is the use ofoutcome/output/input distinctions articulated for the public sector by Ramanathan(1985), but increasingly used in both public and private sector contexts (Atkinson etal., 1997).

The second modification gives greater emphasis to the dynamic inter-relationships

6Changes to most of these drivers are not usually a short-run option.7These perhaps belong to the location category suggested by Shank and Govindarajan (1989).


among the components of cost management. Figure 2 proposes three relationships(depicted by the broken lines) between the following.

(i) ‘Activity trigger and inputs’: authorization may be required to initiate anactivity as well as to approve the release of resources or inputs.

(ii) ‘Inputs/cost objects and performance measurement’: cost comparisons are astandard performance task supplemented by measures of accountability suchas efficiency, effectiveness and economy.

(iii) ‘Performance measurement and cost drivers’: information about the cost objector activity can instigate further cost driver management efforts either in futureperiods (i.e. feedback) or in downstream activities.8

Describing this in general terms, policy responses to environmental and marketfactors (as well as past policy) underpin actions whereby an activity is initiated andresources authorized to provide a product or service. A cost assignment processemploys appropriate resource and activity drivers to trace and assign input coststo the cost object. Data concerning the inputs, outputs and activity enter a broadermanagerial process of performance appraisal and ABM, oriented towards continuousimprovement. In support of these efforts, knowledge of cost drivers can provide theclues to better cost management.

Components of Figure 2 have particular relevance to public sector organizations.In keeping with growing public sector deregulation, more public jurisdictions arepromoting contestibility through open-market tendering. Typical of these structuresis a reliance on competitive pricing policies for outsourcing services previouslycarried out internally. Thus, for many public sector organizations, a major cost driverarises from the nature and intensity of competition amongst suppliers in their localenvironment.

Physical environmental features influence much of the work performed by publicand private sector organizations. For example, transportation, water and electricalutilities are service activities affected to a marked degree by the topological andgeological nature of the local terrain as well as by climate. Although in settingup divisions of organizations some effort may be made to balance task-scope,achievement of a ‘level playing field’ may not be feasible. Varying degrees ofdifficulty due to differing physical environments are normally a fact of life. Thechallenge is to ensure that performance appraisal recognizes this imbalance.

The cost objects of service organizations may be less evident than productsprovided in manufacturing settings. This is particularly applicable for public sectororganizations whose cost objects may include selected groups in the community,dwelling areas or sections of highway. Where market prices for services are notavailable, performance is usually gauged in non-monetary terms and reported aseither outcomes or outputs.

8This would be shown by a similar schematic for the downstream activity.


Cost Drivers

Market:contracts

Physical:Geology &

Climate

Policy:Seal age, width

etc

Inputs:Cost $

Activities:ConstructionRehabilitation

ResealingRoutine Maint

Cost objects: Cost per

highway section

PerfMeasurement:e.g. maintenance

efficiency

ActivityTrigger

Figure 3. Application of cost management framework to highway maintenance.

5. A cost management framework for highway maintenance management

Figure 3 applies the general cost management framework set out above to a highwaysetting.

Cost drivers are shown to comprise market, physical and policy environmental cat-egories. Commencing with the market element, a major component of maintenancecost is the price paid to the contractor. In a number of countries, the end of the 1980smarked the transition from a cost-plus approach to a process of competitive tender-ing. The market became the arbiter of efficiency with contracts awarded predom-inantly on tender price with performance requirements specified in contract form.Competitiveness in the market for highway services may vary according to region,the number of available contractors and intensity of competition.9

The physical element in the cost driver category refers to the highway and itsadjacent environment which includes geological context and vegetation; availabilityof materials for the composition of the highway; traffic intensity especially heavyvehicles; climatic factors such as rainfall intensity, snow, ice and flooding; and thehighway geometry (e.g. gradient). Given that geological and climatic environmentalfactors have long been recognized as important to highway serviceability (Van Til,1972), the paucity of reported empirical research quantifying the effects of geologyon highway maintenance costs10 is noteworthy. Although engineers do take cost intoaccount in their decision making (and in fact benefit-cost ratios form a reference pointfor initial treatment selection), the models are based very much on programme costsand do not explicitly allow for latent environmental costs.

Accordingly, this research starts by determining the geological nature and rangeof the terrain traversed by the highway, and related environmental impacts. Better

9Relative efficiencies amongst contractors can cause differences in cost between different highways andover time for the same highway.10As opposed to the technical outcomes described in footnote 4. The paucity of empirical research intoenvironmental cost drivers may be due to the difficulty of obtaining detailed, time series cost datapertaining to sections of highway that would enable more refined analyses to be performed.


understanding of the way in which environmental factors such as geology drivehighway maintenance costs has the potential to assist management planning,control and performance measurements. Not only is it important to understand costbehaviour in particular settings, but knowledge gained can direct broader enquiriesinto highway cost management. In essence it is recognizing that ‘to be effective,a pavement [highway] research programme must be cohesive and attack priorityitems’. (Haas and Hudson, 1978, p. 446).

Maintenance policy in this context refers to items within the span of control ofthe maintenance engineer in charge of the local network. These include pavementage; the period since last sealed; adequacy of drainage; accident record; consumerfeedback; and recommendations made in the course of periodic operational audits.Although pavement type may be flexible (asphalt) or rigid (Portland cementconcrete), the former has been the preferred choice by New Zealand highwayorganizations. As part of the policy decision to select the appropriate treatmentactivity, the maintenance engineer will need to balance future maintenance costsagainst the cost of remedial work taking into account the market and physical costdrivers.

In this highway context, several levels of cost objects are used. Costs areaccumulated for individual state or local highways as well as by regions.11 In afew cases,12 state highways have detailed cost and non-financial data pertaining tosections along the highway that have been separately identified as requiring differentmaintenance treatments. For these highways, each section can be regarded as a costobject to which resource and production arrangements are directed.

The main activities shown in Figure 3 are: (i) construction of new highways and (ii)maintenance activities for existing highways comprising rehabilitation, resealing androutine maintenance. Rehabilitation involves major reconstruction of the pavementstructure and is generally expected to extend its operating life by up to 25 years.Resealing is an overlay over the existing surface made without disturbing theunderlying pavement structure, and on average is expected to occur two to threetimes over the life of the pavement.

Routine maintenance13 encompasses a variety of ongoing activities throughouteach year to rectify low-level defects such as cracks, potholes, drainage, landscapingand slip removal. These actions are vital for safety, aesthetic reasons and toensure that rehabilitation and reseal average costs do not rise excessively. Routinemaintenance tasks can be categorized further into pavement-related (e.g. cracks andpothole repairs), verges (drainage, landscaping) and emergency (slip removal).

Performance measurement is shown in Figure 3 as an integral part of highway costmanagement. A performance measurement approach, which recognizes diversityin the environment and its effect on cost objects, makes benchmarking practicemore meaningful. With regard to environmental diversity, peer-group-monitoring

11In New Zealand state highways are administered by a central government organization, Transit NewZealand (Transit NZ). Transit NZ regional offices are responsible for all the state highways in designatedregions. Local authorities maintain local roads.12The level of detail for these cost objects is exceptional in comparison with most highway managementsettings.13For a fuller description of the routine maintenance engineering management tasks and budgetimplications see Putterill (1987).


practices become more realistic where similarities and differences between settingscan be clearly articulated (Putterill and Maani, 1992). This improved understandingenables finer-grained and more realistic measurement norms to be developed,superseding traditional non-profit performance indicators (Mayston, 1985).

The dynamic relationships of the extended cost management framework wereoutlined generally in the discussion on Figure 2. These relationships can bespecifically illustrated using Figure 3. Assume that a combination of geologicalfactors (e.g. poor soil and weak rock) leads to mild instability in a particular partof the terrain underlying a highway section. Minor cracks form in the surface ofthe road as a result of this instability and are observed by the highway engineer.Combining this observation with official policy and highway-engineering theory, adecision is made that the appropriate treatment is a routine maintenance activityand a contractor is authorized to carry out the repair. The cost of this repair isincorporated into the cost object (the highway section) and at some later stage, thecost of maintaining this highway is appraised. The appraiser (and this may be theengineer) may question why some highway sections cost more to maintain thanothers on a simple cost per metre measure. Suspecting that geological factors arethe underlying reason for excessive maintenance cost, the engineer can investigatewhether the effect of these factors could be reduced or eliminated by alternativetreatments such as reconstruction or rehabilitation.

The framework in Figure 3 provides the foundation for the model of cost behaviourused in the empirical study described next. The research is sharply focused on routinemaintenance, an important field of study for several reasons. It is ongoing, costly andincreasingly recognized by central and local governments as a critical component oftransportation policy (Hudson and Hudson, 1994). As a key component of overallhighway management strategy, it accounts for over half of the annual maintenanceexpenditure on highways in New Zealand.

Routine maintenance is split into three components comprising pavement, vergesand emergency activities. Inputs in terms of expenditure are traced via these activitiesto cost objects comprising sections of highway. The variability of expenditure persection is the subject of investigation through the influence of cost drivers onresources. This partial inquiry will attempt to identify which, and to what extent,cost drivers can explain variations in cost behaviour across sections of highway.

Following the cost management framework depicted in Figure 3, the majordeterminants of routine maintenance activities and consequently cost per section ofhighway are hypothesized as follows.

Highway Routine Maintenance Cost Dff(i) market competitiveness(ii) maintenance environment (iii) maintenance policyg.

A potential problem for this model is the number of possible variables to be includedunder each component relative to the number of observations. For example, differenttraffic volumes may exist between individual highways or along a specific highway;different contractors may be used; pavement construction characteristics or ages mayvary. To control the confounding impact of complexity, this study is located on aspecific highway where many of these factors are constant, i.e. for all intents andpurposes market conditions and traffic flows are uniform.


6. Research setting and data acquisition

The test site, State Highway 5 (SH5), is a national highway connecting the centralNorth Island with a port on the East Coast. Two factors that support its selection as atest site are the diversity of geological terrain and the availability of data pertainingto the cost objects (contiguous but of varying length sections of highway) from awell-developed cost allocation system. Furthermore, the SH5 database has extensivecurrent information on age, treatment history and treatment costs for individualsections along its entire length. Eighty-nine continuous sections of SH5 are includedin the study representing in aggregate 59.6 kilometres of highway. Four years of costdata for routine maintenance totalling NZ$2.3 million are available for each section,i.e. 356 observations in total.

Several other data-related aspects required attention notably inflation, invariantfactors and technical data.

(i) Market price effects were held constant by employing a price index, which wascompiled using the contract details14 over this period. This index was used torestate cost items into 1995 real terms.

(ii) Invariant factors needed to be identified. First, as traffic is uniform throughoutthe length of the highway,15 traffic flow variations are not an explanatoryvariable in terms of maintenance cost. Second, although competitive tenderingtook place during the four-year period, consistency in treatment methods couldbe assured because the same contractor was successful in three of the four years(1992, 1994 and 1995) in retaining the contract. Furthermore, management ofthe state highway remained the responsibility of the same Transit NZ regionalengineer over this period. Finally, it should be noted that all sections of SH5 areof flexible pavement construction.

(iii) Transit NZ records were used to establish cost and technical data for eachsection, i.e. pavement depth, chip size, and width of seal. Core geologicalfactors were derived from the NZ Land Resource Inventory and consisted ofrock, soil, slope, erosion and vegetation types, covering an area 100 metreseither side of the centreline of SH5. This data was contained in a GIS database.

A GIS is an information system that is designed to work with data referenced byspatial or geographic coordinates (Star and Estes, 1990). To illustrate, panel A ofFigure 4 portrays four types of data (overlays) pertaining to the earth surface thatcan be referenced by geographic coordinates. An obvious overlay is the highway,which can be mapped in terms of latitude and longitude. Geological characteristics(vegetation and soil) are logical candidates for this type of mapping. A lessobvious overlay is cost which can be mapped for each highway section referencedby geographic coordinates. Using the spatial references, characteristics from eachoverlay pertaining to a particular section can be extracted as depicted by the vertical‘cut’ shown in Panel A. This enables combinations of geographic characteristics to beassociated with the cost per section of highway.

14Annual contracts were let for 1992, 1993, 1994 and a three-year contract commencing in 1995.15The annual average daily traffic is 10 000 vehicles for all sections.


Using GIS software, each section length of SH5 was broken down into coordinates10 metres apart, which were used to extract geological combinations in the form ofpolygons16 containing the five core geological factors. Panel B of Figure 4 showshow line segments, corresponding to each highway section, are overlaid onto thegeological polygons.

Five sections of highway are depicted in Panel B together with four geologicalpolygons (shaded). For simplicity, each highway section is shown as a straight line.Some sections can extend over more than one geological combination or polygon (e.g.sections 2 and 4) while others (e.g. sections 1, 3 and 5) remain within their respectivepolygon.

Turning next to factors that vary across the cost objects and are potential costdrivers, the following items, identified above, have been incorporated into theanalysis in the following way.

Market contract fixed rates: section lengthAlthough most of the market environmental effects have been held constant byconfining the study to a single highway and adjusting for price effects, a substantialproportion of routine maintenance cost for emergency and verges activities consistsof a fixed dollar rate per kilometre of road length (known as a ‘cyclic measure’ withinthe industry). For example, the inspection of drains and removal of surface detritusare paid for on this basis. Therefore, a major cost driver for the emergency and vergescosts is volume-based in terms of length per section.

Maintenance environment: rock and soil types, vegetation, climate and topologyAs reported below, Transit New Zealand internal reports in 1991 and 1992 confirmedthat geology has an impact on highway maintenance in New Zealand.

The immediate problem is to find economical ways to mitigate thestability [geological] problems of the existing highway. Many of theinstabilities are in the form of slow, intermittent creep movementswhich apart from having high maintenance costs do not usually failcatastrophically (1991).

In the section from Awatere to Wainui the highway passes throughrolling countryside which consists of weak formations of mudstone andsiltstone which are notoriously unstable. Many sections of this highwayare continually deforming due to land movement and many sections arefrequently ripped, reshaped and resealed to maintain their shape andtrafficability (1992).

This relationship between geological factors and maintenance activity can be laidat the door of three major inter-related aspects: slope failure, compressibility ofmaterials, and the moisture content of the soil on which the road lies. The level ofslope failure is a function of soil and rock types together with slope and vegetationcover. At the extreme, this is manifested in slips above or below the highway that

16A polygon represents a combination of a particular type for the core geological factors that is uniformover an area.


Vegetation

Soil characteristics

Cost data

Highway route

Earth surface Latitude

Longitude

Vertical cut of vegetation, soiland cost characteristics for a

specific highway section

1

2

3

4

5

e.g. all of section 1 fallswithin the one polygon

e.g. section 4 crosses over two polygons

Panel A

Panel B

Figure 4. GIS Representations for Highway Sections. Panel A: Vertical representation of data in overlaysfor a specific section. Panel B: Horizontal portrayal of five highway sections with four polygons.

cause the highway surface to either sink or slip away altogether. At lesser levels, soiland earth movements result in surface failure such as cracking.

Compressibility of materials is related to the density and moisture content ofthe soil in combination with rainfall intensity: ‘flexible pavements were extremelysensitive to failure by loss of subgrade support when the moisture content of theupper subgrade material approached and exceeded the plastic limit, (Haliburton,1970, p. 42). Although soils that drain easily should provide a more stable surfacethan slow draining soils that become unstable when wet, this may not always hold.Haliburton found that the use of sand cushions as base course materials acted aswater reservoirs and distribution systems, catching water from shoulders and cracks,and feeding this water uniformly over the subgrade. ‘Continued feeding resulted inlateral subgrade expansion and pavement cracking’ (Haliburton, 1970, p. 43).

It is to be expected that combinations of poor draining soils and weak sedimentaryrocks will lead to higher costs. To test this proposition, rock and soil combinationsare classified into two groups representing expected high and average cost. Thehigh-cost group contained approximately one-third of these combinations and


Table 1Regression results with and without annual effects

Panel A Single Constant Panel B Annual EffectsEmergency Verges Pavement Emergency Verges Pavement

Dep variable Log total cost Log total cost Log cost per Log total cost Log total cost Log cost perper section per section lane metre per section per section lane metre

R-squared 27.2% 78.0% 11.1% 32.8% 78.8% 18.0%Adjusted squared 25.7% 77.6% 9.1% 30.8% 78.1% 15.4%Number of observations 356 356 356 356 356 356

CyclicLength 0.95697�� 1.03264�� 0.13034 0.97162�� 1.02708�� 0.11357

EnvironmentRock/soil �0:08925 �0:22488�� 0:66545�� 0:11469 �0:19934�� 0.64232��Forestry �0:44707�� 0:03543 �0:80412�� 0:50711�� 0:01881 �0:85463��

Scrub 0:49565�� 0:04381 0.09647 0:47634�� 0:05586 0.04252Rainfall and slope 0.00002�� 0 0.00001 0.00002�� 0.000001 0.00001

PolicyExpected seal life 0.01526 �0:00296 �0:06027�� 0.01041 �0:00118 �0:06752��

Emergency history �0:05507 �0:22825 0.00675 0.06341Drainage history 0.09955 0.26176 �0:12669 0.09284

InterceptsConstants �0:24025�� 0.28706 0.06754 �0:23 0.44095�� 0.45052Annual effects 1993 0.534�� 0:11387 0.012366Annual effects 1994 �0:547�� 0:25769�� 0:035546Annual effects 1995 0.14 �0:10125 �0:959043��

F-ratio 18.53 176.18 5.42734 16.822 127.95 6.864

� significance 10%; �� significance 5%; �� significance 1%; �� significance 0.1%.

was characterized by items such as sandstone, sleepland and hill soils, mudstoneand poor soils. Using zero-one values corresponding to average- and high-costcombinations, each section is assigned a value according to the particular rock/soilcombinations contained within it.

Measures of rainfall were obtained from weather-recording stations in surroundingareas. The road geometry element is partly captured by the seal-width and the slopeelement of the geological factors.

In practice, different combinations of geological factors might be expected to varyin their effect on maintenance requirements. For example, high levels of maintenanceactivity could be expected in areas subject to earth movements such as soil orearth slips or flows, clay-type soils with shallow-rooted vegetation, and moderate-to-steep slopes. Factors that provide greater stability such as forestry might beexpected to favourably affect otherwise high-maintenance activity (Baker, 1974; Gageand Black, 1979). In this regard, although forestry has favourable stabilizing andwater-absorbing effects, it can also have unfavourable shade and airflow-reductioninfluences when located too close to the highway by retarding the drying out processafter rainfall. Fire-control boundaries, however, can be expected to alleviate the lattereffect and reinforce the stabilization effects.

Maintenance policy: expected seal life, emergency history, drainage works carried outPolicy variables such as pavement age and depth, seal age, width of sealed highway,size of pavement chip were examined in initial analyses. Results were inconclusive


and further measures were investigated. Three measures were developed to repre-sent drainage, emergency problems and interactions between pavement age and re-sealing. The first two measures are binary variables, coded ‘one’ when a section hashad additional work performed to remedy drainage and/or emergency problems,as opposed to normal inspection and clearage. The expectation is that maintenancecosts will be higher in sections that have suffered abnormal drainage and emergencycosts.

The third measure posits a relationship between the pavement’s age and theexpected seal life. This is believed to vary around the chip size and pavement age,i.e. as the pavement ages, the beneficial effects of resealing reduce with larger sizesof the metal chip used. The higher the expected seal life, the lower the maintenancecosts are expected to be.

7. Results and discussion

Using both ordinary least squares regression (OLS) and the general regression model(GLM), different models were tested to determine model fit and variable significance.GLM was used to examine possible interactions between factors such as rainfall anddifferent soil types, rainfall and slope, and slope and erosion. All costs and measuresother than binary variables were converted to logarithms.

Table 1 reports the results of the final regressions for the three maintenancecategories: emergency, verges and pavement. For emergency and verges, cost persection of highway was considered to be appropriate; for pavement, cost per lanemetre was used. Panel B adds a binary variable for annual effects17 in years 1993, 1994and 1995. The r -squared measures show that the model explains a significant portionof cost variability in each category. For verges, the fixed dollar rate per metre or cyclicmeasure is a major component of the cost and covers activities such as mowing andstormwater drain inspections. Consequently the r -squared for verges is considerablyhigher than for emergency and pavement.

Following from this and as expected, length is highly significant (and close toone) for emergency and verges maintenance reflecting the fixed charge per metre.Rock and soil combinations are highly significant for verges and pavement activities,but whereas poor draining soils and sedimentary rocks add costs to pavementmaintenance, the analysis shows a beneficial effect for verge activities. The reason forthis is likely to be that clay-type soils and sedimentary rocks provide good earthworkdrains (this entire highway is rural) and facilitate water run-off.

A higher level of afforestation has a beneficial impact on the maintenance cost foremergency and pavement components while scrub cover is costly for emergencyworks. This is hardly surprising considering that a substantial portion of the latteractivity arises from terrain slippage. Although the land resource inventory databaseis based on surveys performed between 1973 and 1979, the region has remained amajor forestry area with insignificant changes in vegetation.

Rainfall and slope interactions are marginally significant for emergency works. Apossible explanation is that the rainfall data in the study is based on annual measures

17Time dummy variables are included in the pooled model to control for any cross-sectional variation thatmay occur in any particular year.


reported by weather stations that are not located systematically along the highway.These may not be representative of actual rainfall occurring in particular locations.Further, road engineers believe that rainfall intensity adjusted for evaporation effectsis the critical measure, not average rainfall.

Under the policy environment, expected seal life is significant and accords withengineering beliefs, i.e. the longer the expected seal life, the lower the maintenancecosts should be. This measure is a first step to combining information on chip sizeand pavement age to better understand seal lifecycles. Other factors such as bitumenadditives, preseal treatments, and laying techniques may also be relevant.18 Drainageand emergency history did not prove significant.

In summary, the results clearly reveal that factors from the physical environmentare significant cost drivers for highway maintenance affecting emergency, verges andpavement activities.

8. Implications and summary

This analysis has shown for the first time the significant influence that specificenvironmental factors have on the incidence of routine highway maintenance cost.In addition, insights gained should encourage researchers in other contexts toreconsider the way in which costs are classified. This will facilitate a move awayfrom the traditional fixed and variable cost dichotomy to schema that allow separaterecognition of cost drivers, e.g. market effects, operating management actions, policyinterventions and environmental states.

At a theoretical level this exploration demonstrates that the general cost driverframework in Figure 1 is under-specified and that scope exists to construct anABC/ABM model which incorporates some of the features of the public sectorversion. While Kaplan (1993) makes the point that there is a need to extend the studyof cost drivers to new settings, it seems equally important to revisit reported studiesarmed with an appropriately upgraded analytical framework.

Reverting to the highway maintenance setting, these results and associated insightsare a useful first step towards providing a fuller understanding of cost behaviourpatterns to those with highway management planning and control responsibilities.It is worth noting that while annual routine maintenance is a large outlay in its ownright, it is only part of the story. No general theory of highway cost behaviour wouldbe complete which did not recognize the impact of maintenance on highway users,i.e. vehicle running costs, delays, accidents, etc.19

An ongoing concern of practitioners on the one hand, and politicians andperformance auditors on the other, is sustaining an acceptable level of ‘value-for-money’ achievement from what is worldwide arguably a very large annual outlayon highway maintenance and construction. Although the concern about value maybe general, planning and control practices differ. Approaches adopted by countriesaround the world fall into one of two general forms that for simplicity can be labelled‘traditional’ and ‘market-based’. The former covers a large number of countries that

18Techniques used in the original construction can also play an explanatory role, especially when extendedover several time periods.19See Newland (1990), for a discussion of external parallel costs of this kind.


use variations of line-item incremental budgeting. In recent years the dictates ofnew public management have seen a significant shift in highly developed countriestowards practices that rely on market forces. Readers should note that this paperaddresses situations in the ‘market-based’ category.

In the past, the appraisal of public sector service delivery, a critical part of overallvalue for money assessment, has been weak along three dimensions. These are(i) the nature, scope and time horizon of the task has been poorly defined (ii) datarequirements and analysis have been superficial and (iii) methods of evaluation havenot been appropriate for particular categories of entity. This has been the case forhighways as with many other services.

The model tested in this study (Figure 3) makes a contribution to dimension(i) by providing a basis for stakeholders to better understand the complexity of thehighway service provision and their part in the process.

Dimension (ii) is concerned with the quality of cost data and associated analysis,decision support and reporting. The use of ‘line-item’ budget preparation remainsa preferred planning and control practice for many highway agencies around theworld that continue to generate and report performance indicators based on naiveinterpretations of cost behaviour. This research shows that it is possible with moder-ate effort to generate more relevant analyses of cost behaviour and associated driversincluding environmental effects. As a significant element of routine maintenance costcan now be explained, it is no longer acceptable for highway management agencies,auditors and politicians to condone or engage in simplistic reporting. In a trenchantcritique of public sector performance measurement Jones (1994, p. 51) says: ‘Estab-lishing causality with any degree of plausibility has been avoided but this has notprecluded organizations from implying causality. And despite the obvious require-ments that economy, efficiency and effectiveness measures must be used togethereven to begin to say performance was better or worse, the lack of effectiveness mea-surement has simply meant a concentration on low-level efficiency and economy.’Although only a part of the highway maintenance process has been examined, thispaper shows the way to move forward from the ‘simple’ towards a sharper focus oncost behaviour.

In addition to these concerns about public sector reliance on ‘simplistic’performance indicators, there is also dimension (iii), the matter of ill-informedentity evaluation. This occurs when a senior agency higher up in the chain ofcommand assembles relative performance ‘league-tables’ from ‘simplistic’ sub-agency measures. Failure to recognize distinctive sub-agency working environmentcharacteristics reduces the decision-usefulness of this evaluation process. In thecase of routine maintenance, it is fair to say that cost comparisons are meaninglesswithout contextual definition by means of factors such as environment, traffic, andnature of construction.

There are several possible explanations for the persistence of deficiencies in practiceof the kind identified in (i)–(iii). In the first place, the training of preparers (andauditors) of financial reports predisposes them towards the use of a common formateven at the expense of relevance (Johnson and Kaplan, 1987). Secondly and arguably,financial accounting has emerged as the main vehicle for the broader concept ofaccountability in the new public management framework. This control of the highground makes it is difficult to introduce other forms of data and analysis. Inessence, this dominance becomes a barrier to collaboration with other disciplines,


i.e. engineers. At the same time, an important component of incisive performanceappraisal, namely a common financial and engineering database, becomes difficult ifnot impossible to obtain (Drury and Taylor, 1997).

The criticism contained in the previous paragraph may be unduly harsh. It must beacknowledged that accounting for services such as highways is outside normal com-mercial experience given that these infrastructure elements are complex cost objectsspanning long time periods. Having inserted this proviso, the challenge remains ofmaintaining appropriately integrated management information systems for strategi-cally important assets such as highways. Section 5 shows that appropriate databasesand analytical tools can be harnessed to expose environmental characteristics andassociated performance characteristics. GIS database capabilities coupled with costeffective electronic data capture have opened up avenues for improved analysis andcontrol. These new cost-effective data capture and analysis capabilities are now avail-able to make the search for causal factors more feasible not only in a highway context,but potentially in many similar service situations such as telecommunications, elec-tricity and water utilities.

By collaborating and pooling complementary skills, management accountants andengineers in these enterprises have the potential to make use of these innovationsto enhance effectiveness and efficiency. Creating a climate of cooperation betweenthese two disciplines is an achievable short-term goal; a less tractable problem isinstitutional preoccupation with financial reporting requirements.

This study can be extended in several directions. First, there is scope for developinga ranking system of particular combinations of (say) geological factors along anordinal scale reflecting highway maintenance cost categories. For example, in such aschema sections of highway on well-draining soils in combination with igneous rocksand forest would be expected to have low unit maintenance costs. Conversely, thoseon poor-draining soils with sedimentary rocks and scrub on steep slopes would fall ina high cost bracket. A loose analogy from the literature on ABC is the classification ofmanufactured products into categories ranging from uniform through to extremelycomplex.

Used as an index of quasi-standard costs, this form of environment-relatedperformance standard has the potential to enhance resource-allocation decisionsand performance measurement. For example, operating managers could use theindex as a guide to locations on the highway network where prompt interventionwould save costs. Having an environment-related cost index for individual agencieswould also play a useful part in benchmarking activities. ‘Peer-group’ supportpractices (Putterill, 1985) encourage the ongoing search for maintenance efficiencyand adoption of technological innovations. The existence of this terrain-related setof quasi-standards could also call to account inefficient agencies inclined to claimdispensation on the grounds of onerous operating conditions.

A second extension of this field of research is to develop the environment-relatedcost index into a form that can be used to make more sophisticated strategicevaluations. Major capital investment decisions come in several parts, each capableof benefiting from more incisive cost data. Decisions about new routes and re-alignments need standard cost data for each set of terrain alternatives. Choicesbetween alternative routes need to consider terrain differences and their effect onboth capital outlays and future maintenance requirements. Once a route has beenplanned, critical questions need to be resolved about the technical specification


of the new construction. Again, the achievement of an optimal balance betweeninitial capital outlay and the pattern for downstream maintenance interventions (i.e.lifetime costing) is particularly important. Computing a terrain-specific standardcost table for long-run highway maintenance would be a valuable managementaccounting task made particularly challenging by virtue of the non-linear behaviourof this category of future expense.

A third possible research extension relates to highway toll systems. In recent years,there has been growing public debate over proposals advocating the introductionof highway pricing. Pricing is determined by many factors including target traveltimes, congestion, traffic type, safety and availability of substitutes. Nonetheless,most analysts including ABC proponents would agree that accurate costing ofsections of highway is essential to provide information for setting initial toll pricesand monitoring ongoing performance. If the motoring public is to accept user-paypolicies, these will need to be buttressed by coherent cost arguments includingevidence of effectiveness and long-run efficiency.

Fourthly, there is much work to be done on policy issues to the extent that theserelate to a wider range of environmental factors. At it stands, the paper incorporatespolicy matters strictly from the perspective of highway operations, i.e. technicalfactors. In time, a broadening of policy perspective is inevitable as public pressuregrows to reduce pollution, congestion and despoiled landscapes. Each of thesefactors has political and economic cost implications both at the planning stage andduring highway operation. Variants of the environment-related cost index would bean essential component of any policy evaluation in these contexts.

In conclusion, this research has produced new insights into physical environmentcost drivers and associated impact on costs with particular emphasis on the impactof varied terrain. Further, the paper shows the way in which the cost managementframework (Figure 3) can be levered to produce a more useful and dynamicmodel that recognizes a fuller range of cost drivers thereby providing a strongerfoundation for performance reporting for service enterprises. Finally, the paper hasshown through a combination of theory building and field analytical activities ina traditionally engineering-dominated setting, that the discipline of managementaccounting can add value in decision making for planning and control.

Acknowledgements: The assistance of Transit New Zealand, Dr David Hawke of theDept of Geography and Dr Chris Wild of the Dept of Statistics, The University ofAuckland, is gratefully acknowledged. We would also like to thank the editor andtwo anonymous referees for their helpful comments.

The data reported in the paper can be obtained from the authors.

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Incorporating environmental factors into a highway maintenance cost model