By: Steve Yaffe, Director, TLPF Industry Resource Center 

Last month’s article focused on financing Start-Up Costs (the float). The Float for a new service occurs until the time you receive the paycheck. 

This month’s focus is on cost allocation, which is basic preparation before you complete a procurement a price sheet.  Expenditures to not accrue uniformly.  
Cost allocation provides a framework to assess how costs will accrue according to the requirements of the new contract. By understanding Cost Drivers, you will better understand how customer priorities affect expenditures.  

Costs fall into three categories: Revenue Hours, Total Miles, or Fixed Costs.  

• Revenue Hours, depending on the terms of the contract, accrue when a vehicle is in service. For taxis, revenue time only happens when someone is riding and perhaps when boarding, or alighting. For paratransit and limousine, revenue time begins with the first pickup and ends with the last drop-off.  When estimating revenue hours, you’ll need to develop a ratio to convert anticipated pay hours to revenue hours.  This ratio would account for “deadhead”. Morning deadhead is time used shuttling between the operating base and the first pickup or start of a route. Evening deadhead is the time from the last drop-off or end of the route and the operating base. Deadhead also includes time shuttling vehicles to/from a separate maintenance or vehicle inspection facility. Driver training time also is not revenue time, though we hope that the “deadhead” term doesn’t apply.   

Many ADA and other demand response contracts pay by the revenue hour. The largest cost category accrues hourly: Driver wages.  If benefits are paid as a percent of wages, then benefits are also associated with service hours. 

• Revenue Miles accrue in the same manner – either when transporting people or from the first pickup to the last drop-off. Medicaid Non-Emergency Medical Transportation contracts generally pay by the revenue mile. Again, a ratio is needed to account for the distance travelled while training drivers, testing new or recently maintained vehicles, shuttling to/from a separate maintenance or vehicle inspection facility, or “deadheading” miles as described above.  

Mileage-related costs include fuel, parts, fluids, tires, and maintenance technician wages and benefits. Vehicle amortization is also mileage-related. Unless the vehicles are grant-funded, you should plan to replace at the end of vehicle life.  If the vehicle is heavy-duty, also budget for a mid-life rehabilitation. Mid-life rehab entails a rebuilt or new engine, water pump and transmission, or electric battery-pack. 

• Fixed Costs don’t vary according to the volume of service on the street. They accrue and are predictable each month. Fixed costs include rent;leases;technology and communications license fees;utilities;and security. Administration (General Manager/CEO, Operations, Maintenance, Safety/Training Managers, HR & Payroll) is a fixed cost.Marketing materials and Outreach/Community Engagement are fixed costs. Fixed costs may change with a major change in the services offered. Adding Sunday or weeknight service requires a dispatcher and perhaps a street supervisor on duty.  Going from 40 to 70 vehicles in peak service may require an additional dispatcher. Certainly, the vehicle insurance premium will increase. Benefits will be a fixed cost if a flat rate is charged per month. Depreciation of durable maintenance equipment (and buildings for that matter) should be considered as a fixed cost.   

Fixed costs are sometimes charged out according to the number of vehicles required for peak service.  If the Area Agency on Aging needs rides to senior centers to arrive at 10AM and depart at 2PM, no additional vehicles or dispatchers are required.  That senior service accrues hourly and mileage costs – but doesn’t impact fixed costs. Same for midday group grocery trips and lunchtime outings. Why not charge them a lower rate?  The company benefits by offering full-time work to drivers and more fully using the vehicles. 

• Some cost categories vary according to company circumstances. Monthly or Quarterly Driver Safety Meetings would be an hourly cost, as the attendees are paid. 

Two major benefits of knowing how your costs accrue and charging accordingly: 

1. Your company can attract and retain off-peak business with lower rates at minimal impact to the operation 

2. This forms the basis for mixing riders sponsored by different funding programs.  Schedule by Geography and Time, not by funding source.  More on that strategy next month! 
    

More resources for ride providers are available, as am I through the TLPF Industry Resource Center (TIRC) if you have any questions. As always, if you have a comment or suggestion, please email me at yaffe@ymobility.info.