STATE OF

NORTH CAROLINA

PERFORMANCE AUDIT

NORTH CAROLINA DEPARTMENT OF

TRANSPORTATION

HEAVY EQUIPMENT FLEET MANAGEMENT

SEPTEMBER 2010

OFFICE OF THE STATE AUDITOR

BETH A. WOOD, CPA

STATE AUDITOR

PERFORMANCE AUDIT

NORTH CAROLINA DEPARTMENT OF

TRANSPORTATION

HEAVY EQUIPMENT FLEET MANAGEMENT

SEPTEMBER 2010

Beth A. Wood, CPA

State Auditor

STATE OF NORTH CAROLINA

Office of the State Auditor

2 S. Salisbury Street

20601 Mail Service Center

Raleigh, NC 27699- 0601

Telephone: ( 919) 807- 7500

Fax: ( 919) 807- 7647

Internet

http:// www. ncauditor. net

September 20, 2010

The Honorable Beverly Perdue, Governor

Members of the North Carolina General Assembly

Eugene A. Conti, Jr., Secretary, North Carolina Department of Transportation

Ladies and Gentlemen:

We are pleased to submit this performance audit titled North Carolina Department of

Transportation Heavy Equipment Fleet Management. The audit objective was to determine

whether Department of Transportation policies and procedures provide reasonable assurance

that underused or idle heavy equipment will be detected and corrective action taken. Eugene

A. Conti, Jr. reviewed a draft copy of this report. His written comments are included in the

appendix.

The Office of the State Auditor initiated this audit to identify improvement opportunities in

heavy equipment fleet management.

We wish to express our appreciation to the staff of the Department of Transportation for the

courtesy, cooperation, and assistance provided us during the audit.

Respectfully submitted,

Beth A. Wood, CPA

State Auditor

TABLE OF CONTENTS

PAGE

SUMMARY ............................................................................................................................... . 1

INTRODUCTION

BACKGROUND.................................................................................................................. 3

OBJECTIVES, SCOPE, AND METHODOLOGY ...................................................................... 3

FINDINGS AND RECOMMENDATIONS.......................................................................................... 5

APPENDIX

AUDITOR’S RESPONSE ................................................................................................... 10

DEPARTMENT RESPONSE ............................................................................................... 12

ORDERING INFORMATION........................................................................................................ 15

PERFORMANCE AUDIT

SUMMARY

PURPOSE

This audit report evaluates whether Department of Transportation ( Department or DOT)

policies and procedures provide reasonable assurance that underutilized or idle heavy

equipment will be detected and corrective action taken. The report also makes

recommendations so Department management can take appropriate corrective action.

RESULTS

Department of Transportation’s policies and procedures do not provide reasonable assurance

that underutilized or idle heavy equipment will be detected and corrective action taken. An

analysis of DOT reports for approximately 2,300 pieces of heavy equipment, 1 costing around

$ 153 million, shows that more than half of those items were used less than 30% of the

available time2 between October 1, 2006, and September 30, 2009. Approximately one third

of these pieces, costing $ 56 million, were used less than 15% of the time during each year of

the three- year period.

DOT could generate significant cash and reduce the amount of direct and overhead costs if it

identified and disposed of underused equipment. Based on the average selling price over the

past seven years, DOT could realize around $ 3.5 million by selling half of the equipment

( about 390 pieces) that was used less than 15% of the time during the year ending September

30, 2009.

Idle and seldom used equipment exist in part because the Department has not established a

goal or expectation for heavy equipment usage rates. Furthermore, DOT lacks specific

written policies and procedures that direct managers to identify and report underutilized

equipment or instruct managers on what corrective action to take.

RECOMMENDATIONS

DOT management should establish performance measures or expectations for heavy

equipment usage rates that would justify the cost associated with continued ownership. The

Department should periodically review and adjust performance measures to increase

efficiency and achieve departmental goals.

DOT management should develop written policies and procedures that clearly assign

responsibility for identifying and reporting underused equipment. The Department should

1 The audit focused on six classes of heavy equipment used for road maintenance: excavators, tractors, backhoes,

motor graders, loaders and dump trucks. These classes were chosen after consulting with DOT equipment

managers because those classes were the most commonly used high- dollar- value classes of heavy equipment.

2 Available time is considered to be 40 hour a week or 2,080 hours a year. Utilization rates were calculated by

dividing the annual hours of actual use by available time ( 2,080 hours a year). Equipment use during emergency

conditions ( nights and weekends) is included in the actual use but does not increase the total available time.

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PERFORMANCE AUDIT

also develop written procedures to instruct managers on what corrective action to take when

underused equipment is detected.

The Department should identify and dispose of underused equipment. Classes of equipment

that are used less than defined minimum- use standards should be analyzed, by location, to

identify the number of pieces that should be sold or transferred to other locations that need

that type of equipment. Similarly, individual pieces of equipment that are routinely identified

as idle or underutilized should be sold or transferred. Reasons for keeping underused

equipment should be documented and approved by central managers.

The Department should provide training to all equipment managers in order to expand their

knowledge in efficient fleet management practices. The Department should continue its

efforts to obtain the Association of Equipment Manager Professionals fleet manager

certification for all equipment superintendents.

AGENCY’S RESPONSE

The Agency’s response is included in the appendix.

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PERFORMANCE AUDIT

INTRODUCTION

BACKGROUND

North Carolina General Statute § 136- 18 assigns responsibility for maintaining the State’s

80,000- mile highway system to the North Carolina Department of Transportation

( Department or DOT). To meet its statutory responsibility, DOT owns, maintains, and

manages a fleet of heavy equipment. The Department supplements its fleet on an as needed

basis by renting heavy equipment from commercial rental businesses. The Fleet and Material

Management Unit, a centralized unit within DOT’s Highway Division, is charged with

primary oversight of DOT’s fleet of heavy road maintenance equipment.

After purchase, equipment is assigned to local DOT facilities within the 14 geographically

clustered divisions in order to meet central and divisional road maintenance goals and

objectives. Divisions, each headed by a Division Engineer and a Division Equipment

Superintendent, are responsible for storing, scheduling, and maintaining their assigned fleet of

heavy equipment. Each division performs an annual equipment needs and replacement

assessment, at which time recommendations are made for disposals and new equipment

purchases. Disposed equipment items are sold at auction or via surplus property, transferred

to other facilities, or scrapped for used parts. All disposals and purchases require state level

approval from the Fleet and Material Management Unit.

As of June 30, 2009, the Department held over 25,000 pieces of heavy equipment with an

acquisition cost of approximately $ 633 million.

OBJECTIVE, SCOPE, AND METHODOLOGY

The audit objective was to determine whether Department of Transportation policies and

procedures provide reasonable assurance that underused or idle heavy equipment will be

detected and corrective action taken.

The Office of the State Auditor initiated this audit to identify improvement opportunities in

heavy equipment fleet management.

The audit scope included a review of current fleet management practices and the use of

equipment within six classes of DOT owned heavy equipment3 between October 1, 2006, and

September 30, 2009. We conducted the fieldwork from October 2009 to July 2010.

To determine current DOT fleet management procedures, we conducted interviews with Fleet

and Material Management Unit personnel and division equipment managers and reviewed

policies and procedures as they related to equipment use and fleet management. We also

reviewed DOT management meeting minutes and Board of Transportation meeting minutes.

3The audit focused on six classes of road maintenance heavy equipment: excavators, tractors, backhoes, motor

graders, loaders and dump trucks.

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PERFORMANCE AUDIT

To determine current fleet management procedures in other states, we conducted internet

research and interviewed DOT fleet managers in Virginia, Missouri and Texas.

To determine potentially underused or idle equipment, we analyzed DOT equipment

utilization reports for six classes of DOT- owned heavy equipment for the three years ending

September 30, 2009. These six classes ( excavators, crawler tractors, backhoes, motor graders,

loaders and dump trucks) were chosen after consulting with DOT equipment managers

because those classes were the most commonly used high- dollar- value classes of heavy

equipment.

The equipment utilization data we analyzed was available to Department management and

equipment managers during the audited period. We did not verify or validate this data.

Therefore, we do not conclude as to the exact amount of idle and underused equipment.

However, we conclude that the Department had information available to it that indicated that

some equipment was idle or used less than 15% of the time, and the Department did not take

corrective action.

To determine the cost of the heavy equipment, we relied on cost information in DOT’s fleet

management records after reconciling the total to the Department’s accounting and financial

reporting system. To estimate the current value of the heavy equipment, we used DOT’s

average sale proceeds for excavators, tractors, backhoes, motor graders, loaders and dump

trucks over the last seven years.

Because the sample of items analyzed is not intended to be statistically representative4, the

results of our analysis cannot be projected to the entire ( approximately 25,000 piece) heavy

equipment fleet. The results of any analysis performed under this audit are restricted to the

specific pieces of equipment selected for testing.

This report contains the results of the audit including findings and recommendations.

Because of the test nature and other inherent limitations of an audit, together with limitations

of any system of internal and management controls, this audit would not necessarily disclose

all performance weaknesses or lack of compliance.

We conducted this performance audit in accordance with generally accepted government

auditing standards. Those standards require that we plan and perform the audit to obtain

sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions

based on our audit objectives. We believe that the evidence obtained provides a reasonable

basis for our findings and conclusions based on our audit objectives.

We conducted this audit under the authority vested in the State Auditor of North Carolina by

North Carolina General Statute 147.64.

4 We judgmentally selected the six classes of heavy equipment after consulting with DOT equipment managers

because those classes were the most commonly used high- dollar- value classes of heavy equipment.

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FINDINGS AND RECOMMENDATIONS

DOT PROCEDURES DO NOT DETECT UNDERUSED AND IDLE HEAVY EQUIPMENT

Department of Transportation’s ( DOT or Department) policies and procedures do not

provide reasonable assurance that underutilized or idle heavy equipment will be detected

and corrective action taken. An analysis of three years of DOT reports shows that more

than half of items analyzed were used less than 30% of the available time5 and some

equipment was not used at all. The Department did not identify underused and idle

equipment because DOT has not established a goal or expectation for heavy equipment

usage rates that would justify the cost associated with continued ownership.

Furthermore, DOT does not have specific written policies and procedures that direct

managers to identify and report underutilized equipment or instruct managers on what

corrective action to take.

DOT Reports Indicate Underused and Idle Equipment

DOT has approximately 25,000 pieces of heavy equipment costing approximately $ 633

million. Though DOT has not set minimal use rates or expectations, central equipment

managers agreed during the audit that it would be reasonable to further investigate

maintenance equipment utilization rates of less than 30%.

An analysis of DOT reports for approximately 2300 pieces of heavy equipment, 6 costing

around $ 153 million, shows that more than half of those items were used less than 30%

of the available time between October 1, 2006, and September 30, 2009. Approximately

one third of these pieces, costing $ 56 million, were used less than 15% of the time during

each year of the three- year period.

DOT reports indicate that some pieces of heavy equipment were not used at all. During

the 12 months ending September 30, 2007, there were 274 pieces of heavy equipment

( 12% of items analyzed), with a cost of $ 20.7 million, which were never used. There

were 15 pieces of equipment, costing $ 1.1 million, which sat idle during the entire three

year period from October 1, 2006 to September 30, 2009.

Examining individual classes of equipment provides more insight into apparent

underused and idle equipment. For example, of the 330 loaders analyzed, over 235

( 71%) sat idle more than 70% of the time for the entire three- year period. During the

year ending September 30, 2009, there were 270 loaders that sat idle 82% of the time.

During the two years ending September 30, 2008, there were 54 loaders on DOT

equipment yards that were never used.

5 Available time is considered to be 40 hour a week or 2,080 hours a year. Utilization rates were calculated by

dividing the annual hours of actual use by available time ( 2,080 hours a year). Equipment use during emergency

conditions ( nights and weekends) is included in the actual use but does not increase the total available time.

6 The audit focused on six classes of heavy equipment used for road maintenance: excavators, tractors, backhoes,

motor graders, loaders and dump trucks. These classes were chosen after consulting with DOT equipment

managers because those classes were the most commonly used high- dollar- value classes of heavy equipment.

5

FINDINGS AND RECOMMENDATIONS

In addition to the initial purchase price and ongoing depreciation expense, there are other

costs to owning any piece of heavy equipment. DOT must pay for regular maintenance

and other overhead costs in order to own any piece of machinery. Incurring these costs

for seldom or never used items is not cost effective.

It would be impractical for DOT to dispose of all pieces of the equipment that have low

utilization rates. In addition to scheduled maintenance projects, the Department stages

back- up equipment throughout the state for emergency situations such as debris and snow

removal after significant storms and to respond to unexpected road failures due to

accidents or natural disasters.

Nevertheless, DOT could generate significant cash and reduce the amount of direct and

overhead costs if it were to identify and sell underused equipment. Based on the average

selling price of equipment within the six classes over the past seven years, DOT could

realize around $ 3.5 million in cash by selling just half of the equipment ( about 390

pieces) identified as being used less than 15% of the time during the year ending

September 30, 2009.

No Usage Goals or Expectations

Idle and seldom used equipment exist because DOT has not established performance

measures that define an efficient and productive level of equipment use. Though the data

is available, no analysis has been conducted that looks at historical average use rates for

classes of DOT owned maintenance equipment. Conducting such a trend analysis and

comparing the results to average equipment use rates from DOT agencies in other states

would provide management a baseline for establishing minimum use rates.

Managers are supposed to set performance goals and expectations and communicate the

measures to the agency, activity, and individual level. The U. S. Government

Accountability Office recommends the setting of performance measures and indicators so

that management can compare actual performance to expected or planned goals, identify

and investigate unexpected results, and take corrective action.

The Association of Equipment Management Professionals teaches Certified Fleet

Managers that setting and comparing actual results to performance measures is an

effective way to achieve greater efficiency7. Several other state DOT agencies adopted

this valuable management control and have established or redefined equipment use goals

and expectations. Within the past five years DOT agencies in Virginia, Missouri and

Texas established minimum performance measures for heavy equipment use.

According to DOT management, the Department identified equipment utilization as an

area in need of improvement in 2006, and began formulating a plan to increase

7 From The Career Equipment Fleet Manager manual published by the Association of Equipment Manager

Professionals. The Certified Fleet Manager is a designation that DOT seeks for its managers of heavy

equipment.

6

FINDINGS AND RECOMMENDATIONS

equipment utilization awareness and efficiency. In July 2009, DOT contracted with East

Carolina University to analyze heavy equipment use and determine the point at which

items in an asset class begin to cost more to retain than their projected market value. The

Department states that one of the outcomes of the study will be a recommendation for

minimum use standards for each equipment class. DOT managers also stated that this

analysis was not conducted previously due to the lack of reliable historical equipment use

data within its computerized fleet management system.

No Written Policies and Procedures

Another reason idle and seldom used equipment exists is because the Department does

not have written policies and procedures that direct managers to identify and report

underutilized equipment or instruct managers on what corrective action to take if they

suspect or detect underutilized equipment.

Central equipment managers stated that responsibility for monitoring and acting on low

use rates lies at the division level. However, the responsibility for monitoring and acting

on low use rates is not documented in written policy. Furthermore, DOT has not

provided written guidance to assist division managers in defining inefficient use levels or

specific steps to take if underused equipment is identified.

Government agencies should clearly assign authority and delegate responsibility to the

proper personnel to manage organizational goals, objectives, and ensure general

government accountability. The U. S. Government Accountability Office states that

responsibility for decision- making should be clearly linked to the assignment of authority

and that individuals should be held accountable.

Without clearly defined authority and responsibility to identify, report, and act upon

underused or idle equipment, the Department likely retains underused or unneeded

equipment in its heavy equipment fleet. Keeping underused and idle equipment in the

fleet is inefficient, causing unnecessary expenses associated with storing and maintaining

that equipment and preventing the Department from converting the asset to cash and

using it for other priorities.

Recommendation:

DOT management should establish performance measures or expectations for heavy

equipment usage rates that would justify the cost associated with continued ownership.

The Department should periodically review and adjust performance measures to increase

efficiency and achieve departmental goals.

DOT management should develop written policies and procedures that clearly assign

responsibility for identifying and reporting underused equipment. The Department

should also develop written procedures to instruct managers on what corrective action to

take when underused equipment is detected.

7

FINDINGS AND RECOMMENDATIONS

The Department should identify and dispose of underused equipment. Classes of

equipment that are used less than defined minimum use standards should be analyzed, by

location, to identify the number of pieces that should be sold or transferred to other

locations that need that type of equipment. Similarly, individual pieces of equipment that

are routinely identified as idle or underutilized should be sold or transferred. Reasons for

keeping underused equipment should be documented and approved by central managers.

The Department should provide training to all equipment managers in order to expand

their knowledge in efficient fleet management practices. The Department should continue

its efforts to obtain the Association of Equipment Manager Professionals fleet manager

certification for all equipment superintendents.

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APPENDIX

Auditor’s Response

It is the intent of the Office of the State Auditor that the Governor, the General Assembly, and

the citizens of North Carolina receive only complete and accurate information from the

reports issued by this office. Therefore, we are required to provide additional explanation

when an agency’s response could potentially cloud an issue, mislead the reader, or

inappropriately minimize the importance of our findings.

Additionally, Generally Accepted Government Auditing Standards state,

When the audited entity’s comments are inconsistent or in conflict with the

findings, conclusions, or recommendations in the draft report, or when planned

corrective actions do not adequately address the auditor’s recommendations, the

auditors should evaluate the validity of the audited entity’s comments. If the

auditors disagree with the comments, they should explain in the report their

reasons for disagreement.

To ensure the availability of complete and accurate information and in accordance with

Generally Accepted Government Auditing Standards, we offer the following clarification.

In response to audit recommendation # 3, Department of Transportation ( Department)

management notes, “ The department disposed of approximately 3,900 pieces of equipment

which sold for approximately $ 15.5 million during the years represented by the audit.”

It is important for readers of this report to understand that the 3,900 pieces of equipment the

Department reports as sold were from the total heavy equipment fleet of almost 300

categories, not just the six categories ( 2,300 pieces) analyzed in this report. The Department’s

response to our recommendation does not make this distinction. Readers of this report should

not assume that the disposal of 3,900 pieces of equipment was solely from the six classes of

equipment referenced in the audit report.

The Governor, Legislators, and the citizens of North Carolina should consider the clarification

provided above when using this report to evaluate the Department of Transportation’s heavy

equipment fleet management and holding government managers accountable for their

programs.

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ORDERING INFORMATION

Audit reports issued by the Office of the State Auditor can be obtained from the web site at

www. ncauditor. net. Also, parties may register on the web site to receive automatic email

notification whenever reports of interest are issued. Otherwise, copies of audit reports may be

obtained by contacting the:

Office of the State Auditor

State of North Carolina

2 South Salisbury Street

20601 Mail Service Center

Raleigh, North Carolina 27699- 0601

Telephone: 919/ 807- 7500

Facsimile: 919/ 807- 7647

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