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Utility Relocation and Accommodation on Federal-Aid Highway Projects
Chapter 1 (cont'd): Utility Relocations, Adjustments, and Reimbursement

Construction (23 CFR 645.115)

Cost Effectiveness Finding

Prior to 1983, under the provisions of 23 U.S.C. 112, FHWA had determined it was in the public interest for utility relocation work to be performed by a utility with its own forces and equipment, provided the cost of such force account work was reasonable and the utility was qualified to perform the work in a satisfactory manner.

The Surface Transportation Assistance Act (STAA) of 1982 amended the provisions of 23 U.S.C. 112 to require construction of each project to be by contract awarded by competitive bidding unless some other method was shown to be more cost effective. Basically, wording concerning a public interest finding was eliminated and replaced with wording requiring a cost effectiveness finding.

On May 23, 1983, the FHWA issued a revision to 23 CFR 635 (Force Account Construction), implementing the new provisions in 23 U.S.C. 112. This included a finding of cost effectiveness covering certain utility work. Under this finding, a utility that is adequately staffed can use its own forces to adjust its own facilities provided the work is minor, is on the utility's existing facilities, and is routinely performed by the utility's own forces. Furthermore, the utility's own forces can also perform work that involves minor installations of new facilities, such as services for a safety rest area.

A cost effectiveness finding for minor utility work covers much of the utility work routinely done on Federal-aid highway projects. However, major (non-minor) utility work is not covered by this cost effectiveness finding. This does not necessarily mean that major utility work has to be accomplished by competitively bid contracts. It can still be accomplished by the utility, provided an individual cost effectiveness finding has been made by the Division Administrator under the provisions of 23 CFR 635.205.

No specific thresholds or criteria have been established by the FHWA for determining what is minor versus what is major utility work because the circumstances may vary depending upon the size of the utility company and the work involved. The Division Offices, working with the individual States, have been given the flexibility to make this decision.

As a general approach, if the utility can demonstrate that it has the ability to accomplish the necessary work with its own forces in a timely fashion and the costs appear reasonable, this will usually serve as prima-facie evidence that it is cost effective for the utility to do the work.

Wage Rate And EEO Requirements

Davis-Bacon wage rate and EEO (Equal Employment Opportunity) requirements apply to State-let contracts, but do not apply to utility-let contracts.

This was not always the case. On January 21, 1983, Chief Counsel issued a decision that wage rate and EEO requirements were applicable when Federal-aid funds participated in utility work and the work was accomplished by State-let contracts; when the utility let the contracts; or when continuing contracts which a utility already had in force were being used. There was one exception -- wage rate and EEO requirements were not applicable when a utility accomplished the work with its own forces.

Counsel's decision reinforced a position taken on wage rates in the 1979 edition of the Labor Compliance Manual. It also raised numerous complaints because several editions of the Labor Compliance Manual prior to 1979 held in abeyance the application of wage rates to utility-let contracts and continuing utility contracts.

Subsequently, Chief Counsel reconsidered its position and issued a decision on May 15, 1985, which reversed parts of its 1983 position. Under the 1985 decision, wage rate and EEO requirements are not applicable to utility-let contracts, including continuing contracts. Hence, wage rate and EEO requirements are only applicable to utility work when this work is included as part of a State-let contract.

MBE, Clean Air, And Other Contract Requirements

In light of Chief Counsel's decision on the non-applicability of wage rate and EEO requirements to utility let contracts, as previously discussed, other areas were examined. It has been determined that the MBE provisions of 49 CFR 23 and the required contract provisions of 23 CFR 633 do not apply to reimbursable utility work on Federal-aid projects if the work is to be accomplished by a contract let by a utility, including a continuing contract.

Additionally, requirements of other Federal laws, such as the Clean Air Act, which cover recipients of Federal financial assistance, do not have to be applied to utility let contracts. However, this should not be construed to relieve a utility or its contractor from complying with any aspects of these other Federal laws that would apply regardless of whether or not Federal assistance is involved.

Utility Let Contracts (Concurrence In Award)

When utility relocation work is to be accomplished by a contract secured under a fully competitive bidding process controlled by a utility, the State should undertake all actions needed to verify that the utility awards the contract to the lowest qualified responsible bidder based on appropriate solicitation.

The FHWA does not need to concur in the award of such a contract, but the State should agree to the utility's bid solicitation process and should concur in the award of the contract.

If utility relocation work is to be accomplished under a utility's continuing contract, it normally would not be necessary for the State to verify the bidding process used by the utility to secure the continuing contract. However, the State is expected to review costs that would result under the continuing contract. This type of arrangement should only be accepted if the State and FHWA feel the costs are reasonable.


It is essential that State inspectors verify all reimbursable utility work that has been accomplished.

When the utility is to be reimbursed based upon the actual cost incurred under the force account payment method, the State, in particular, needs to have a daily inspection record that can be used to verify billings for labor, materials, and major items of equipment used by the utility to complete the work.

Construction Engineering Costs

Construction engineering (CE) costs may be incurred on utility relocation work by both the utility and the State.

Reimbursement for CE costs is governed by the same limitations that apply to other Federal-aid highway projects as discussed in 23 CFR 140B (Construction Engineering Costs).

Cost Development and Reimbursement (23 CFR 645.117)

Acceptable methods for developing relocation costs include -

  • actual direct and related indirect costs accumulated in accordance with a work order accounting procedure prescribed by the applicable Federal or State regulatory body;
  • actual direct and indirect costs accumulated in accordance with an established procedure developed by the utility and which the utility uses in its regular operations;
  • an agreed fixed amount (lump sum) payment; and
  • other acceptable costing methods, such as unit costs (see the discussion of "Unit Costs").

Guidance on several features involved with cost development follow.

Labor Costs (Engineering Or Inspection)

When not billed at actual, average, or other similar rates, engineering or inspection charges may be reimbursed under the utility's construction overhead account. Costs to the utility of vacation, holiday pay, company sponsored benefits, and similar costs incidental to labor employment are acceptable when supported by adequate records. These may include individuals who are engaged in the direct and immediate supervision of the work at the site of the project and in the actual preparation of the plans and estimate of the relocation/adjustment.

Indirect Or Overhead Costs

Under 23 U.S.C. 123, the term "cost of relocation" is defined as the entire amount paid by a utility that is properly attributable to the relocation.

Federal-aid reimbursement is therefore limited to direct and indirect costs directly related to utility relocation work necessitated by the construction of a Federal-aid highway project. The mere fact that a utility may incur legitimate costs as a function of doing business in general is not sufficient reason to warrant reimbursement unless such costs can be shown to be essential for the performance of the actual and necessary relocation work at hand. For example, advertising may be necessary to promote a utility's product; however, it is not related either directly or indirectly with the physical work of relocating the utility's facilities. Another example could be a diversified utility with several interests or areas of economic activity.

Each interest or area may be separate and distinct and each may have direct and indirect costs identifiable to each function. Should such a utility be involved in a Federal-aid highway relocation, only those costs related to and properly attributable to the work itself would be eligible. The fact the company incurs indirect costs in other non-related areas of interest has little or no bearing or effect on the actual or real costs of performing the relocation work in question.

There are many possible combinations of indirect costs that may be charged to a project. At times it may be difficult to ascertain the legitimacy of a specific cost. However, in light of the above discussion, each proposed cost should be reviewed to determine if it is reasonable, related to the work at hand, necessitated by the highway construction, and properly attributable to the actual work undertaken. If the proposed cost meets all of these tests, then reimbursement is acceptable.

Except for costs specifically allowed or disallowed by FHWA regulations, the cost principles found in the Federal Acquisition Regulations (FAR) are the primary criteria for determining the eligibility of overhead costs claimed by a utility company.

Based upon FHWA regulations in 23 CFR 645 and the FAR cost principles, the following expense items are as indicated:

Corporate Operations Expenses
  • Planning: Economic planning costs are allowed, including costs of generalized long-range management planning for future overall development of the contractor's business. [FAR 31.205-12]
  • External Relations: Advertising costs and costs associated with lobbying activities are generally not allowed. [23 CFR 645.117(d)(2) and FAR 31.205-1 and .205-22]
  • Legal: Costs of personal services rendered by employees of the contractor, and costs of professional and consultant services rendered by persons who are not officers or employees of the contractor are generally allowed. [FAR 31.205-6 and 205-33]
  • Other General and Administrative: Costs are allowed that are necessary to the overall operation of the business, even if a direct relationship to any particular cost objectives cannot be shown. [FAR 31.201-4]
  • Research and Development: Costs of research programs are not allowed for Federal reimbursement. [23 CFR 645.117(d)(2)]
Investment Related Costs
  • Return on Investment: Interest and other financial costs that include the costs of financing capital are generally not allowed. Hence, "Return on Net Investment" may not be allowed unless the tests for facilities capital cost of money are met under FAR 31.205-10. [FAR 31.205-20]
  • Float is considered to be an interest cost and is generally not allowed. [FAR 31.205-20]
  • Income Tax: State and local taxes are generally allowed, but Federal income taxes are not allowed. [FAR 31.205-41]
  • Property Tax: Property taxes are generally allowed. [FAR 31.205-41]
  • Depreciation: Depreciation expenses are generally allowed. [FAR 31.205-11]
  • Capital Stock Tax: Taxes in connection with financing operations are not allowed. [FAR 31.205-41]
  • Plant Specific Operations Expenses: General support asset accounts of a specific plant, including expenses related to vehicles, equipment, etc., are generally allowed.

Materials (Recovered From Permanent Facility)

Materials recovered from a utility's permanent facility that are accepted for return to the utility's stock are to be credited to the project at the current stock prices for such used materials.

If a utility charges recovered materials to the material and supply account at the original cost, or at a percent of the current new price, and if the utility follows a consistent practice in this regard, the work order may be credited accordingly. This would not preclude any additional credits when State laws or regulations require such credits.

Where materials of a type different than the materials being replaced are used in the replacement facility (e.g., aluminum for copper), the credit for the materials recovered from the existing facility should not exceed the original cost of the existing material, or the current cost of the replacement materials, whichever is the greater.

However, if the State follows a more stringent standard -- for example, if it insists on a credit equal to the current value of the materials being replaced -- then this standard becomes the one to be followed on Federal-aid projects.

Materials (Recovered From Temporary Use)

The proceeds of the sale of any materials recovered from temporary use are to be credited to the cost of the project. The sale may be conducted by the utility or, at its request, by the State. In no event would the State or the utility be considered an acceptable bidder for such materials.

Materials (Cost Of Removal)

Costs for the removal of existing utility facilities are eligible for Federal-aid participation provided the removal is necessitated by the highway project or required for aesthetic or safety reasons.

In some cases it may be feasible to abandon existing utility facilities in place, particularly in urban areas when all the customers along a utility's line are to be removed as the result of a highway construction project, and also in areas where the existing utility facilities will not conflict with the proposed highway project.

In cases where there is no need to remove the existing utility facilities, but where the utility or highway contractor still elect to proceed with the removal, any removal costs above the salvage value of recovered materials credited to the project are not eligible for Federal-aid participation.

Equipment And Transportation Costs

Accounts for transportation and heavy equipment are used for the purpose of accumulating expenses and distributing them to accounts properly chargeable with the services. Among the items of expense clearing through these accounts are --

  • depreciation;
  • fuel and lubricants for vehicles (including sales and excise taxes);
  • freight and express on fuel and repair parts;
  • heat, light, and power for garages and garage offices;
  • insurance (including public liability and property damage insurance) on garages, transportation, and heavy work equipment;
  • license fees for vehicles and drivers;
  • maintenance of transportation and garage equipment;
  • operation of garages; and
  • rent of garage buildings and grounds.

Equipment expenses may include the cost of supervision, labor, and expenses incurred in the operation and maintenance of the transportation equipment and heavy equipment of the utility, including direct taxes and depreciation.

Reimbursement for the use of small tools on a project may be made on the basis of tool expenses accumulated in and distributed through the utility's clearing accounts, or on the basis of some other equitable and supportable allocation basis. Otherwise, reimbursement should be limited to actual loss or damage during the period of use. In the latter case, the loss or damage should be billed in detail and supported to the satisfaction of the State and the FHWA.

Where the utility does not have equipment available of the kind or type required, the amount of rental paid to the lowest qualified bidder following an appropriate solicitation for quotations from owners of the required kind or type of equipment is eligible for Federal participation.

Existing continuing contracts for rental of transportation and heavy equipment, which the utility determines to be of the most advantage to its operations, may also be used.

In the event of an emergency, such as breakdown of the utility equipment, or where additional equipment not originally contemplated is needed, and/or where compliance with the solicitation/bidding method would seriously impair the progress of the utility work or highway construction, Federal funds may participate in the cost of equipment rental provided the emergency circumstances are clearly demonstrated and the rental charges are reasonable.

Credits (Accrued Depreciation)

Accrued depreciation credit (referred to in the past as expired service life credit) is only required for major operational utility facilities (such as plants, stations, or buildings) which are being replaced.

Credit for accrued depreciation is not required for any segment of a utility's service, distribution, or transmission lines, regardless of the length of line involved.

This credit is figured as follows:

  • The original cost of a pumping substation in 1973 was $80,000, and the original facility was expected to have a service life of 40 years. The facility is replaced in 2003 as part of a utility relocation on a Federal-aid project. The original facility has served 30 of the expected 40 years. The accrued depreciation credit amounts to 30/40 x $80,000 = $60,000.

Sometimes the credit for accrued depreciation may be so small that the cost of researching the installation date and original cost, negotiating with the utility, processing the paperwork, and doing whatever else may be necessary, and the time to do these things, is just not worth the effort. In such cases the State should apply its engineering judgment to the situation and document its reasons for not pursuing the credit.

Even though the FHWA's posture on accrued depreciation credits has been relaxed, some States may choose to continue to follow a more stringent policy. Where this occurs and a State continues to receive credits for accrued depreciation, these credits must be properly reflected in determining costs eligible for Federal-aid participation. Under the provisions of § 645.103(d), if a State has established a payment standard more restrictive than the Federal standard, the FHWA's reimbursement will be based on the State payment standard.

It has been suggested that it may be more appropriate to calculate the accrued depreciation using the "replacement cost" rather than the "original cost." The rationale behind this suggestion is that credit to the project is often so minuscule using the original cost, as compared to the total cost of replacing a large facility, that it is often hardly worth the trouble to calculate it and apply it to the project.

Even so, it was the intent of the Federal regulation pertaining to accrued depreciation, 23 CFR 645.117(h)(2), for the Federal-aid project to receive a credit based on the value the utility has derived from an asset at the time it is replaced by the Federal-aid project. If the asset is brand new at the time of replacement, the company has received no value yet from its investment and the credit is near zero. If the asset is old (has served its life) when replaced by the Federal-aid project, then the utility has likely received the full value of its investment in the asset and the credit reflects its investment in the asset. In determining what service life to apply to an asset, one means would be to look at the utility's financial records to see what time period it is using to depreciate the asset on its books.

Normally, the most minuscule credits occur when a nearly new asset is being replaced as very little accumulated depreciation has occurred. For example, if the asset has a 50-year service life and only one year has passed since it was built, based on straight-line depreciation, the credit is only 2% of the original cost. Again, this reflects the fact the company has received little value to date from the investment. On the other hand, for an older asset that has served its life and has been fully depreciated on the utility's books, the credit is the original cost of the asset. Granted, based on inflation, this could also be a relatively small amount, but if the State chooses to receive the credit, it should be based upon a determination of the original cost of the asset.

Taking this a little further, suppose a utility built a pumping station in 1963 that cost $100,000 and had a 40-year service life. In 2003 the State comes along building a highway and the pumping station must be relocated. At today's prices it may cost $1,000,000 to do so. The State will recoup the original $100,000, but even so it will cost them $900,000 to build the utility a new pumping station. How can this be justified?

Consider what the utility is faced with in this situation. Granted, the plant might be old, but it is most likely still a functioning facility. As such, the utility probably doesn't have immediate plans to invest in a new plant at this time. Along comes a highway project and the plant has to be moved, now. This isn't a utility decision and funds have not been budgeted for this purpose. Why should the utility now have to find funds to absorb most of the cost to replace what they viewed as an operating portion of their facility? The utility may benefit from this position in that they receive a newer facility that may be more efficient in operation. However, it is a State action that forces the need for the new plant, and, historically, it has been Federal policy to "make the utility whole again," and to limit utility participation only to the value derived from their prior investment.

Credits (Betterments)

When reviewing a situation where a utility proposes to install different devices or materials than are currently in place, the following guidance can be used in determining whether a betterment credit is appropriate.

No betterment credit is required for the replacement of utility devices or materials that are --

  • required by the highway project,
  • of equivalent standards although not identical,
  • of the next highest grade or size when the existing devices or materials are no longer regularly manufactured,
  • required by law under governmental and appropriate regulatory commission code, or
  • required by current design practices regularly followed by the utility in its own work, and there is a direct benefit to the highway project.

Examples of devices or materials of a type different than those being replaced might involve the substitution of aluminum clad steel reinforced conductors for copper conductors, underground cables for aerial lines, or fiber optics cable for conventional cable.

Evidence of a direct benefit to the highway project may include, but is not limited to, economy, timesavings, aesthetics, safety, environmental, and future use considerations

The most basic Federal premise regarding utility relocation is that a utility's service should be restored so that it may continue to provide its product to its users in a fashion similar to that which existed prior to its relocation as a result of the highway project. The idea of making the utility "whole" in many cases means that various facilities will have to be functionally restored. A few examples of this concept are as follows:

  • Replacement facilities that maintain the overall functional capacity, even including those that may rearrange this capacity to a more efficient operation as a result of present day design or operation needs, are eligible for Federal participation.
  • Features required to meet present standards, or required by current design practices regularly followed by utilities in their own work, are considered to be an essential part of the functional replacement and are eligible for Federal participation.
  • If a utility elects to install, or if it is a utility's current practice in its own operations to install facilities of a type different that the facilities being replaced, the cost of providing the most economical such replacement facility or restoration of service is eligible for Federal participation.

It is considered to be in the best interest of the highway project and a direct benefit to the highway project when any of the above criteria are applied.


Periodic progress billings of incurred costs may be made by a utility, if acceptable to the State, and Federal-aid reimbursement may be approved for claims of this type received from the State.

The utility's final billing statement should follow as closely as possible the order of the items in the estimate portion of the State-utility agreement.

When the estimate and final billing are made on the basis of actual costs, the statement should be itemized to show the totals for labor, overhead construction costs, travel expenses, transportation, equipment, materials and supplies, handling costs, and other services.

In all cases, the final billing statement should be provided in a format that allows comparisons to be made with the approved plans and estimates.

Materials are generally itemized in the final billing statement when they represent major components or costs in the relocation, following the pattern set out in the approved estimate as closely as possible. It is desirable that salvage credits from recovered and replaced permanent materials and recovered temporary materials be reported in the final billing statement in relative position with the charge for the replacement or the original charge for temporary use.

The final billing statement should also include the -

  • description and site of the project;
  • Federal-aid project number;
  • dates on which the State-utility agreement was executed and the first work was performed or, if preliminary engineering or right-of-way items were involved, the date on which the earliest item of billed expense was incurred;
  • date on which the last work was performed or the last item of billed expense was incurred; and
  • location where the records and accounts billed could be audited.

In order to expedite the closing of projects, new guidance was provided in the 1995 regulatory amendments. The utilities should now submit final billings within one year following completion of the utility relocation work.

If final billings are not received within this one-year period, the State may --

  • consider previous payments made to the utility to be final, or
  • make a final payment when the final bill is received if the State and utility have agreed in advance that a longer time period is needed to alleviate undue hardships.

Federal funds may participate in payments made by the State for final billings received more than one year after completion of the utility work if deemed appropriate to do so.

Average Rates

Regulations 23 CFR 645.117(c)(1) and 117(e)(4) concerning labor surcharges and materials/supplies, respectively, allow average rates that are representative of actual costs to be used in lieu of actual costs if approved by the State and the FHWA.

In some States average rates are developed by the utilities based on previous years costs and are adjusted at least once annually in accordance with the FHWA regulations.

Problems with average rates sometimes arise when State auditors expect State transportation departments to review and approve average rates each and every time they are adjusted, or else absorb all associated costs if they fail to comply. Most States don't have the time or manpower to review and approve these rates even annually for all the utilities involved, let alone every time an adjustment is made.

The original intent of the FHWA regulations was that any average rates used should be --

  • based on historical cost data,
  • representative of actual costs incurred,
  • adjusted at least annually, taking into consideration known anticipated changes and correcting for any over or under applied costs for the preceding period, and
  • approved by the State and FHWA.

It was not intended that these regulations create unreasonable burdens on the State or the FHWA. Hence, as with other things in the Federal-aid program, prior approval of the methodology to be used by the utilities in developing average rates and periodic State reviews of the rates may provide all the oversight that is necessary. Such an option satisfies the intent of the FHWA regulations.

Unit Costs

The 2000 amendments added 23 CFR 645.117(a)(3) to the utility regulations in order to allow States, in cooperation with utilities, to develop unit costs to estimate utility relocation costs and reimburse expenditures.

Documenting actual costs is often very time consuming and expensive for both States and utilities. Often, there are disputes over the type of documentation or support needed to obtain full reimbursement. For these and other reasons, the Montana Department of Transportation (MDT) developed, and the FHWA Division Office approved, a unit cost method of reimbursement to utilities for costs incurred relocating their facilities in public and private rights-of-way.

The MDT worked closely with telephone, electric, and gas utilities in developing standard construction units and associated cost components, such as direct labor, labor overheads, indirect labor, vehicle/equipment rates, material costs, material overhead costs, and retirement. The State amended its legislation dealing with reimbursement to utilities to include a unit cost method of reimbursement in State law.

The benefits of a unit cost method of reimbursement are numerous. Some are listed below:

  • Audits of each project's actual costs are not required. Periodic reviews of the accuracy of the individual utility unit costs will suffice.
  • Cost accounting, with extensive documentation for time and materials used on a project, is not required.
  • Detailed cost estimate preparation and subsequent State review is significantly simplified.
  • Utility company contractors and consultant engineers do not need to be reviewed or pre-approved by the State.
  • State participation in utility cost overruns is eliminated, except for overruns caused by increased numbers of units.
  • Prompt billing is facilitated and projects are closed in a timely manner.

Unit costs should be developed periodically and supported annually by a maintained database of relocation expenses.

FHWA Division Office concurrence is required for unit costs, and for any costing method used other than actual cost.

Alternate Procedures (23 CFR 645.119)

About a dozen States at one time or another have handled their reimbursable utility relocations under the alternate procedures provisions. These procedures were a forerunner of the certification acceptance process, and in many aspects were similar to the certification acceptance provisions.

As States adopted the certification acceptance process, some, which previously handled utilities by the alternate procedures method, dropped that approach and handled their utility relocations under certification acceptance.

With passage of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), the States were given the option of exempting FHWA from oversight on many Federal-aid projects under the provisions of 23 U.S.C. 106(b). As a result, there has been limited interest in using the alternate procedures for utility relocations.

One matter to keep in mind, though, is that the alternate procedures process can include Interstate projects; whereas, even the new oversight exemption process under 23 U.S.C. 106(b) can only cover certain projects on the Interstate.

Should a State decide to use the alternate procedures process, Division Administrators have the authority to approve their requests.

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Updated: 09/22/2014

United States Department of Transportation - Federal Highway Administration