Highway Financing: How Funding Affects Construction

Financing a highway requires diverse sources of funding used for the construction, upkeep, and enhancement of public roads — typically from federal grant programs, state taxes or tolls. A thorough grasp of highway financing is important for contractors working on highway projects to help with adequate reporting, maintaining compliance and timely project completion.

This article will explore the different financing methods for highway projects — and look into the financial and logistical challenges they can present for contractors.

Understanding Highway Financing in Construction

Highway financing in construction involves securing funding from various sources to cover the costs associated with constructing, maintaining and improving public roads.

Funding for highway projects typically comes from federal, state, and sometimes local or private sources. Highway financing can involve multiple levels of government and several separate jurisdictions, creating challenges in getting projects off the ground. Despite the challenges highway projects present, roads themselves are critical infrastructure that allows for residents and economies to thrive across the country.

Federal Funding

In the United States, most of the time, the funds for highway construction are set aside by the federal government and allocated to the states as grants. Federal projects often receive funding through federal grants and programs. These funds are earmarked and assigned to the states, which then decide how to distribute them to various highway and bridge projects that need attention.

State and County Funding

In addition to federally funded highway projects, state and county governments also contribute funding for highway projects, sourced from state and county taxes. State policies can significantly impact the availability and management of these funds. For example, a decision to stop charging businesses taxes could lead to a shortage of funds, which would then impact the state's ability to start new highway projects.

Private Funding

In some cases, highways are funded through private means, such as tolls. Toll highways are financed by the users who pay to use the road, and the funds collected go into a trust managed by a turnpike authority. For instance, there is a toll highway where the people using it are the ones paying for it. Those funds go into a trust, and the turnpike authority manages that trust and pays for repairs.

What Public Funding Means for Contractors

Publicly funded highway projects offer contractors both advantages and challenges, such as reduced financial risks, structured work processes, and limits on subcontractor selection. 

Less Financial Risk

Although states must make a case for their projects, once the project is approved, there’s minimal risk for contractors when it comes to payment. For example, if a contractor bids on a project and loses, they risk their pre-qualification for all Department of Transportation (DOT) work. Additionally, government projects have a significant advantage in the work approval process — they often have an inspector onsite to approve completed work as it happens, offering increased payment security for the work completed any given day.

Because of the Federal Prompt Payment Act — enacted to avoid slow payment problems on government construction contracts — once a federal contract has been awarded and the work is in place, there is little risk surrounding payment as a general contractor. 

Sharing Government Work

It could happen that two contractors are allowed to bid a single job together, especially if the work represents a really large project that would be more than one contractor could handle.

Materials Purchase and Storage

Government entities funding highway projects are not likely to pay for storing materials before they’re installed. In some cases the tendency to delay payment until installation can lead to project delays and cash flow crunches, as materials suppliers also wait to be paid before having specialty pieces fabricated.

For instance, the large square culverts that go under highways sometimes have to be ordered in advance. The materials supplier, unwilling to float the cost of such a supply, waits until the contractor pays for the culverts before beginning the fabrication process. The contractor then has to wait until the culvert is delivered to the site and installed before being reimbursed for the materials cost.

Once the culvert is ready, the contractor seeks to have it brought directly to the installation site rather than moving it more than once. The contractor needs to have obtained permission from adjacent landowners to store those types of materials until they’re installed, and will want to time delivery as close to the installation date as possible. Securing nearby storage space becomes a big part of the prospecting process.

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Limits on Subcontractor Selection

Contractors get to choose specialty trade partners on highway projects, but their selection process is narrowed by some requirements that come with the public funding model.

First, the qualified contractor who can come up with the lowest bid is most likely to win public projects, so the contractor will have to choose subcontractors who fit into the bid numbers.

Second, contractors have to meet minimum participation requirements for disadvantaged business entities — if only one specialty trade contracting business fits into that category, the contractor may be forced to work with it.

Reporting Requirements

Contractors should be sure they fully understand the reporting requirements of any highway project they work on. There's often a big difference in reporting requirements on projects funded by federal, state and county governments.

Contractors on publicly-owned projects may be asked to fill out specific forms to report project expenses, to share their payroll records, and possibly all the way down to how many minority employees or women-owned businesses have worked on the project.

Government Leadership & Upcoming Projects

Government contracts that have been awarded and signed are not generally impacted by changes in government leadership. If the project is awarded, those funds are typically earmarked and that's not something that will be pulled.

However, projects that are being negotiated but haven’t had a contract signed could be in jeopardy if government mandates change.

Financial Impacts of Highway Financing

The financial backing on a project may change more than the invoice recipient. Contractors need to know which body is paying the bills, and how that changes project requirements.

Highways in Other Jurisdictions

Highways are sometimes owned by entities other than the local, state or federal governments. Understanding the way those highways are financed can help contractors navigate nuances in reporting and regulations.

Although tribal reservations follow similar protocols to states when accessing funding for highway projects, once those jurisdictions are allotted their funding they will go about their own methods of deciding which roads to work on, and their own processes for procurement and payment.

When a state decides to make an existing highway into a toll highway, essentially the people become responsible for funding its maintenance and repairs. When that happens the state creates a turnpike authority. All the funds from users go into a trust, and the turnpike authority manages the money and pays for the repairs to keep the highway moving.

At that point, the risk to the contractor is that the funds in the trust are being poorly managed.

Strategies for Contractors on Highway Projects

Contractors — and their accounting staff — must be aware of the funding sources for their highway projects so that the company can effectively manage the contract requirements to work with public entities.

Be aware of all contract terms.

Contractors may include price indices in contract language to protect themselves from rising project costs, especially on longer projects. A price index can be a key safeguard to the contractor’s margins, but prices have to be adjusted regularly to be effective.

Price margins can allow prices to go up or down — if prices go up and contractors don’t adjust their paperwork accordingly, the owner won’t fully reimburse project costs and the contractor will suffer losses to profit margins. If prices go down and the owner pays out according to actual costs, the contractor may receive a smaller payment than expected.

Follow funding compliance requirements.

Contractors need a full understanding of where the money is coming from for the projects they work on. Particularly on projects funded by the federal government, there are specific rules, regulations, and protocols to follow for smoother operations.

Knowing all the ins and outs of the funding for a highway project can prevent missed deadlines and help make sure all the right data is collected to fill out government reports. Contractors should use that information to create a data management plan and an invoicing protocol at the project’s outset.

Successful Financial Management in Highway Projects

The funding sources that pay for highway projects can offer advantages and disadvantages for contractors. Because highways are often financed through a mix of federal and state funding allocations, contractors must navigate a landscape shaped by government regulations and funding policies so that payments continue and the project can thrive.

However, once funding is allocated it can be one of the most certain and steady sources of cash a contractor can hope for. To thrive on highway projects, contractors should make sure they understand where the financing is coming from on any given contract so that they can ensure compliance and proper processes for smoother partnerships and ongoing payments.

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