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Advance Construction

MnDOT Policy FM008
View/print signed policy (PDF)

Policy statement

Federal advance construction (AC) financing for the federal aid eligible highway program any fiscal year will not exceed an amount of 125 percent of federal obligation authority forecast for that year. At the end of each state fiscal year, the federal AC financing balance will not exceed 100 percent of the federal funds amount specified above. Use of federal obligation authority for AC conversions for all projects must not exceed 50 percent of the official, estimated federal formula funds available for use during a state fiscal year, unless a different amount is approved by the Transportation Program Investment Committee.

Federal earmarked funds for local projects are exempted for purposes of calculating the limits described in the previous paragraph. The use of federal AC financing to finance projects other than those on the trunk highway system must be included when calculating the total for compliance with this policy.

Reason for policy

Use of federal Advance Construction financing allows MnDOT to maximize the use of federal funds. There are two types of Advance Construction:

Planned Advance Construction - One of the ways this occurs is through the use of “planned AC.” This allows more closely matching actual reimbursements from the Federal Highway Administration to when project expenditures occur on multi-year projects. History shows that project expenditures for projects exceeding $1 million are more likely to be paid out over more than one year; typically these payouts will be 30% in the first year, 50% in the second year, and 20% in the third year. Use of federal AC financing allows executing a federal AC agreement for the entire project, but delaying the use of regular federal funding until times that more closely match when actual project expenditures occur by executing federal AC conversions at various times during the project’s timeframe. This frees up, on a one-time basis, federal funds in the first year of multi-year federal projects that otherwise would have been entirely committed to these projects. Planned AC is noted in the STIP (State Transportation Improvement Program) each year and paybacks are also noted in the STIP.

Managed Advance Construction - Another type of use of federal AC financing is “managed AC.” Managed AC involves entering into federal AC agreements in order to respond to unplanned events such as delays in actual receipt of federal funding during a federal fiscal year. The U.S. Congress has not been able to pass full year appropriations legislation prior to the start of a federal fiscal year for a number of years. This results in receipt of only portions of the total amount of funding for a federal fiscal year, rather than the entire amount early in the year. In order to be able to continue with MnDOT projects that will be partially funded with federal funds, federal AC financing is used to bridge the gap in time between when a project needs federal approval and when federal obligation authority (funding) is actually made available. In addition, because the federal fiscal year runs from October to September, while the state fiscal year runs from July to June, there are often instances where federal AC financing is used to cover the period between July through September. Managed AC is typically not included in the STIP and does not have planned AC paybacks.

Who needs to know this policy

The following individuals (and staffs) need to have an understanding of this policy:

  • Commissioner
  • Deputy Commissioner/Chief Engineer
  • Chief Financial Officer
  • Director, Governmental Affairs
  • Director, Capital Programs and Performance Measures (and direct reports)
  • Director, Financial Management (and direct reports)
  • District Engineers
  • Executive Budget Officer, Minnesota Management & Budget
  • Legislative Staff


  • Federal AC financing will be used to finance multi-year projects (planned AC) and for temporary federal fund management (managed AC).
  • Each project for which federal AC financing is used must be authorized in the same way as projects that use regular funding; that is, these projects must be authorized by the Federal Highway Administration prior to advertising for letting or expending any funds on the project.
  • Trunk highway construction projects using federal AC financing must be fully encumbered in the state road construction budget for the amount of both the state funds and the federal advance construction agreement amounts.
  • Prior to using federal AC financing, assurance must be obtained that the cash balances in the trunk highway fund are sufficient to pay project expenditures prior to the time an federal AC financing is converted to regular funding (this normally should not be an issue).
  • Assuming federal funds are available, conversions of federal AC financing to regular federal funding must be initiated when unbilled eligible costs for a project are determined to exceed $500,000. At the end of the state fiscal year, no unbilled amounts are carried into the next fiscal year for state aid projects and unbilled amounts for trunk highway projects are minimized as well. This minimizes the impact on both the general fund and trunk highway fund balances.
  • Overall Federal AC balances should be within the balances prescribed in this policy at the time of the final State Transportation Improvement Program.
  • MnDOT will not utilize additional advance construction that would exceed these federal AC financing limits unless the Transportation Program Investment Committee, in consultation with the Chief Financial Officer, approves in advance.
  • If any forecast projects that these federal AC financing limits will be exceeded, changes must be proposed to the federal AC financing plan to bring it back into compliance by the beginning of the following year’s State Transportation Improvement Program.
  • In addition to management of federal AC financing as it relates to the State Transportation Improvement Program, estimates are also needed for each upcoming biennium, as part of the biennial budget preparation process, because federal AC financing amounts are also recognized as revenue in the formal fund statement for the trunk highway fund that is prepared to support the biennial budget proposals.


Advance Construction

The Federal Highway Administration authorizes eligibility of using future federal appropriations for current year Minnesota trunk highway, local road, or other projects. An Advance Construction obligation is incurred when the financing agreement is completed with FHWA. During the course of a project, advance construction project conversions are executed, which result in cash reimbursement that would have been received earlier if regular federal aid financing were used.

Advance Construction Conversion

Advance Construction conversion is the process of converting advance construction to the obligation of actual federal funds.

Federal Aid Advance Construction Agreements (referred to as federal AC financing in this policy)

Federal aid advance construction agreements are a special type of federal aid agreement. Typically rather than receiving reimbursement on a concurrent basis, reimbursement occurs in future periods of time or future years, with the agreements based on future federal aid amounts expected to be allocated to MnDOT. Actual reimbursement, often referred to as a “conversion,” is typically a lump sum amount, representing reimbursement of costs incurred in the previous periods of time. When this occurs, this reduces the amount of federal funds available for current year project agreements.

Federal Aid Agreements

Federal aid agreements are executed on a project-by-project basis between MnDOT and the Federal Highway Administration. They provide for reimbursement of project costs on a concurrent basis (that is, reimbursement of project costs is provided on a scheduled basis, usually weekly). The total dollar amount of an agreement is the maximum amount of reimbursement that will be provided. Reimbursement is typically for 80% of eligible costs. Since the entire amount of a project encumbrance is recognized as an expenditure on a budgetary basis, so too must the entire amount of the federal aid agreement for the same project be recognized as revenue.

Federal Apportionment

  • A term that refers to a federally prescribed division or assignment of funds. An apportionment is based on prescribed formulas in the federal law and consists of dividing apportionment for a specific program among the states.
  • The distribution of funds as prescribed by a statutory formula.

Federal Appropriation*

Authorization of funding expenditures from Congress through passage of a federal appropriation law.

*U.S. Department of Transportation, Federal Highway Administration Planning Glossary

Federal Earmarked Funds

Funds that the U.S. Congress allocates to specific projects; this funding is separate from the formula funding.

Federal Obligation Authority Forecast

The amount of federal formula funding that is specifically allocated to Minnesota (and each state), based on approved federal appropriations or continuing resolutions.


The Federal government's legal commitment (promise) to pay or reimburse the States or other entities for the Federal share of a project's eligible costs.

*U.S. Department of Transportation, Federal Highway Administration Planning Glossary

State Transportation Improvement Program Financial Plan

This is a detailed plan that outlines the financing plan for the State Transportation Improvement Program. It include information about the condition and forecast of state funding sources, especially the Trunk Highway Fund, forecast of federal formula funds for the four years of the STIP and other information about federal funding, and a variety of related information. The STIP must be fiscally constrained, and one of the primary goals of this plan is to provide information about the funding that will be used to finance the projects contained in the STIP. This document also contains detailed information about the planned use of federal AC financing for the four-year period encompassed by the STIP.

State Transportation Improvement Program (STIP)

The STIP is a federally required document that provides a list of transportation projects that are expected to be funded with federal transportation dollars within a four-year window. This list of projects includes state and local transportation projects funded with federal highway or federal transit funds. Minnesota also includes most projects on the state trunk highway system regardless of funding source (federal or state). Rail, port, and aeronautics projects are included for information purposes. Refer to the website for details, State Transportation Improvement Program.

Transportation Program Investment Committee

This committee has nine voting members, consisting of the deputy commissioner, all six division directors, the district engineer of the Metropolitan District, and the Chief Financial Officer. The committee’s main purpose is to provide strategic management leadership for all aspects of MnDOT’s trunk highway construction program.

Trunk Highway Fund

This fund is the principal operating fund for MnDOT, and to some extent for the Department of Public Safety. It is a governmental fund that accounts for public monies used to construct, maintain, and operate Minnesota’s trunk highway transportation infrastructure. Annual transfers of funds to the Minnesota Management & Budget (MMB) debt service account in the state debt service fund are also made from this fund.


Chief Financial Officer

Consult with the Director of the Office of Capital Programs and Performance Measures whenever a proposal to exceed the use of advance construction financing stated in the MnDOT policy.

Director, Capital Program & Performance Measures

  • Prepare STIP Financial Plan
  • Forecast federal funds
  • Prepare quarterly advance construction reports and submit to the Federal Highway Administration
  • Inform the Transportation Program Investment Committee about the planned use of advance construction in the upcoming State Transportation Improvement Program, as part of the presentation to the committee about the entire State Transportation Improvement Program, to be recommended for approval by the Commissioner.

Director, Financial Management

  • The director ensures that the planned use of advance construction financing is consistent with the MnDOT policy.

Minnesota Management & Budget (MMB)

MMB reviews forecasts of use of federal AC financing in conjunction with its responsibility to approve MnDOT’s overall forecast of federal agreements revenue for the trunk highway fund that are incorporated into the formal financial statements for this fund. The overall level of funding proposed in biennial budget requests for the trunk highway fund is limited by the amount of revenue projected to be available in the fund.

Transportation Program Investment Committee

As part of carrying out its responsibilities related to the STIP, which includes review and recommend for approval by the Commissioner, review the federal funds forecast (which includes some of the information contained in the STIP Financial Document Number: 1225647 Plan), which includes specific recommended amounts for use of federal AC financing during the upcoming four years that the STIP encompasses.

Frequently asked questions

What is the principal risk associated with using advance construction financing? What would be the risks of adopting higher levels of federal Advance Construction financing than are included in this policy?

Use of federal AC financing involves use of the cash available in the Trunk Highway Fund to make project expenditures that would be reimbursed on a concurrent basis if federal AC financing were not used. If expected federal revenue did not become available because of congressional inaction, major economic recession that dramatically reduced the amount of revenue received by the Federal Highway Trust Fund, or other factors, federal reimbursement could be delayed, resulting in lowered levels of cash in the Trunk Highway Fund. This would result in reduced investment income for the fund. In extreme circumstance, MnDOT’s ability to make other required payments from the Trunk Highway Fund might result (see Cash Balance policy). If higher levels of use of federal AC financing (especially significantly higher levels) than included in this policy were used, the risks mentioned above would become magnified.

What would be the risks of adopting lower levels of federal Advance Construction financing than are included in this policy?

There would be a loss of flexibility and the risk of losing federal funds. Having reasonable levels of federal AC financing is desired in order to provide flexibility in managing federal funds. For example, if the amount of federal funding actually made available is greater than was originally planned, the additional funds can be used to execute additional AC conversions. Not being able to fully utilize federal funds might result in the loss of additional funds, through having some funds lapse, or not being able to apply for certain types of special funding where there is a requirement that Minnesota has committed all of its available federal funds.

What cash resources are used to pay project expenditures while projects are funded with advance construction financing, prior to executing conversions?

The cash balance in the Trunk Highway Fund provides the resources needed to pay all of the project expenditures, including the portion that would be reimbursed by the Federal Highway Administration if regular federal agreements were used. The Trunk Highway Fund typically has a substantial cash balance, because the State of Minnesota uses an encumbrance-based accounting system. This means that money for future expenditures must be fully encumbered (that is, set aside) to assure that money is available to pay for the commitments. For MnDOT’s highway construction contracts (and also some other types of expenditures – for example building construction contracts) encumbrances are made for projects that might last one or more years. The encumbered money is placed in reserve, and these reserves result in substantial cash balances in the Trunk Highway Fund. Similarly, the state General Fund typically has large cash balances that are available for paying the portion of project expenditures that would be reimbursed by the Federal Highway Administration if regular federal agreements were used for local road and other types of projects that use federal AC financing.

What would be the effect on state financing in the unlikely event that the federal government were unable to continue financing the federal aid highway system?

When highway construction contracts are encumbered, including those where federal reimbursement will pay for significant portions of the projects, the total amount of the contract is included in the encumbrance, including the anticipated federal reimbursement through executed federal aid agreements (both regular and AC agreements). In the unlikely event that the federal government was unable to continue to provide reimbursement, AC conversions would no longer be able to be made. This would require significant adjustments to the program of planned construction projects, including cancellations of project lettings. In addition the cash balance in the Trunk Highway Fund would continue to be used for payments for projects already underway, leading to significantly lower levels of cash, with the same effects as described in response to the first question in this section.

History of policy updates or amendments


Policy 2.5 – Advance Construction, Financial Administration, established 7-1-10

Effective date

Effective date as signed by responsible senior officer.


Responsible Senior Officer

Tracy Hatch
Deputy Commissioner/COO/CFO

Policy Owner

Duane Leurquin
Director, Financial Management

Policy Contact

Pa Youa Xiong
Program Analysis & Management Section