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Section 4: Advance Funding Agreements

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In order for TxDOT to spend funds or other resources on a transportation project with a local government (LG), a written contract must first be executed between the parties. At TxDOT, an Advance Funding Agreement (AFA) is the form of contract most frequently used for development of projects with LGs. When TxDOT contracts with another party, usually a private firm, for a well-defined good or service such as engineering plans, environmental studies or asphalt for a highway, a procurement contract is used. However, the AFA is not a procurement contract. The AFA is an agreement under which TxDOT and the LG allocate participation in a transportation improvement project. The AFA allows TxDOT and the LG to “jointly” provide for the implementation of a specific project.

The term “advance funding agreement” is used throughout the Manual and Local Government Project Management (LGPM) Guide as a generic term for a variety of joint-funding agreements between TxDOT and LGs. Some specific agreement types included with the AFA are:

This list is not intended to be all inclusive, but to demonstrate the types of agreements that fall within the general category of AFAs.

The AFA defines the scope of work, labor and material resources, and cash funding responsibilities to be contributed by each party necessary to accomplish a transportation project. In addition to contract provisions specifying the work and resource contributions, an AFA will have other legally required provisions. For example, if the AFA involves federal funds, a provision requiring the parties to follow the audit requirements of 2 CFR Part 200, Subpart F will be included in the AFA. Other federal requirements are also included in the AFA. In all cases for projects using federal funds, an approved Federal Project Authorization and Agreement (FPAA) is required before the LG can begin work.

The purpose of this section of the Manual is to help the LG:

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  1. Identify, negotiate, execute, administer and manage an AFA for a transportation improvement project with TxDOT;
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  3. Calculate and track funding; and
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  5. Implement proper contract management procedures for an AFA.

The LGPM Guide provides additional information describing the parties to an AFA. In general, the LG will work with the TxDOT district to develop and execute the AFA, and the district will coordinate the process within TxDOT. The AFA determines which party, the LG or TxDOT, is responsible for conducting the work, providing funding or contributing items in kind. Under the contractual commitments established in the AFA, both TxDOT and the LG must follow their rules and regulations applicable to that type of work, as well as federal or state laws and requirements that may apply.

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Categories of AFAs

General Categories of AFAs with LGs

AFAs with LGs may be divided into three broad categories:

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  1. AFAs for voluntary transportation projects (all local funds with no federal or state funds involved in the work);
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  3. U.S. Department of Transportation (USDOT), Federal Highway Administration (FHWA) federally funded AFAs between the state and LGs (local or state funds along with federal funds); and
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  5. State-funded AFAs with LGs (state funds or both local and state funds, no federal funds).

Voluntary Transportation Projects

An AFA for a voluntary project involves cash or other resources voluntarily contributed to a project on the state highway system. LGs may sign these agreements providing they pay for 100 percent of the project costs or 100 percent of a “discrete element” of a project and there is no required state or federal match. A discrete element is a task that is separate or unconnected to other tasks in the project and can be completed independently from other tasks. There is no minimum or maximum dollar amount for these agreements.

For accounting purposes within TxDOT, the agreement may state that the “work under this voluntary agreement is 100 percent paid for by others.” In practice, a voluntary project may be a small part of a larger TxDOT project that may involve other funding sources. Examples of common voluntary projects are feasibility studies, land acquisition, environmental work, plans, specifications and estimates, drainage projects, highway construction and maintenance projects.

The AFA for voluntary projects does not contain federal provisions because the contributed resources are not a part of a federal program agreement.

Federally-funded USDOT FHWA Programs

Federal legislation creates funding programs administered by USDOT through FHWA that allow states to pass federal funds through the state to an LG for coordinated development of transportation projects. TxDOT acts as the conduit in Texas for the funds and is the oversight agency responsible for assuring these federal funds are spent in an allowable manner.

In most cases, the federal programs require a local match to the federal funds in a defined ratio. For example, a project might be funded with 80 percent federal funds and 20 percent local resources. The local match may be paid with state resources, LG resources or, in some cases, private-sector resources. In most cases, the local match is a cash match, but it can also be an in-kind match of resources, such as land, labor or materials. The federal government may also provide funding for specific earmark projects. The specifics of the agreement depend on the program and negotiated agreements among the parties.

Examples of the most common programs funded through FHWA are:

Instead of cash or in-kind services, a LG may choose to use transportation development credits (TDCs) as the non-federal match on a project. TDCs are a financing tool approved by FHWA allowing states, toll authorities or a private entity to earn credits when these entities fund a capital transportation investment with toll revenues earned on existing toll facilities, excluding revenues needed for debt service, returns to investors or the operation and maintenance of toll facilities. In Texas, 75 percent of credits are allocated to the metropolitan planning organization (MPO) in whose region they were earned and 25 percent are allocated on a competitive statewide basis. The methods for calculating the match and for accounting for TDCs in the AFA budget are different than those used for a cash match. These methods, along with examples, are presented in detail in the Best Practices Workbook (Workbook). The LG will be required to document TDC expenditures, and this documentation will be specified in the AFA. More information can be found on the TxDOT website regarding TDCs.

TxDOT has adopted rules under the Texas Administrative Code applicable to many of the federally funded programs. These rules are found at 43 TAC §15.50 et seq.

Some other programs have extensive rules specifically applicable to them. For example, TAP rules are found at 43 TAC §§11.300-11.317 (implementation and administration of the TAP), as well as 43 TAC §16.153 (funding categories) and 43 TAC §16.154 (transportation allocation funding formulas). It is the responsibility of the contract manager of individual contract programs to be familiar with the applicable rules for his/her specific program contract. A contract manager working with federally funded FHWA projects with TxDOT/LG AFAs should be familiar with 43 TAC§§15.50-15.56 and with the specific rules affecting his/her program.

Some TxDOT divisions administering various programs have published important guides for reference. For example, refer to the Bridge Division’s Bridge Project Development Manual for more information on bridge projects and the various right-of-way manuals found in the TxDOT Online Manual System for projects involving right-of-way acquisition.

State-funded Projects with LGs

The state may allocate funds for local projects involved in specific programs, and these projects may be handled with a unique version of the AFA. These programs are managed through various TxDOT divisions/offices including the Transportation Planning and Programming Division (TPP), Design Division (DES), Bridge Division (BRG), Traffic Operations Division (TRF) and Local Government Projects Office (LGP). LGs are encouraged to contact their local district to obtain current information in these situations. Additional information may be available through the appropriate division’s Web pages on the TxDOT website.

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Standard and Non-standard Agreements


In 2000, the TxDOT Contract Services Office (CSO) introduced a streamlined format for AFAs with LGs. The format consists of two standard agreements that, when used together, form a system for implementing a combined TxDOT/LG agreement:

The MAFA/LPAFA system is an efficient contracting system that simplifies the majority of local project agreements and substantially reduces their physical size and processing time. It is also the basis for the provisions contained in the traditional “long-form” AFAs described below.


The MAFA sets out the general terms and conditions of the relationship and cites the federal and state laws that govern the agreements with LGs. The LG formally adopts a MAFA and agrees that its general terms and conditions will be followed on all the local projects undertaken between TxDOT and the LG, unless a specific exception is made in a LPAFA. Signing a MAFA dispenses with the need for the two parties to negotiate and review standard contract terms and conditions each time they wish to enter into a LPAFA. The MAFA does not specify either the cost or the scope of work for individual projects. The MAFA also does not have a set termination date and is in effect until it is terminated by TxDOT or the LG.


Once a MAFA has been executed, a LPAFA is then used to define the scope of work and funding responsibilities for a specific project. The LPAFA contract period usually ends upon completion of the project unless the LPAFA is terminated early or is extended based on an amendment to the LPAFA executed by both parties. The LPAFA specifies the distribution of responsibilities for performing work, such as right-of-way acquisition, environmental, preparation of the PS&E, construction of the roadway and other aspects of the project.

The LPAFA also specifies which party will provide what resources, such as the land or the funding necessary for a project. The party responsible for performing work may or may not be the party responsible for paying for the work. The LPAFA does not include general terms and conditions of the agreement, which have been included in the MAFA. If there are exceptions to the MAFA that pertain to a specific project, then the LPAFA provides for these exceptions.


The TxDOT district offices have standard templates for the MAFA and LPAFA. The process for using and implementing the MAFA and LPAFA by the LG and TxDOT is described in the LGPM Guide.

Long-form Agreements

TxDOT uses two different kinds of long-form agreements for situations where the LG has not implemented the MAFA/LPAFA system. Standard long-form agreements are modeled after the MAFA/LPAFA and contain provisions substantially identical to the MAFA/LPAFA provisions. Non-standard long-form agreements are still accepted, but not preferred, by TxDOT. The long-form agreements are discussed in more detail in the LGPM Guide.

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Additional Information Regarding Funding Approvals

Commission Approval

A transportation project must be authorized in a minute order presented and heard at a meeting of the Texas Transportation Commission. If a project is included in the Unified Transportation Program (UTP), the minute order approving the UTP is the only Minute Order required. Projects funded with TxDOT district discretionary funds are also authorized under the UTP minute order. There are times when an individual, project-specific minute order is required.

LG Authority Approval

It is the responsibility of the LG to know the legal requirements governing its ability to contract with TxDOT. In general, LGs authorize the expenditure of funds through action of their governing body or board that authorizes the LG to enter into a contract with TxDOT.

Outstanding Balance

In negotiating AFAs, the TxDOT district office must first check with the Finance Division (FIN) to determine if the LG has an outstanding balance owing to the state. In most cases, outstanding balances must be paid before further funding agreements can be executed.

Special Approvals

In some cases, special approvals are needed to allow a LG to perform the work. Some examples include the following.

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  • Local Letting. The LG may locally let and award a construction contract if approved by TxDOT. 43 TAC §15.52 (8) outlines the conditions required for a LG to receive TxDOT approval to let/award a construction contract. If the specified conditions are demonstrated, written approval by the TxDOT executive director or his designee is required. This approval should be obtained during preparation of the AFA and documented in the project files.
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  • Local Force Account Work. The LG may use county or municipal employees to perform minor improvements of the highway system. 43 TAC §15.52 (8) outlines the conditions required for a LG to perform project construction activities with its own forces. Once these conditions are demonstrated, written approval of the TxDOT executive director or his designee is required prior to performing the improvements. To reduce potential delays, this approval should be requested as early in the project as practicable.
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  • Fixed Price Agreement. As of September 2014, 43 TAC §15.52 (3) defines fixed price as the primary method of defining local financial participation in AFAs. Based upon estimated project costs at the time of executing an AFA, TxDOT and the LG agree upon a fixed price amount of participation by the LG. This amount may be adjusted through execution of amendments to the AFA due to changes in project scope and/or unforeseen conditions. In this case, any project costs in excess of the amount specified in the AFA would be the responsibility of TxDOT. This change is intended to incentivize both the LG and TxDOT to be more proactive in estimating and managing project costs and in significantly expediting the project close-out process at project completion.
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  • Specified Percentage Agreement. An alternate financing agreement provided in 43 TAC §15.52(3) where the LG agrees to pay a specified percentage amount may be used when the total project cost is difficult to predict at the time of execution of the AFA. Typically, this type of agreement will specify a percentage participation for federal funds, state funds and local funds with a cap on the amount of federal and state participation. In this case, any project costs in excess of the amount specified in the AFA would be the responsibility of the LG. A specified percentage agreement must be approved by the executive director or his designee.
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  • Incremental Payment Agreement. An alternate financing agreement provided in 43 TAC §15.52(6) allows the LG to pay its share of estimated project costs using a repayment schedule included in an AFA. An incremental payment agreement must be approved by the executive director or his designee and may not be approved if the LG has any delinquent obligations to TxDOT.
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  • Approval of Projects in Economically Disadvantaged Counties. 43 TAC §15.55(b) provides special consideration for projects located in economically disadvantaged counties (including the cities and towns within these counties). In evaluating a proposal for a highway improvement project with a LG that consists of all or a portion of an economically disadvantaged county, the commission shall, for those projects in which the commission is authorized by law to provide state cost participation, reduce the minimum local matching funds requirement after evaluating an LG’s effort and ability to meet the requirement. Transportation Enhancement/Transportation Alternatives Program projects do not qualify for this program. Further information regarding the Economically Disadvantaged County Program is available on the TxDOT website.

An economically disadvantaged county is one that has:

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Funding Overruns


One provision of the AFA between a LG and TxDOT is the funding arrangement as mentioned in the Special Approvals section above. State, federal and local funding is limited to the values indicated in the agreement unless the AFA is amended in writing.

Federal Requirement

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  1. There are no specific federal regulations concerning funding overruns. FHWA executes a FPAA with TxDOT on all federally funded projects.

State Requirement

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  1. 43 TAC §15.52 – Requires a written agreement between TxDOT and a LG when the LG is providing financial assistance for a highway improvement project. One of the provisions of the AFA is the funding responsibilities of each party to the agreement.
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  3. 43 TAC, Chapter 5 – Provides for agreements between TxDOT and other entities that include funding arrangements and responsibilities:
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  5. 43 TAC, Chapter 5, Subchapter E – Pass-through Fares and Tolls;
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  7. 43 TAC, Chapter 5, Subchapter H – Transportation Development Credit Program; and
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  9. 43 TAC, Chapter 5, Subchapter G – Private Activity Bonds.

Required Practices

The LGPM Guide includes the LG and TxDOT responsibilities related to project funding overruns. In general, for projects with state or federal funds, the LG must follow the terms of the project AFA executed between TxDOT and the LG.

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AFA Amendments

If there is a significant change in the scope of work, funding or time, the district will prepare an AFA amendment that sets forth the change and the reason for the change. Frequently this is related to a construction contract change order, but may be necessary for non-construction projects as well. An amendment to the AFA will frequently trigger a change order in the related bid documents or scope of services. Any change in the scope of the project must be consistent with TxDOT’s change order policy. The LGPM Guide contains additional information regarding project changes and amendments.

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