COMPONENTS OF THE COST OF A SERVICE CONTRACTOR -or- Why the Government pays $126,087 for a Contractor’s $70,000-a-Year Employee

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COMPONENTS OF THE COST OF A SERVICE CONTRACTOR
-or-Why the Government pays 126,087 for a
Contractors 70,000-a-Year Employee

• Prepared by
• The Tidewater Government / Industry Council

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AGENDA

• PURPOSE
• DESIRED END STATE OF BRIEFING
• COMPONENTS OF PRICE OF CONTRACTOR- Fringe
  Benefits- Overhead
• - General and Administration- Profit
• COMPARISON BETWEEN PRIVATE SECTOR AND GOVERNMENT
  EMPLOYEES

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PURPOSE

• To provide an executive overview of the
  components involved in computing the costs of a
  contractor employee providing services on a level
  of effort contract I.E., Cost Plus Fixed Fee,
  Time and Material, or Cost Plus Award Fee
  Contract.

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DESIRED END STATE OF BRIEFING

• Ensure senior executives have understanding of
  price structure for contractors providing level
  of effort services.
• Provide comparison between corporate and
  government personnel to call attention to
  similarities in costs.

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Direct Labor RatesvsFully Burdened Rates
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• Direct Labor Rate
• Covers the basic labor cost of the employee

• Fully Burdened Rate
• Proposed by offeror to cover direct labor,
  indirect costs, and profit under a service
  contract.

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Components Of The Cost Of A Service
ContractorFRINGE BENEFITS

• DEFINITION The costs associated with benefits
  provided to employees working for the corporation.

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Components Of The Cost Of A Service
ContractorFRINGE BENEFITS EXAMPLES

• Paid Leave
• Paid Holidays
• Medical and Dental
• Short and Long Term Disability
• Life Insurance
• Retirement Programs
• Bonuses
• Severance Pay
• Social Security, Federal , and State Taxes
• Employee Morale and Welfare
• Tuition Assistance
• Workmans Compensation

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Components Of The Cost Of A Service
ContractorOVERHEAD (OH)

• DEFINITION Overhead is traditionally defined as
  costs to operate local corporate operations
  providing indirect support to clients and direct
  support to contractor employees working for the
  client. Overhead costs are usually broken down
  into two separate rates

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Components Of The Cost Of A Service
ContractorOVERHEAD (OH)

• CLIENT SITE This is a rate normally applied to
  the cost of a contractor who is working at a
  government or client site.
• CORPORATE SITE This is a rate normally applied
  to the cost of a contractor who is working in
  support of a client, but working at an off-site
  location. This rate is normally higher for the
  client because the corporation must pay for
  additional facilities and equipment to provide
  the required support.

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Components Of The Cost Of A Service
ContractorOVERHEAD EXAMPLES

• Supervisory Labor and Benefits
• Recruiting and Hiring
• Human Resource Support to Employees
• Security Clearance Processing
• Regional Office Staff Labor
• Operating Supplies/Materials
• Leases, Rent, and Utilities
• Repairs and Maintenance
• Licenses/Taxes
• Depreciation
• Travel
• Professional Development

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Components Of The Cost Of A Service
ContractorGENERAL AND ADMINISTRATIVE EXPENSES
(GA)

• DEFINITION Costs associated with the overall
  management and operation of a business (corporate
  headquarter costs).

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Components Of The Cost Of A Service
ContractorGA EXPENSE EXAMPLES

• Corporate Staff Labor Benefits
• Operating Supplies/Materials
• Leases, Rent, and Utilities
• Repairs and Maintenance
• Licenses/Taxes/Insurance
• Accounting/Banking Fees
• Depreciation
• Travel/Conferences
• Business and Development
• Professional Development

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Components Of The Cost Of A Service
ContractorPROFIT

• DEFINITION The dollar amount over and above
  allowable costs that is paid to the firm for
  contract performance.
• Remember that companies are in business to make a
  profit, and that in addition to covering the
  costs of running their businesses, they must also
  make a profit for growth (investment) and their
  shareholders (increase shareholder equity).

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EXAMPLE OF COMPUTING THE COST OF A
CONTRACTOR(Cost Plus Fixed Fee)

• COST ITEM RATE COST CUMULATIVE
  COST
• Salary N/A 70,000.00 70,000.00
• Fringe 33 23,100.00 93,100.00
• Overhead 10 9,310.00 102,410.00
• G A 14 14,337.40 116,747.40
• Profit (Fee) 8
  9,339.79 126,087.19
• (Base Labor Rate 33.65
• versus
• Burdened Labor Rate 60.62)

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COMPARISON TO GOVERNMENT EMPLOYEE

• COST FACTOR CONTRACTOR GOVERNMENT
• Salary YES YES
• Fringe Benefits YES
  YES
• Overhead YES YES
• G A YES
  YES
• Profit (Fee) YES
  MAYBE
• NOTE All activities have the same costs. The
  major difference is that the contractor must
  account for all their costs in one package. Other
  agencies may not capture the costs at the user
  level, distorting the actual costs of providing a
  work place, equipping, and paying an employee.

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ASSUMPTIONS(Government Employee)

• GS 12, Step 5 (Engineering Tech)
• 10 x 10 sqft office space (15 per sqft)
• GS 13, Step 5 (1st Line Supvr. over 8 people)
• 12 x 12 sqft office space
• GS 14, Step 5 (2nd Line Supvr. over 40 people)
• 14 x 14 sqft office space
• 32.85 Fringe Rate (OMB Circular A-76 Std.)

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COMPARATIVE COSTS OF A GOVERNMENT EMPLOYEE
47.83
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Govts Overhead Expenses not Included in
Calculations

• All Supervision and Management Support above 2nd
  level
• Department Head, Deputy
• Department Level Staff (Admin Asst., Budget
  Asst, Secretary)
• Front Office (CO, XO, ED, Secretary)
• Support Staff at Command Level
• Human Resources Office
• Comptroller/Budget
• Security
• IT Services
• Admin/Mail
• Local Facilities, Utilities, Equipment and
  Maintenance

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Govts GA Expenses not Includedin Calculations

• Headquarters Management
• Functional Departments, Deputy Commanders
• Commander, Vice Commander, ED
• Headquarters Support
• Human Resources
• Comptroller/Budget
• Security
• IT Services
• Admin/Mail
• Headquarters Facilities, Utilities, Equipment,
  and Maintenance

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Cost and Price Analysis

• Determining whether the proposed labor and
  indirect rates are fair and reasonable may
  require using various evaluation techniques with
  input from Government sources, such as
• Defense Contract Audit Agency (DCAA)
• Administrative Contracting Officers (ACO)
• Procuring Contracting Officer (PCO)

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Professional Services

• Electrician 45
• Computer Technician 60
• Auto Mechanic 60
• Plumber 65
• HVAC Technician 70
• Accountant 40 to 200
• Lawyer 200 to 500

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SUMMARY

• Companies in the service-provider business must
  cover costs and make a profit. Those costs are
  reflected in the burdened hourly rates charged.
• Businesses and the government incur the same
  types of costs for their employees, with the
  possible exception of profit for the government
  and non-profit organizations. However, cost
  centers and accounting practices may not allow
  these activities to fully realize the costs of
  providing a work place, equipping, and paying for
  their employees services.