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

Prepared by The Tidewater Government / Industry Council

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

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.

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.

Direct Labor Rates vs Fully Burdened Rates

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.

Components Of The Cost Of A Service Contractor:

FRINGE BENEFITS
DEFINITION: The costs associated with benefits provided to employees working for the corporation.

Components Of The Cost Of A Service Contractor:

FRINGE 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

Components Of The Cost Of A Service Contractor:

OVERHEAD (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:

Components Of The Cost Of A Service Contractor:

OVERHEAD (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.

Components Of The Cost Of A Service Contractor:

OVERHEAD 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

Components Of The Cost Of A Service Contractor:

GENERAL AND ADMINISTRATIVE EXPENSES (G&A)

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

Components Of The Cost Of A Service Contractor:

G&A 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

Components Of The Cost Of A Service Contractor:

PROFIT
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).

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

COST ITEM Salary Fringe Overhead G&A Profit (Fee) RATE N/A 33% 10% 14% 8% COST $70,000.00 $23,100.00 $ 9,310.00 $14,337.40 $ 9,339.79 CUMULATIVE COST $ 70,000.00 $ 93,100.00 $102,410.00 $116,747.40 $126,087.19

(Base Labor Rate: $33.65 versus Burdened Labor Rate: $60.62)

COMPARISON TO GOVERNMENT EMPLOYEE

COST FACTOR Salary Fringe Benefits Overhead G&A Profit (Fee) CONTRACTOR YES YES YES YES YES GOVERNMENT YES YES YES 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.

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.)

COMPARATIVE COSTS OF A GOVERNMENT EMPLOYEE

COST FACTOR Salary Fringe Benefits Overhead G&A RATE $29.47 32.85% COST $61,511 20,206 18,094

CUMULATIVE COST
$61,511 $81,717 $99,811

Profit Burdened Rate

$47.83

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

Govts G&A Expenses not Included in 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

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)

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

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.