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

COMPONENTS OF THE COST OF A SERVICE CONTRACTOR - or - “Why the Government pays $126,087 for a Contractor’s $70,000-a-Year Employee”. Prepared by The Tidewater Government / Industry Council. AGENDA. PURPOSE DESIRED END STATE OF BRIEFING

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

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  1. COMPONENTS OF THE COST OF A SERVICE CONTRACTOR -or-“Why the Government pays $126,087 for a Contractor’s $70,000-a-Year Employee” Prepared by The Tidewater Government / Industry Council

  2. 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

  3. 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.

  4. 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.

  5. Direct Labor RatesvsFully Burdened Rates

  6. 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.

  7. Components Of The Cost Of A Service Contractor:FRINGE BENEFITS DEFINITION: The costs associated with benefits provided to employees working for the corporation.

  8. 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 • Workman’s Compensation

  9. 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:

  10. 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.

  11. 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

  12. 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).

  13. 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

  14. 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).

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

  16. COMPARISON TO GOVERNMENT EMPLOYEE COST FACTORCONTRACTORGOVERNMENT 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.

  17. 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.)

  18. COMPARATIVE COSTS OF A GOVERNMENT EMPLOYEE $47.83

  19. Govt’s 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

  20. Govt’s G&A 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

  21. 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) • ProcuringContracting Officer (PCO)

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

  23. 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.

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