REVIEW SCHEDULES FOR COMMERCIAL AND INDUSTRIAL ACTIVITIES UNDER OMB CIRCULAR A-76

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP06M00974R000100240002-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 98
• Document Creation Date: December 27, 2016
• Document Release Date: July 29, 2013
• Sequence Number: 2
• Publication Date: September 20, 1978
• Content Type: MEMO

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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
OFFICE OF FEDERAL
PROCUREMENT POLICY
SEP 2 0 1978
zawgierve Registry
C -C.
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
SUBJECT: Review Schedules for Commercial and Industrial Activities Under
OMB Circular A-76
As you were advised on February 7, 1978, OMB Circular A-76, "Policies for
Acquiring Commercial and Industrial Products and Services for Government
Use," is being revised to call for more effective, equitable, and consistent
implementation by all agencies. The memorandum issued on that date listed
several steps that were necessary to plan for improved implementation of
the Circular, including preparation of comprehensive schedules for review
of all Government commercial and industrial activities and certain contracts.
Agencies were alerted to have these schedules prepared and ready for use
by July 1, 1978.
A revised draft revision of Circular A-76 was published for comment on
August 22, 1978, and a draft cost comparison handbook is being published for
comment this week. It is anticipated that both documents will be finalized
and issued by the first of the calendar year, and the new implementation effort
can be initiated at that time.
Please furnish this office, by October 16, 1978, a-copy of your schedule of
`commerciaT-and industrial activities and contracts to be reviewed under this
Circular. The schedules should (1) identify the activity or contract; (2) give
the location of the activity or contracting agency; (3) show the approximate
annual cost; and (4) list the month and year in which the activity/contract
will be reviewed under Circular A-76 guidelines. Any questions concerning
the detail to be submitted should be directed to W.D. Russell, OFPP, phone
202/395-3327.
Your cooperation and support are sincerely appreciated andcbtie
to achievement of a stable, equitable, and effectiv tion of th,is
long-standing policy.
ester A. F t ig
Administrator
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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
OFFICE OF FEDERAL
PROCUREMENT POLICY
SEP 2 0 1978
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS
Subject: Draft Cost Comparison Handbook to Supplement OMB Circular,
A-76, "Policies for Acquiring Commercial or Industrial
Products and Services for Government Use"
The draft revision of OMB Circular A-76 which was published for
comment on August 22, 1978 calls for a comprehensive handbook on
comparative cost analyses conducted to determine whether a product
or service can be produced at less cost by contract or in-house
performance. The attached draft of the handbook, which was prepared
by an interagency work group, is forwarded for your review and is
being published in the Federal Register for comment by all interested
parties.
Please review this draft and provide any comments or recommendations
that you have, by November 15, 1978 as indicated in the
notice for the Federal Register.
Attachment
Lester A. Fettig
Administrator
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L.)
OFFICE OF MANAGEMENT AND BUDGET
OFFICE OF FEDERAL PROCUREMENT POLICY
Proposed Policy Issuance
Invitation for Public Comment
AGENCY: Office of Federal Procurement Policy, Office of Management
and Budget.
SUMMARY: This proposed Cost Comparison Handbook (enclosed) would
supplement OMB Circular A-76, "Policies for Acquiring Commercial or Industrial
Products and Services for Government Use." It provides comprehensive guide-
lines for agencies when they conduct a comparative cost analysis to determine
whether a particular product or service could be provided more economically
by the private sector or by use of Government employees. These guidelines
should assure greater accuracy, equity, and consistency in such cost analyses
and contribute significantly to improved implementation of Circular A-76.
DATE: Comments must be received on or before November 15, 1978.
ADDRESS: Comments should be addressed to the Administrator for
Federal Procurement Policy, Office of Management and Budget, 726 Jackson
Place, N.W., Washington, D.C. 20503.
FOR FURTHER INFORMATION CONTACT:
Mr. William D. Russell
Deputy Assistant Administrator
for Logistics
Telephone [phone].
SUPPLEMENTARY INFORMATION: In the comprehensive review of OMB
Circular A-76 which preceded the current revision of that 'Circular, one of
the major deficiencies noted in implementation was inaccurate, incomplete,
and inconsistent cost analyses used to support both in-house and contract
performance. The proposed revisions to Circular A-76, which were published
for comment in November 1977, included a propoal for a detailed cost com-
parison handbook. This proposal was strongly endorsed by a broad range of
interests responding to the notice, including Federal employee unions, private
firms and associations, and Members of Congress.
This draft handbook was prepared by an interagency work group consisting
of cost accounting experts from the Departments of Defense and Energy, the
General Services Administration, and Veterans Administration, and an advisor
from the General Accounting Office. It is offered for review and comment
by all interested parties to ensure that the final version is clear, comprehen-
sive, and adequate to ensure satisfactory results.
/s/
Lester A. Fettig
Administrator
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OFFICE OF MANAGEMENT AND BUDGET
CIRCULAR A-76
COST COMPARISON HANDBOOK
TABLE OF CONTENTS
TITLE PAGE
CHAPTER I - GENERAL 1
INTRODUCTION 1
PURPOSE 1
BACKGROUND 1
DEVELOPMENT OF HANDBOOK 2
CHAPTER II - POLICY 3
COMMON GROUND RULES 3
CALCULATING CONTRACTOR COSTS 4
CALCULATING COSTS OF GOVERNMENTOPERATION 4
OTHER REQUIREMENTS 4
CHAPTER III - PREPARATION FOR COST ANALYSIS 6
GENERAL 6
INITIAL PLANNING 6
PREPARATION OF WORK STATEMENT 6
PROCEDURE 7
CHAPTER IV- DEVELOPING AN ESTIMATE OF GOVERNMENT COSTS 10
GENERAL 10
MATERIAL COSTS 11
DIRECT MATERIAL 11
PRICING OF GSA MATERIAL 12
DOCUMENTATION 13
MATERIAL OVERHEAD 15
PERSONNEL COSTS 18
DIRECT LABOR 18
FRINGE BENEFITS 23
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STANDARD FRINGE BENEFIT FACTORS 23
ADDITIONAL BENEFITS 23
DOCUMENTATION 24
OPERATIONS OVERHEAD 26'
DEFINITION 26
ESTIMATING OPERATIONS OVERHEAD COSTS 26
TYPES OF OPERATIONS OVERHEAD EXPENSES 28
INDIRECT LABOR 28
INDIRECT MATERIALS AND SUPPLIES 28
DEPRECIATION 29
RENT 30
MAINTENANCE AND REPAIR 31
SUPPORT COSTS 31
UTILITIES 32
INSURANCE 32
OVERTIME AND PREMIUM PAY 32
OTHER COSTS 33
DEVELOPING OVERHEAD RATES 33
ALLOCATION BASE 33
OVERHEAD RATES 34
SUMMARY , 38
SUPPORTING DOCUMENTATION 38
INTERAGENCY SUPPORT 40
OTHER DIRECT COSTS 40
GENERAL AND ADMINISTRATIVE EXPENSE 42
INFLATION OF OUT-YEAR COSTS 47
CHAPTER V - DEVELOPING AN ESTIMATE OF CONTRACTING-OUT
COSTS 48
CONTRACT PRICE 48
TRANSPORTATION COST 49
CONTRACT ADMINISTRATION 50
GOVERNMENT-FURNISHED PROPERTY 50
GOVERNMENT-FURNISHED MATERIALS AND SUPPLIES 51
GOVERNMENT-FURNISHED FACILITIES (BUILDINGS AND
OTHER LAND IMPROVEMENTS) AND EQUIPMENT 52
STANDBY COSTS 53
OTHER COSTS 55
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GENERAL AND ADMINISTRATIVE EXPENSE 55
CHAPTER VI - OTHER CONSIDERATIONS 56
COST OF CAPITAL 56
DETERMINATION OF THE COST OF CAPITAL FOR RETAINED
ASSETS 57
PRORATING COST OF CAPITAL 58
ASSIGNING COST OF CAPITAL 58
SUPPORTING DOCUMENTATION 59
DISPOSAL OF FIXED ASSETS 59
ONE-TIME COSTS 60
ONE-TIME COSTS RELATED TO A NEW-START 61
ONE-TIME COSTS RELATED TO A CONVERSION 62
MATERIAL-RELATED COSTS 62
LABOR-RELATED COSTS 62
OTHER COSTS 63
GENERAL AND ADMINISTRATIVE EXPENSES 63
DOCUMENTATION AND COMPARISON 63
UTILIZATION OF GOVERNMENT CAPACITY 63
FEDERAL TAXES 68
OTHER ADDITIONS/DEDUCTIONS 70
CHAPTER VII - COST DIFFERENTIALS 71
NEW-START 71
CONVERSION 76
CHAPTER VIII - SUMMARY 77
EXHIBIT 1 -r COST COMPARISON FORM
EXHIBIT 2 - DECISION SUMMARY FORM
APPENDIX - GLOSSARY OF TERMS
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CHAPTER I - GENERAL
Introduction
This Cost Comparison Handbook implements the cost comparison
principles contained in OMB Circular A-76, "Policies for
Acquiring Commercial or Industrial Products and Services for
Government Use." Official use of this Handbook is prescribed
in OMB Circular A-76, which directs Federal agencies to
ensure that their comparative cost analyses are made in
conformity with these guidelines.
Purpose
The purpose of this Handbook is to provide a detailed,
simplified guide for developing comprehensive cost
estimates. Such information is necessary for a valid
comparison of the estimated cost to the Government of
acquiring a product or service by contract or by providing
it with Government in-house resources. In addition to
assisting agencies in developing comprehensive cost
estimates, the Handbook is intended to establish
consistency, assurance that all substantive factors are
considered when making cost comparisons, and a desirable
level of uniformity among agencies in the handling of this
determinative process.
Background
The American taxpayers have a right to expect economical
performance ofFederal activities. In some instances, these
activities must be performed by Federal employees. In many
other instances, however, they may be performed either by
contractors or by Federal employees. That choice must be
determined by a finding as to whether contract or in-house
performance would be more economical.
Government reliance on the private sector was first
enunciated by the executive branch as a general policy in
1955. Since then Federal agencies have struggled to make
rational judgments as to the cost considerations that should
be included in a comparative analysis to establish whether
the Government's interest would be served best by contract
or in-house performance. Assistance was provided by OMB
Circular A-76, initially issued on March 3, 1966 and revised
August 30, 1967, which contained guidelines for agencies in
making those analyses.
As Government cost accounting techniques progressed, it
became obvious that Circular A-76 guidelines were too
general to achieve desirable uniformity, and were
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insufficient as a basis for comprehensive cost studies. The
need for more precise guidance in developing cost estimates
and for cost comparative analyses was the most prevalent
suggestion made when agency and public comments were invited
for consideration in a review and subsequent revision of
Circular A-76. The proposed solution, a detailed cost
comparison handbook, was widely and strongly supported by
the numerous respondents to OMB's request for comment on the
proposed changes to Circular A-76 in November 1977.
Development of Handbook
This Handbook has been developed to provide step-by-step
guidance for making a cost comparison analysis. The
Handbook is addressed to readers who are not cost
accountants and who may not have access to the advice of a
cost accountant. The simplified guidance employed in the
Handbook is not so much designed to make a difficult task
easy as it is to make a complicated task understandable --
and doable by persons without prior experience in cost
accounting. Such technical advice as may be needed should
be available from Government financial management or
comptroller personnel.
The first and most important step in making a cost
comparison analysis is the development of the work
statement. Chapter III explains the importance of this
effort and the steps necessary to its preparation. It also
explains the process by which the in-house cost estimate is
placed in competition with contractor bids.
The principal chapters of the Handbook describe the steps
necessary to develop entries for each of the lines on the
Cost Comparison Form (Exhibit 1) and the Decision Summary
Form (Exhibit 2). The location of these forms in the
Handbook corresponds with their place as the end objective
of every cost comparison study. The forms also serve to
organize the Handbook in that each of the cost analysis
chapters and sections is keyed to a line ?entry on the Cost
Comparison Form.
The Glossary of Terms, included as an appendix, contains
definitions which are consistent with those generally
accepted in the cost accounting community.
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CHAPTER II - POLICY
Under certain circumstances, a Government agency is
authorized by OMB Circular A-76 to establish in-house
capability or to continue an existing activity to provide a
product or service that is obtainable from a private source.
One justifying circumstance is when a comparative cost
analysis, prepared as provided in this Handbook, indicates
that the Government's cost would be lower than if the
product or service were obtained from a commercial or other
non-Federal source. Detailed guidelines for making these
cost comparisons are set forth in this Handbook for
application by all Federal agencies. The guidelines are
based on the following policy principles:
Common Ground Rules
a. Both Government and commercial cost figures must be
based on the same scope of work and the same level of
performance. This requires the preparation of a
sufficiently precise work statement with performance
standards that can be monitored for either mode of
performance.
b. Standard cost factors will be used as prescribed by
the Cost Comparison Handbook and as supplemented to
accommodate particular agency operations. It will be
incumbent on each agency to defend any variations in costing
from one case to another.
c. All significant Government costs must be considered,
both for administering a contract and for direct Government
performance, including allocation of indirect (overhead)
costs.
d. The base period for the cost analysis will be keyed
to the expected span of performance to guard against "buy-
in" pricing on the part of contractors or Government
activities. Prepriced options and subsequent recompetition
should also be used to avoid a contract "buy-in." Except
when the circumstances of the requirement dictate otherwise,
the base period will correspond to the period of the
proposed contract, including options.
e. Cost comparisons are to be aimed at full cost, to
the maximum extent possible in all cases.
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f. Ordinarily, agencies should not incur the delay and
expense of conducting cost comparison analyses to justify a
Government commercial or industrial activity for products or
services estimated to cost the Government less than $100,000
per year. However, if there is reason to believe that
inadequate competition or other factors are causing
commercial prices to be unreasonable, a cost comparison
analysis can be conducted. Reasonable efforts should first
be made to obtain satisfactory prices from existing
commercial sources and to develop other competitive
commercial sources.
g. The cost comparison will use the present value cost
and discount rate prescribed in OMB Circular No. A-94,
"Discount Rates to be Used in Evaluating Deferred Costs and
Benefits," when there are significant differences in capital
investment or in the timing of outlays.
Calculating Contractor Costs
The commercial cost figure must be based on a firm bid or
proposal, solicited in accordance with pertinent procurement
regulations. Bidders must be told that an in-house cost
estimate is being developed and that a contract may or may
not result, depending on the comparative cost of the
alternatives.
Calculating Costs of Government Operation
a. Each agency should assure that Government operations
are organized and staffed for the most efficient
performance. To the extent practical and in accordance with
agency manpower and personnel regulations, agencies should
schedule reviews under this Circular with internal
reorganizations for accomplishing the work most efficiently.
b. The Government cost factor for Federal employee
retirement benefits, based on a dynamic normal cost
projection for the Civil Service retirement system, will be
20.4%.
c. The Government cost factor for Federal employee
insurance (life and health) benefits, based on actual cost,
will be 4%.
Other Requirements
a. An existing in-house activity will not be converted
to contract performance on the basis of economy unless it
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will result in savings of at least 10% of the estimated
Government personnel costs.
b. A "new start" will not be approved on the basis of
economy unless it will result in savings .compared to
contract performance at least equal to 10% of Government'
personnel costs, plus 25% of equipment and facility costs.
c. All cost comparisons must be reviewed by a qualified
activity independent of the cost analysis preparation to
ensure conformance to the instructions in the Cost
Comparison Handbook.
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CHAPTER III - PREPARATION FOR COST ANALYSIS
General
A valid comparative cost analysis under Circular A-76
requires an accurate determination of the costs of acquiring
the needed products or services from the private sector and
from the existing or proposed Government commercial or
industrial activity. To ensure an equitable comparision,
both cost figures must be based on the same scope of work,
and include all significant identifiable costs that would be
incurred by the Government under either alternative.
Initial Planning
The comparative cost analysis and implementation of the
conclusions reached involve the responsibilities of many
functional and staff, offices of the agency. For best
coordination of these responsibilities, a task group should
be formed by representatives of the various organizations
and offices concerned, such as: the functional or
operational organization, the manpower and/or personnel
office, the finance and accounting office, the management
analysis group (if available), the budget office, the
procurement office, the legal office, and other staff
functions as appropriate. The task group leader should be
thoroughly familiar with this Handbook.
This group should establish a plan and time schedule for
orderly completion of the necessary steps to conduct the
study and reach a timely conclusion to either award a
contract or to continue or initiate the Government
commercial or industrial activity. The schedule should
allow adequate time for preparation of a comprehensive work
statement, solicitation of bids or proposals, determination
of in-house costs, evaluation of bids and the Government
estimate, the independent audit, and review and approval of
the conclusions. In this regard, close coordination with
the procurement office and the personnel office is required
to ensure Compliance with procurement regulations and to
provide maximum consideration for Government personnel who
would be displaced in the event of a conversion from
in-house to contract performance.
Preparation of Work Statement
The preparation of the work statement is a critical step; it
must be comprehensive enough to ensure that performance by
contract or in-house will satisfy the Government
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requirement. It must also serve as the basis for estimating
both the contract and Government cost, to ensure
comparability and equity in the cost analysis. The work
statement should clearly state what is to be done without
prescribing how it is to be done. It should also provide
performance standards to ensure a comparable level of
performance by both alternatives and to provide a basis for
evaluation. Maximum flexibility should be permitted in
staffing to permit each potential performer to propose the
most efficient approach consistent with his organization and
resources.
The work statement should describe all duties, tasks,
responsibilities, frequency of performance of repetitive
functions, and requirements for furnishing facilities and
materials. Where the workload is variable, historical data
for a representative period on workload, material and parts
consumption, etc. will be provided, when available, along
with the best estimate of future requirements. Bid
solicitations will normally call for use of contractor
facilities, unless performance on Government property is
essential or would be more economical. When the work is
currently being performed in a Government-owned facility or
appropriate Government facilities are available, and
contractor use of those facilities would be in the
Government's interest, bids will be requested on that basis.
Requirements regarding the proximity of the contractor's
facility to the Government installation will be used only
when clearly justified in terms of operational necessity to
meet Government needs.
The work statement will be reviewed by the contracting
officer to ensure that it is adequate and appropriate for a
contract specification. The contracting officer will be
responsible for advertising the requirement, through the
Commerce Business Daily and by other means, but the
functional organization will identify any known commercial
sources -- this is particularly important in the case of
unique products or services which have not been previously
procured commercially.
Procedure
When the statement of work has been prepared and approved,
firm bids or proposals will be solicited. Formal
advertising, with firm fixed price bids, will be used when
appropriate for the requirement. Proposals may be requested
for competitive negotiations when this method would be more
suitable and warranted under current procurement
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regulations. Concurrent with the procurement procedure, the
in-house cost estimate will be prepared, based on the same
work statement that is used in the contract solicitation.
If the Government staffing plan differs from the existing
Government activity, it must be consistent with agency
manpower and personnel regulations and must be implemented
within 60 days following a determination to continue
Government performance.
The in-house cost estimate will be completed and submitted
to the contracting officer three days prior to opening of
bids or completion of negotiations. Confidentiality of both
the in-house estimate and contract prices will be maintained
to ensure that they are completely independent.
The contracting officer will determine the lowest acceptable
contract price, conducting preaward surveys as required to
establish the lowest responsible and responsive bidder.
When the proposed contract would contain flexible pricing
provisions, the criteria for incentive or award fees are
critical to the determination of the proper amount to be
entered as the contract price. Use of the maximum incentive
or award fee available would be inappropriate because it
would reflect a different standard of performance from the
level which provided the basis for the in-house cost
estimate. It is essential that the invitation for bid or
proposal provide for a common standard of performance to
permit an equitable comparison of Government and contract
costs for performing the same task.
When the Government and contract costs are established, the
Cost Comparison Form can be completed, adding the Government
costs for awarding and administering the contract and
applying the appropriate cost differntial and and other
considerations as provided in Chapter VI. The comparison
must then be reviewed for conformance with this Handbook by
a qualified party independent of the cost analysis
preparation; e.g., the agency independent audit function.
The results of the cost study will then be announced and the
detailed analysis will be made available to any interested
parties -- bidders, affected employees, and unions
representing affected employees. If no significant
discrepancy in the cost comparison is reported within five
working days after the announcement, a contract will be
awarded or the procurement action will be cancelled, as
appropriate.
When a discrepancy is found in the cost analysis, every
effort will be made to correct it in a time frame that
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corresponds to the requirement and the validity date of
proposals. If the analysis is for a new start, and there is
a serious defect in the in-house cost estimate, the in-house
figure will be rejected and a contract will be awarded.
When the analysis concerns a Government commercial or
industrial activity, and the discrepancies cannot be
corrected within the validity date of prposals, the
procurement action may be terminated and the review
rescheduled.
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CHAPTER IV - DEVELOPING AN ESTIMATE OF
GOVERNMENT COSTS
GENERAL
In order to develop the estimated cost to the Government for
producing a product or performing a service, it is necessary
to accumulate the various elements of direct and related
indirect costs. The Cost Comparison Form shown as Exhibit 1
will be used for this purpose. In the following sections,
definitions of the cost elements contained in this form are
presented. Also included are instructions on how to
estimate the amount to be included in each cost element, and
on the data needed to support the estimates.
To the extent practical, the cost accounting standards
published by the Cost Accounting Standards Board have been
used as guides for classifying costs by elements and for
distinguishing between direct and indirect costs. The
following definitions, based upon Title IV, Code of Federal
Regulations, Chapter III, Subchapter G, Part 400, are
particularly pertinent to these determinations:
Cost Objective. A function, organizational subdivision,
contract, or other work unit for which cost data are
desired and for which provision is made to accumulate
and measure the cost of processes, products, jobs,
capitalized projects, etc.
Final Cost Objective. A cost objective which has
allocated to it both direct and indirect costs, and, in
the cost accumulation system, is one of the final
accumulation points.
Direct Cost. Any, cost which can be
specifically with a particular final cost
Direct costs are not limited to items
incorporated in the end product as material
Costs which can be identified specifically with a
product/service are direct costs of that
product/service. All costs identified specifically with
other products/services are direct costs of those
products/services.
identified
objective.
which are
or labor.
Indirect Cost. Any cost not directly identified with a
single final: cost objective, but identified with two or
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more final cost objectives or with at least one
intermediate cost objective.
It is important that the basic principles contained in the
above definitions be understood to preclude the possibility
of "double counting" in preparing the estimate of the
Government's costs. "Double counting" results when certain
costs are treated as direct costs of the product/service,
while similar costs related to other products/services are
treated as indirect costs and a portion thereof is also
allocated to the product/service for which the estimate is
being prepared. A common instance of "double counting" is
the treatment of travel costs. All travel is considered as
an indirect cost in typical accounting systems. However,
when estimating the cost of an activity being reviewed for
contracting out, the travel required of personnel whose time
is accounted for as direct labor can easily be allocated to
the activity under review. Since the travel costs of
personnel whose time is accounted for as direct labor
working for other activities is treated as indirect costs, a
portion of such travel will be allocated to the activity
under review. This is "double counting." The correct
approach is to treat all travel as indirect costs, or to
change the accounting system so that all travel costs of all
personnel whose time is accounted for as direct labor are
allocated as direct costs to the activities charged for the
direct labor costs.
The application of these principles is demonstrated, and
clarified, in the following sections.
MATERIAL COSTS
Direct Material
Direct material includes the costs of such goods as raw
material, parts, subassemblies, components and supplies
which are identified specifically with the product/service
(the final cost objective) under review. In additon, the
cost should be significant enough in amount to warrant its
inclusion as a direct cost. Nominal material costs should
be classified as indirect costs and allocated to applicable
final cost objectives. Thus, direct material should have
three general characteristics:
a. they should be essential to the performance of the
service or necessary to the production of the
product;
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b. their quantity and price should be significant; and
c. measurement of their quantity and cost should be
relatively easy and inexpensive.
The estimate of direct material costs begins with a thorough
review of the specifications for the job to be performed or
the product to be funished by the activity under review
during the specified time period. Available material usage
information and bills of material;i.e., a detailed listing
of material for the same or similar jobs requirements and/or
products will be used to estimate direct material quantities
needed. Changes in the specifications between the past and
proposed work effort need to be taken into consideration.
Provision needs to be made for overruns, scrap, spoilage and
defective work. Thus, the estimated quantity of direct
materials to be costed may exceed the minimum quantity
determined from the specifications or bills of material. A
detailed listing of the kind of direct materials to be used
by the activity under review will be developed.
Direct material costs are determined by multiplying the
quantities of direct materials by the unit prices. Unit
prices will be derived from current cost records to the
extent they are available and applicable to the activity
under review. Current costs need to be adjusted to give
effect to price level changes applicable to the future
periods for which the estimate is being made. If current
cost records cannot be used, the supply activity (inventory
control point) can estimate issue prices for its inventory
and General Services Administration or other suppliers'
catalogs can be used for non-stocked material. Recent
purchase prices of similar items can also be used. The
procurement office (purchasing department) can be asked to
help estimate the purchase price of special or unusual
direct material items. When purchase prices are entirely
uncertain and time permits, quotes may be be obtained from
potential suppliers. Specific guidance on the pricing of
GSA material is presented below.
Pricing of GSA Material
In most instances, the prices charged by GSA for material do
not include all the costs of the acquisition and storage
functions performed by GSA. Since inclusion of these costs
in GSA prices is currently prohibited by law it will be
necessary to adjust GSA prices for purposes of Circular A-76
cost estimates. Following is a description of the material
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supply services provided by GSA together with mark-up rates
to be applied to GSA prices to show full costs:
Wholesale and Stores Direct Delivery. This program area
involves the distribution of common-use, commercially
available items, to agency requisitioners worldwide,
through a network of supply distribution facilities
located throughout the United States. Also included is
the Stores Direct Delivery Program which is designed to
provide customers with the same type of items carried in
stock which, because of volume orders, are procured from
the vendor for direct delivery to the requisitioner in
instances when delivery time is not critical.
Retail. The Retail Program provides the agency
requisitioner with high demand common-use office and
janitorial requirements from retail outlets located in
areas of concentrated Federal activity.
Nonstores Direct Delivery and Competitive Federal Supply
Schedules. This program Th concerned with obtaining
customer nonstock requirements through direct shipment
from the vendor. Presently, agencies are ordering
directly from vendors using schedules established by the
GSA Federal Supply Service. Agencies pay the vendors
directly for goods and services obtained.
The results of a GSA study disclosed the following add-ons
to GSA material prices which must be applied to show the
full cost to the Government for purposes of Circular A-76
cost studies:
Wholesale and Stores Direct Delivery - 21%
Retail - 36%
Nonstores Direct Delivery and
Competitive Federal Supply Schedules
5%
Documentation
The backup for the amount shown as direct material costs
must be supported by a detailed listing of all the items
needed with quantities, unit prices, suppliers, details of
adjustments and the source of the information. See Figure
1.
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FIGURE 1.
Estimate of
of contracting-out activity,
Quantity
direct material for
the review
Direct
Material
Cost
(5)X(9)
Source
of
Supply
Cost
National Quantity per
Item Stock Bill of Mat. or
Nomenclature Number Specifications
Adjust. 1/
Final
Est.
Quantity
Unit
Purchase
Price
Source
of Unit
Price
Adjust.1/
Final
Est. Unit
Price
(1) (2)
(3)
(4)
(5)
tb)
(1)
(K)
(9)
(10)
(11)
Widget 6730001161618
120
30 2/
150
$11.00
GSA Cat.c/
.55 b/
$11.55
693.00
GSA
Socket None
60
5 a/
65
15.00
Pur. Dept.
.75 b/
15.75
1,023.75
PM, Inc.
Frontam 3760008161611
500
50
550
57.00
Inventory
3.30 b/
60.30
33,165.00
ABC Corp.
TOTAL COST
$34,881.75
NOTE: 1/ Explain basis for adjustment.
2/ Normal spoilage.
h/ Estimated price change.
C/ Price list dated October 1, 1978.
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In developing the cost of direct material, it is important
to know how the cost of the material was determined. That
is, does it include such items as transportation,
procurement, storage, etc. This determination is essential
to the proper application of material overhead costs as
defined in the following paragraphs.
Material Overhead.
In addition to the direct cost of material, the costs of
material overhead -- acquiring, handling, and controlling
material -- must also be included in the Government's cost
estimate. Since, in most cases, it is not practical to
ascertain the costs of these activities as they relate to
each item of material, the related expenses should be
accumulated in an indirect cost pool (intermediate cost
objective) and allocated to the service/product being
estimated. Brief descriptions of the functions, the costs
of which are to be added to the basic material cost, are
presented below:
Acquiring. Includes the efforts related to the
determination of material needs, ordering, and/or
purchasing material and immediate supervision of such
efforts. It also includes the incoming transportation
cost of the material.
Handling. Encompasses the efforts related to the
physical receipt, storing, and issuing or otherwise
disposing of tangible material. Included in these
efforts are receiving and inspection activities, care in
storage, preservation and depreservation efforts,
assembly or disassembly of "sets" and "kits," and the
immediate supervision of such efforts.
Controlling. This administrative function relates to
the overall acquisition, handling, and distribution
process and involves the monitoring of these functions.
It also includes the keeping of inventory records of
material on hand or on order, and the taking of physical
inventories.
The costs to the Government of certain of the above
functions may already be included in the price that is paid
for the material. For example, the cost of material
acquired from Defense stock funds generally includes the
incoming transportation costs as well as a surcharge to
cover estimated net stock losses on current procurements due
to pilferage, damage, deterioration, physical inventory
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shortages and excess arising from obsolescence and other
causes. Accordingly, as mentioned in the DIRECT MATERIAL
section above, it is important to ascertain the makeup of
the price paid for material to preclude double costing.
The prices charged for material sold by one Government
agency to another should include all significant
identifiable direct and indirect applicable costs unless
exempted by law. This is in accordance with Comptroller
General Decision B-136318, which states in pertinent part:
"Effective compliance with the reimbursement provision of 31
U.S.C., paragraph 686(a) is only achieved when all
significant elements of cost are recognized and recovered in
any transaction under that section. If overhead expense is
significant, then like other elements of costs, it should be
recognized and recovered." Accordingly, for the most part,
and with the exception of GSA, as noted in the DIRECT
MATERIAL section, it can be assumed that the price paid for
material acquired from other Government agencies and outside
vendors will include all of their costs. Under these
circumstances, only those costs incurred by the acquiring
agency in accomplishing the acquiring, handling, and
controlling functions need be added to the material costs.
Within the acquiring agency, it will be necessary to
ascertain the costs of the above functions and allocate them
to the using activities on the basis of a beneficial or
causal relationship. For those agencies which conduct a
significant amount of interagency material transfer,
appropriate rate data should be readily available in view of
the above-mentioned Comptroller General's decision. For
those agencies which have not developed appropriate overhead
rates, the following guidance is presented.
Anticipated costs specifically identified with the functions
of acquiring, handling and controlling material will be
determined for the period of performance of the activity
being reviewed. Costs specifically identified with the
functions include assigned personnel and materials or
supplies and equipment used to perform the function as well
as related occupancy costs. Purchased services may also be
specifically identified with the functions; for example,
special tests as part of inspections of the material upon
receipt or while in storage to assure acceptability and
continued usability. Supervision and other indirect costs
applicable to the functions will also be included.
All other costs which measurably benefit or are caused by
the functions will be allocated to them. Among these should
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be the costs of central purchasing,requisitioning and
accounting for the activity's materials. The allocation of
centralized activities is discussed further under the
GENERAL AND ADMINISTRATIVE COSTS section of this Handbook.
A detailed listing of the material overhead costs will be
prepared and the total of such costs shown. Figure 2 is an
example of such a listing. Supporting documentation for the
amounts shown should be either attached to the listing or a
reference made to where such data can be examined.
After the total amount of the material overhead costs is
determined, it will be necessary to allocate a portion of it
to the function being costed. In most cases, an equitable
allocation of these costs to the function being priced can
be obtained by application of a developed rate to the
material costs. As illustrated in Figure 2, a material
overhead rate can be developed by dividing the total
material overhead expenses by the total material costs;
i.e., the allocation base. It is to be noted that this base
is the total for all products/services and indirect material
and supplies of the entity; not just for the activity under
review.
As illustrated above, the use of total material cost as the
allocation base is advocated except in those situations
where a specific function's beneficial or causal
relationship to , goods or services produced may be
significantly better measured by a physical characteristic
of the direct material used such as quantity, weight, or
volume. Similarly, the use of one indirect cost pool for
material overhead is advocated unless its use would
significantly distort the resultant allocations. When
material acquired from GSA is included in material costs,
the additive factors as presented in the DIRECT MATERIAL
section for GSA-furnished material should be added thereto
as a cost, and included in the total material costs used to
determine the rate.
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FIGURE 2
MATERIAL OVERHEAD
Description
18
Estimated Cost
For the Period
Ending
Salaries and Wages
Labor $ XXX,XXX
Fringe Benefits on above XX,XXX
Travel XX,XXX
Operating Supplies XX,XXX
Maintenance XX,XXX
Stationery, Printing & Office Supplies XX,XXX
Utilities XX,XXX
Depreciation XX,XXX
Rent (SLUC) XX,XXX
Allocated Amounts of Centrally Performed
Functionsl/
Purchasing XX,XXX
Requisitioning XX,XXX
Accounting X,XXX
Others (list separately) X,XXX
Total Material Overhead Expense (A) XXX,XXX
Total Material Costs (B) XX,XXX,XXX
Material Overhead Rate (A)1- (B)
1/ Attach details of allocation. That is, what rate was
used and how the rate was determined.
PERSONNEL COSTS
Direct Labor
Direct labor cost is that portion of wages or salaries which
can, as a practical matter, be identified with and charged
only to a specific product or service (final cost
objective). As stated in the Cost Accounting Standard
Board's promulgations, costs are either direct or indirect
only. Accordingly, labor costs similar to those treated as
direct for the cost estimate must also be considered as
direct costs of other final cost objectives and not included
in an indirect cost pool. Conversely, no final cost
objective shall have charged to it as a direct labor cost a
portion of any labor costs the remainder of which is
included in an indirect cost pool.
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Labor shall be classified as direct when:
a. it is essentially directly related to the product or
service;
b. the labor cost can be measured with reasonable
effort; and
c. the labor cost is not insignificant.
Direct labor costs are composed of two factors: the first is
the time it takes to do the job, and the second is the
rate(s) of pay for the labor skills required. These two
factors are equally important and each must be estimated as
precisely as possible. For this reason, they are treated
separately in the following paragraphs.
In estimating the time required to perform a service or
produce a product, the starting point is the statement of
work. A thorough review of the work requirements should
definitize the outputs requiring labor. The time required
to perform these outputs can be estimated by utilizing prior
experience if it is available, engineered standards, or
engineering estimates. If similar jobs have been completed,
the direct labor hours of those jobs may be used as a basis
for subsequent job estimating, provided appropriate
adjustments are made for any scope and procedural changes.
Also, when estimating the direct labor hours, include all
on-the-job training which involves productive work. Time
spent on all other training will be treated as indirect
labor and included in the appropriate overhead pool. See
OPERATIONS OVERHEAD, and GENERAL AND ADMINISTRATIVE
EXPENSES.
Normally, time requirements will be expressed in man-hours.
These man-hours can be converted to man-years, by dividing
the total man-hours required by either the total number of
working hours in a year (i.e., 52 x 40 or 2,080) or by the
number of hours normally worked in a year (i.e., 2,080 less
leave and holiday time). It is important to know how the
man-years were developed to determine whether the labor rate
to be applied to the time estimate should be increased to
provide for leave and holidays to be earned and taken by the
workers. If the time estimate includes a provision for
leave and holidays, the rate by which such a time estimate
is to be multiplied should not be increased to provide for
these costs, and vice versa. Additional comments in this
regard are contained in the following paragraphs dealing
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with the rate of pay to be applied to the time estimates and
in the examples at the end of this section.
When the number of hours of each type of labor are
identified, they must be multiplied by the approprate hourly
rate in order to arrive at an estimate of direct labor
costs. The skill requirements determined to be needed for
arriving at the time estimates will dictate the basic rates
to be used. Normally, the skills required will specify a
Wage Board (WB) or General Schedule (GS) level. When
computing costs for an existing Government activity, use the
actual rates for current employees. For positions that are
not occupied, or for a proposed new start, use salary step 4
for GS positions and wage step 2 for Wage Board positions.
Wage Board rates are normally expressed as hourly rates.
These are called the basic hourly rates and will be applied
to all hours worked and to all hours of annual leave earned,
and sick, holiday and other leave taken to ascertain the
total pay of a Wage Board employee. If night and/or
environmental differential pay will be required, these
differentials should also be included in the direct labor
cost for Wage Board employees. Premium pay for Federal
civilian firefighters and law enforcement officers is also
to be included. Excluded are bonuses, allowances, overtime,
and holiday pay.
General Schedule rates are normally expressed as annual
rates of pay. Night and post differentials are excluded
from this annual rate for GS employees. In order to convert
this annual rate to an hourly rate comparable to that of a
Wage Board employee, it must be divided by 2,080 hours.
Neither the basic hourly rate nor the annual rate contain a
provision for leave and holidays.
Based on Civil Service Commission data, a factor of 20% of
basic hourly or annual pay has been developed to estimate
the amount of annual leave earned and sick leave, holiday,
and other leave taken. In computing direct labor costs,
this factor must be used. As indicated earlier, the factor
may be applied to either the basic labor rate or the
productive time estimate. Because of this, care must be
taken that the 20% factor not be included in or excluded
from both. The following decision diagram illustrates the
proper rate to be applied to the time estimate.
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TIME ESTIMATE
REPRESENTS
Estimated hours required to do the job.
Estimated hours required to do the job,
plus the allowance for leave and
holidays (i.e., actual hours x 120%).
Estimated hours to be worked for a year
plus leave and holidays to be taken.
21
LABOR RATE
TO USE
Basic hourly
rate increased
by the factor
for leave and
holidays (i.e.,
base pay x 120%).
Basic hourly
rate.
Annual rate, or
basic hourly
rate x 2,080.
The detail necessary to support the estimate of direct labor
costs will be a listing of the various labor skills
required, the number of hours and rates of pay for each job
or component contained in the statement of work as
illustrated in Figure 3.
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FIGURE 3
DIRECT LABOR REQUIREMENTS
(Examples of Typical Entries)
Total Cost W/0
Basic Hourly Rate Leave & Holiday Total Annual
Hourly Based dn Annual Required Hours or Periodic
Line Item Skill Required Req. Hrs. Rate Annual Salary Salary X Applic. Rate Labor Costs**
Repair Electric
Meters Electrician W/B-4 200 $11.00 $ $ $2,200.00 $ 2,640.00
Install Meter
Mounts Carpenter W/B-3 100 11.50 1,150.00 1,380.00
Install Water
Coolers Carpenter's Helper 100 7.00 700.00 840.00
Inspection Inspector GS 9/2 100 - 7.21 721.00 865.20
($15,000 t 2,080
hours = $7.21)
Reliability
Improvement
Engineering Engineer GS 12/2 1 ?Man Year* 23,000 $23,000.00**
* Includes leave and holiday but excludes other fringe benefits.
**Annual salary already includes leave and holiday.
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Fringe Benefits
Fringe benefits are allowances and services provided by the
Government to its employees as compensation in addition to
the wages or salaries used in determing the basic hourly
rate or the annual rate of pay. For purposes of estimating
the cost of a Government operation, fringe benefits will
include only the normal, recurring benefit costs
attributable to an on-going operation. Costs such as
termination and separation allowances of Government
personnel displaced by a contractor operation are not fringe
benefits but rather are to be included as Termination Costs
in comparing Government costs and contractor costs.
Employee relocation allowances provided to Government
personnel shall be included in Government start-up or
termination costs, as applicable, when associated with the
opening or closing of a Government-operated activity.
The following guidance has been developed to facilitate
estimating fringe benefits applicable to the basic hourly
pay and the annual rate of pay of General Schedule and Wage
Board employees. In cases where certain employees receive
fewer or additional benefits, special computations will be
needed.
In determining direct labor costs, leave and holiday time is
considered as being included. Therefore, they are not
included in fringe benefits. Premium pay for working on
holidays is discussed under "Additional Benefits."
Standard Fringe Benefit Factors. Government-wide percentage
factors shall be applied to annual or periodic labor costs
(C above) to determine the following fringe benefit costs:
Retirement and Disability (for employees
under Civil Service Retirement)
Health and Life Insurance
20.4%
4.0%
Other Benefits (including work disability,
unemployment programs, bonuses and awards,
etc.) 1.9%
Additional Benefits. For Government civilian employees
(normally temporary employees) who are not under the Civil
Service Retirement System, the Social Security (FICA) cost
factor to be applied to salary or wage costs is the actual
employer contribution rate for the employees involved. When
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estimating the FICA cost, care must be exercised to assure
that the FICA rate is applied only to wages and salaries
subject to the tax. Information regarding FICA tax rates
and minimum salaries and wages to which they are applicable
should be obtained from the appropriate personnel office.
If the Government employees whose time is included in the
cost estimate will receive allowances for off-site pay,
location allowances, hardship pay, hazardous duty pay,
uniform allowances, incentive pay, cost of living
differential, night differential for General Schedule
employees, etc., an estimate of the actual costs thereof
will be used to develop individual rates for the local area.
Information needed to compute rates involved should be
obtained from the cognizant personnel or payroll office.
Where allowances are not uniformly distributed among all
local personnel, it may be necessary to compute separate
rates or amounts for individual employees or employee
groupings such as General Schedule employees and Wage Board
employees.
Overtime premiums and premium pay for working holidays are
not included as an additional benefit. Overtime and holiday
premiums are either "other direct costs" or "indirect
costs." In either case, they are not included in the
determination of additional benefits nor in the total annual
or periodic labor costs. Overtime and holiday premiums are
direct costs only when it is known that the work required to
provide the product/service being estimated must be
performed on overtime. Otherwise, overtime and holiday
premiums are indirect costs since the incurrence of overtime
provides equal benefit to all work scheduled. Night and
environmental differentials are considered additional
benefits for General Schedule employees, but are included in
the annual or periodic labor costs for Wage Board employees.
Fire fighters and law .enforcement officers' premiums are
also included in the annual or periodic labor costs.
Documentation. The backup material for the amount shown as
fringe benefits applicable to direct and indirect labor
shall be a detailed summary of each fringe benefit,
supported by a schedule ,showing the computation of each
fringe benefit cost. The computation schedule should
include the base costs to which fringe benefit factors are
applied and their source, as well as the rate factors and
their source. Normally, a single fringe benefit factor may
be used. However, if significant differences exist in their
composition, different fringe benefit rates will have to be
calculated separatelty for direct labor costs and for
indirect cost pools. A sample schedule is shown in Figure
4.
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Lo)
FIGURE 4
FRINGE BENEFITS
Annual or Periodic Labor Costs
25
SUBJECT
TO
RETIREMENT1/
SUBJECT
TO FICA
FRINGE
BENEFIT
TOTAL AMOUNTS
UNDER
LIMIT
OVER
LIMIT
DIRECT
LABOR $6,800,000
$170,000
$30,000
$7,000,000
INDIRECT
LABOR
MATERIAL
OVERHEAD 1,980,000
17,000
3,000
2,000,000
OPERATIONS
OVERHEAD 2;984,000
16,000
3,000,000
GENERAL &
ADMIN-
ISTRATIVE
EXPENSE 4,000,000
$ 4,000,000
TOTAL $15,764,000
$203,000
$33,000
$16,000,000
RETIREMENT AT 20.4%
of $15,764,000
$3,215,856
FICA at 6.05% of $203,000 13,195
HEALTH, LIFE INSURANCE AND OTHER BENEFITS
AT 5.9% of $16,000,000
TOTAL STANDARD FRINGE BENEFITS
ADDITIONAL FRINGE BENEFITS
LIST AND EXPLAIN
TOTAL FRINGE BENEFITS
CALCULATION OF FRINGE BENEFIT RATE
TOTAL FRINGE BENEFITS t TOTAL ANNUAL OR PERIDOIC
LABOR COSTS = $ 6,080,000 = 38%
$16,000,000
944,000
$4,173,051
1,906,949
$6,080,000
ENTRY ON COST COMPARISON
LINE 4 - $7,000,000 DIRECT LABOR x 38% = $2,660,000
LINES 2, 5, AND 7 - THE FRINGE BENEFITS TO BE INCLUDED
IN THE OVERHEAD POOLS (38% of $2,000,000; $3,000,000
AND $4,000,000, RESPECTIVELY) ARE INCLUDED IN THE
TOTAL SHOWN ON THESE LINES.
1/ See Subchapter S.14, "Computation of Annunities,"
Federal Personnel Manual.
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OPERATIONS OVERHEAD
General?
Operations overhead is one of the three classifications of
indirect costs. The other two, material overhead and
general and administrative expense, are discussed in
separate sections. This section deals only with operations
overhead.
Definition
Operations overhead costs are the indirect costs of an
annual fiscal period which are necessarily incurred to
,produce or deliver the products/services being provided by a
particular organizational element (hereinafter referred to
as a work center). Operations overhead differs from
material overhead costs which are related only to acquiring,
handling, and storing material, and from general and
administrative expenses which are those costs whose
incurrence benefits all the activities of the organization
of which the particular work center is a part.
For practical reasons, some minor costs are treated as
indirect costs even though a direct cost relationship can be
determined. Short-term work efforts and small, inexpensive
items of material generally fall in this category. They
should be included in the overhead pool which is most
closely related to the nature of the costs; i.e., material
overhead, operations overhead, or general and administrative
expense. It is important, however, that all costs incurred
for the same purpose in like circumstances be treated as
either direct costs only or indirect costs only with respect
to the final cost objectives (i.e., the product or service
being provided by the work center).
Estimating Operations Overhead Costs
Step One. The first step in estimating operations overhead
costs is to cletermine the work center(s) which will perform
the Work necessary to provide the product/service being
estimated. Once this determination is made, all of the
estimated costs related to the elements of expense of that
work center must be classified as either direct or indirect
costs. (Refer to the applicable sections for each element
of expense.) The following table illustrates the final
result of such a classification.
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TOTAL ESTIMATED COSTS TO BE
INCURRED BY
WORK CENTER "A"
DURING
FISCAL YEAR 197X
Direct Costs
Indirect Costs
Operations Overhead $4,500,000
Material Overhead -0- *
General & Administrative
Expense -0-
Total Indirect Costs
Total Annual Costs
27
$9,000,000
4,500,000
$13,500,000
* While it is possible to incur some of these types of
costs in Work Center "A", for purposes of this illustration
it is assumed that none will be.
Step Two. The summary amount of operations overhead shown
in the illustration in Step One represents the total costs
of the individual types of expenses involved. To arrive at
this amount, it is necessary to estimate the amount of the
individual types of expenses. As a general rule, where the
product or service is to be provided by an existing work
center, historical records of the amounts and types of
indirect costs incurred by it will be available. These
historical records may be used as the basis for developing
an estimate of the indirect costs to be incurred during the
period in which the product or service is to be provided.
They should be adjusted to reflect inflation and any other
changes in staffing or operations contemplated by
management. If the product or service being estimated
represents a new start, the statement of work will be the
fundamental document on which the estimate will be
predicated. Once the requirements of the statement of work
are determined, it may be possible to find a work center
within the organizational structure that is similar to the
one required. The indirect costs of that similar work
center, appropriately adjusted, would be an acceptable basis
for developing the estimate of the costs of the individual
elements of expense. If neither an existing nor similar
work center is available, then the annual amounts of the
individual items of indirect costs necessary to accomplish
the statement of work should be estimated in consultation
with cognizant management and technical personnel.
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Types of Operations Overhead Expenses
A description of the more common types of operations
overhead expenses are discussed in the following paragraphs.
Indirect Labor - This category includes all personnel costs
of the work center not considered as direct labor, material
overhead, or general and administrative expense, as defined
in the sections dealing with those costs. The costs of
supervision and administration within the work center, as
well as the costs of the time of direct employees not spent
in productive effort or on leave (e.g., idle time, training,
etc.) should be included. Care must be taken to assure
that indirect labor costs that are more appropriately
classified as material overhead or general and
administrative expense are not included in the operations
overhead. Indirect labor costs should include all
applicable fringe benefit costs (see Figure 2). Estimates
of and supporting documentation for indirect labor should be
prepared in much the same way as for direct labor.
Essentially, positions required by the work center
identified as providing the product/service are identified
and designated as direct or indirect. Once the designation
is made, it must be consistently followed. The salaries and
wages of the indirect employees are estimated for the
year(s) being studied.
Indirect Materials and Supplies - Included in this category
are those items of material or supplies utilized by the work
center in its operations but which are not chargeable as
direct materials as defined earlier in this chapter.
Examples of such items are lubricants and rags for
equipment, or common use low-cost fasteners, such as wire,
staples and screws. The costs of indirect materials and
supplies should include their allocable share of material
overhead. Estimates of indirect materials and supplies are
determined in much the same manner as those for direct
materials. The prices for these types of materials and
supplies are estimated and total indirect material and
supply costs determined.
If it is not practical to list each single item of indirect
material and supplies in the documentation supporting the
estimated amount, they may be aggregated into logical
subgroupings and shown in total and a reference made as to
where the detail can be examined. If the amounts of
indirect material and-supplies are estimated in some other
way than by a detailed listing, a clear explanation of the
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method used to arrive at the estimated amount must be
contained in the supporting documentation.
Depreciation - Depreciation is the method utilized to spread
the cost of tangible capital assets (plant, machinery, etc.)
less residual value, over their estimated useful lives in a
systematic and logical manner. Note that because land has
an unlimited life, it is not a depreciable asset and its
cost should not be included with other asset costs that are
subject to depreciation. The cost of a tangible capital
asset includes the original acquisition cost plus the
transportation and installation costs incurred to place the
asset in use. Additions need to be added and retirements
deleted to keep the costs current. Useful life has
reference to the estimated period of economic usefulness of
the asset in a particular operation as distinguished from
its physical life. Determination of the asset's useful life
should be based on actual or planned retirement and
replacement practices. An asset that is still in use should
not be reflected as being fully depreciated. To avoid this
happening, the estimated useful lives need to be reviewed
and adjusted periodically to conform to current plans.
Residual value is the estimated value of the asset at the
end of its useful life. Because useful life and physical
life may differ, the residual value is not always equal to
scrap value. Both the useful life and residual value should
be estimated, based on historical records and in
consultation with engineering and management personnel. For
purposes of this Handbook, depreciation will be computed on
a straight-line basis. That is, an equal amount of the
difference between the acquisition cost of the asset and its
residual value should be charged to each accounting period
or unit of usage covered by its useful life.
For example, if an asset costs $1,000 and had a residual
value of $100 and a useful life of 10 years, $90 should be
charged to each year's operation during its useful life
($1,000 - $100 = $900 t 10 years = $90/year).
If depreciation is to be based on hours of usage, the
difference between the cost and residual value would be
divided by the estimated number of hours the machine will be
used during its useful life to arrive at an hourly
depreciation rate. The amount of depreciation to be
included in the operations overhead pool would be the
product of the number of hours that the machine will be used
during the year, multiplied by the hourly rate previously
described, as illustrated below
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Acquisition Cost
Residual Value
30
$1,000
-100
$ 900
Estimated usage during useful life 5,000 hours
Depreciation Rate ($900 t 5000 hours) .18/hour
Estimated usage during year 500 hours
Depreciation tO be included
(500 hours x $0.18 hour) $ 90
The annual depreciation related to all the tangible capital
assets (building, plant, equipment, etc.) used by the work
center in providing the product/service being estimated will
be included in the work center operations overhead costs.
The indirect cost pool (material, operations, or general and
administrative expense) to which it is assigned will depend
on the use made of the assets.
Supporting documentation for the estimated amount of
depreciation should be a detailed listing of the assets
involved and the annual depreciation related to each.
Where, because of the magnitude of the assets involved, it
would not be practical to prepare such a list, the amount of
depreciation may be supported by a listing of logical
groupings by type of assets and reference made to where the
detailed supporting property records may be examined. If
depreciation is estimated on other than an item-by-item
basis, a complete explanation of the methology used must be
included in the supporting documentation.
Rent - This is a cost incurred for the use of a
non-Government entity's tangible assets (land, plant and
machinery, etc.) in providing the product/service being
estimated. All such costs anticipated to be incurred during
a fiscal year encompassing the period of performance should
be included in the operations overhead pool unless the
assets are used in connection with only one product/service.
In the latter case, the rental amounts will be treated as a
direct cost of that product/service, provided that the
rental amounts of similar assets are treated consistently
for all other products/services. The amount of rent and the
charges included must be determined. If the rent includes a
separate charge for maintenance and repair, utility charges,
etc., and the amount is significant, those charges should be
included in their proper expense classification, if they do
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not benefit all products or services in the same proportion
as the rental charge.
The cost of Government ownership of an asset will normally
be included under depreciation and other ownership accounts.
However, where a Government-owned asset is "rented" by one
Government organization, from a different Government
organization, only the actual costs of ownership should be
recorded as cost. If the rental amount is predicated on the
market rental value, or an incremental cost basis, there may
be a significant difference between the rental amount and
the cost of ownership. If the rental amount to be included
in the estimate represents a GSA-billed Standard Level Users
Charge (SLUC) and are in excess of $50,000 annually, a
determination of this difference will be made. The
difference will be either added or subtracted from the
"rental" costs to bring them to the actual costs to the
Government. If the rental costs are based on incremental
costs, the difference will be determined regardless of their
amounts. If it is impractical to arrive at actual
Government ownership costs by consultation with the
Government lessor, a reasonable estimate of ownership costs
will be included.
Maintenance and Repair - The normal costs incurred during a
fiscal year for maintaining and repairing the tangible
capital assets utilized by the work center providing the
product or service being estimated (but not those properly
classified as material overhead or general and
administrative expense) will be included in the operations
overhead cost pool. These costs relate only to those
maintenance and repair activities that are necessary to keep
the buildings and equipment in operating condition. The
costs of major overhauls and repairs which add value or
prolong the life of the asset should be treated as capital
expenditures and depreciated over the extended or remaining
useful life of the asset. The methodology used to estimate
of all these costs should be contained in the supporting
documentation.
Support Costs - This category includes those indirect costs
incurred during the fiscal year by other organizational
elements in support of the work center in which the
product/service being estimated is to be performed. For
example, motor pool services in support of the products or
services provided by the work center would be includable in
operations overhead. Support costs applicable to material
overhead or general and administrative expense should not be
included in operations overhead (e.g., ADP services
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involving material inventory or general management
information), but should be included in those accounts.
Supporting documentation for these costs should indicate the
service involved and the performing organization. If
significant in amount, the organization supplying the
support should estimate the costs in accordance with the
provisions of this Handbook and provide the estimate and
supporting documentation to the recipient work center for
inclusion in its estimate. If the amount is not considered
significant enough to warrant preparation of an estimate as
described above, the methodology used to arrive at the
estimate must be _clearly stated in the supporting
documentation.
Utilities - This category includes charges for fuel,
electricity, telephone, water and sewage services, etc. The
amount of these costs applicable to the work center will be
determined either on a metered or allocated basis of
consumption. Proration of the amounts to the various
overhead pools will be by a unit of measure that would vary
directly with consumption; e.g., floor space, number of
telephones, etc. Estimates of these expenses to be incurred
for fiscal years encompassing the period of performance
should be based on current experience appropriately adjusted
for anticipated future experience. Engineering estimates
should be used when experience data are not available. All
estimates should be appropriately documented in supporting
detail.
Insurance - Operation of any government activity involves
risks and potential costs from fire and casualty losses and
from liability claims. These risks are normally covered by
insurance in the private sector, but the Government is
primarily self-insured and must pay for such losses as
incurred. Casualty losses have been estimated at .05% of
the value of Government facilities, equipment, and material;
liability losses at .07% of personnel costs. For a
simplified estimate of insurance costs, use .06% of the sum
of lines 1 through 4 plus the net book value (acquisition
cost less depreciation accumulated to date) of all
depreciable assets.
Overtime and Premium Pay - The amounts of overtime and other
premium pay to be included as indirect costs in the
operations overhead pool are those incurred in order to
complete all work of the work center in a timely manner.
The reason for considering the overtime or other premium
portion of the salaries and wages as an indirect cost is
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that the scheduling of work effort is usually done on a
random basis. That is, the actual work performed during
overtime hours or on holidays is usually no more the basis
for incurring the premium payments than the effort performed
during the regularly scheduled hours. Accordingly, under
these circumstances, all work performed in the work center
should receive a proration of the premium costs. This is
accomplished by including these costs in the overhead
expense pool.
The straight time portion of such wages will be considered
as Direct Labor as indicated under that section of this
Handbook. If the premium pay is necessitated not by an
overloading of the work center's normal capacity, but by the
special demands of a single customer or client, the related
premium costs should be considered as Other Direct Cost for
the product or service furnished that customer or client.
Supporting documentation for the amount of overtime and
other premium pay included in the indirect cost pool should
indicate how the need for such payments was determined and
how the amount was computed.
Other Costs - The indirect costs previously discussed are
examples of the principal common types of costs which, if
applicable, may be entirely or partially included in
operations overhead. If further guidance is required on
some unique element of cost, the cognizant accounting office
should be consulted.
Developing Overhead Rates
Allocation Base - Determination of the amount of the annual
operations overhead cost to be applied to the
product/service being estimated requires establishment of an
appropriate base for allocation of costs. Where the
product/service being estimated represents the total output
of the organization for the year, all of the operations
overhead costs are applcable. However, where more than one
product or service is provided during the year, an
allocation must be made between these products and/or
services. This is normally done by determining and applying
an overhead rate. Overhead rates can be expressed as a
percentage of one or more elements of expense; e.g., 20% of
direct labor or 15% of total direct costs. Overhead rates
can also be expressed as a monetary unit related to some
quantitative measure; e.g., $2.00 per direct labor hour,
$3.00 per machine hour, $0.50 per square foot of space used.
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To illustrate the above, assume that Work Center "A"
provides three products/services entitled A-1, A-2, and A-3,
and a cost comparison analysis is being prepared for A-3.
The following additional facts are to be assumed;
o That 300,000 direct labor hours are incurred
annually on the three products/services, as follows:
A-1 150,000
A-2 90,000
A-3 60,000
Total 300,000 labor hours
o Direct labor costs for the year are $3,000,000.
o 50,000 machine hours are used to provide the three
products/services.
A-1 5,000
A-2 5,000
A-3 40,000
Total 50,000 machine hours
Overhead Rates - Using these assumptions as well as those
shown for Work Center "A" in Step One, the following
overhead rates (and many others) can be developed:
Percentage of Direct Labor Costs
Operations Overhead t $4,500,000 = 150%
Direct Labor $3,000,000
Percentage of Direct Costs
Operations Overhead t $4,500,000 = 50%
Total Direct Costs $9,000,000
Rate Per Direct Labor .Hour
Operations Overhead t $4,500,000 = $15.00 per Direct
Direct Labor Hours 300,000 Labor Hours
Rate Per Machine Hour
Operations Overhead t $4,500,000 = $90.00 per
Machine Hours 50,000 Machine Hour
As can be seen from the above, there are several ways of
developing overhead rates. Rarely will the various rates
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result in the identical allocation of overhead costs to the
services/products provided by the work center. Accordingly,
the selection of the proper base of allocation is of extreme
importance in costing product/service A-3.
A straightforward way to select the best allocation base is
to chart operations overhead costs and various possible
allocation bases over time. The allocation base that varies
most frequently in the same direction at the same time as
the operations overhead costs would be the best allocation
base.
As long as it can be ascertained that indirect. Costs vary
directly with a measure of an element of expense or activity
(dollars, hours, etc.) and that all products or services
furnished by the work center benefit from the same elements
of expense or activity, and in the same proportion, the use
of that single element as the allocation base will normally
result in an equitable distribution of overhead costs.
Assuming direct labor hours meet this criterion for Work
Center "A," operations overhead would be allocated to the
three products/services as follows:
Operations
Direct Overhead Rate
Product/ Labor Per Direct Overhead
Service Hours Labor Hour Allocation
(1) (2) (1) x (2)
A-1 150,000 $15.00 $2,250,000
A-2 90,000 15.00 1,350,000
A-3 60,000 15.00 900,000
300,000 $15.00 $4,500,000
A single base of allocation will normally not be warranted
in a work center where:
o The indirect costs do not vary directly and
proportionately with a single measure of expense or
activity, or
o all elements of expense and activities which
influence the incurrence of operations overhead
costs (e.g., direct labor influences supervision,
etc.) are not incurred in roughly the same
proportion for the various products/services
provided.
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When these conditions are encountered, there are two
possible solutions. The first would be to subdivide the
work centers into departments and develop a separate
operations overhead for each. In that case, development of
the departmental operations overhead would be identical to
the development of the operations overhead rate(s) for Work
Center "A", as described herein. The second solution is to
develop two or more overhead rates within the work center by
grouping the indirect expenses in overhead pools related to
the disparate functions and allocating them on appropriate
bases. Obviously, the bases of allocation will not be the
same.
We can illustrate the use of two rates for Work Center "A"
using the assumptions previously cited. From these
assumptions, it can be seen that product/service A-3 is
responsible for most of'the machine hours used by the work
.center. Specifically:
A-1 uses 5,000 machine hours;
A-2 uses 5,000 machine hours;
A-3 uses 40,000 machine hours.
Accordingly, direct labor hours would not be an appropriate
allocation base because it would result in a
disproportionate amount of machine shop expenses
(depreciation, maintenance and repair) being allocated to
products A-1 and A-2. Conversely, the use of machine hours
would result in an inequitable share of the labor-related
indirect expenses being allocated to product/service A-3.
Two pools for Work Center "A" may be established by
segregating machine-related costs from the other operations
overhead as follows:
Basic Pool $1,500,000
Machine Pool 3,000,000
Total Operations Overhead $4,500,000
It is determined that the best allocation base for the basic
pool is direct costs and the rate is:
Basic Pool t $1,500,000 = 1/6 or 16.67%
Direct Costs $9,000,000
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U 37
Then, the $9,000,000 direct costs are
charged to each product as follows:
A-1
$4,500,000
A-2
2,700,000
A-3
1,800,000
Total
$9,000,000
Therefore, the allocation of the
pool is:
$1,500,000
determined to be
A-1 1/6 of $4,500,000 = $ 750,000
A-2 1/6 of $2,700,000 = 450,000
A-3 1/6 of $1,800,000 300,000
$1,500,000
in the basic
It is also determined that the best allocation base for the
machine pool is machine hours and the rate, $60 per machine
hour (machine pool $3,000,000 t 50,000 machine hours).
Taking the machine hour usage previously determined and this
rate, the allocation is:
A-1
5,000
hours at
$60
$ 300,000
A-2
5,000
hours at
$60
300,000
A-3
40,000
hours at
$60
2,400,000
$3,000,000
Combining the two pools gives us the total allocations:
Basic Pool
Machine Pool
Together
A-1
$ 750,000
$ 300,000
$1,050,000
A-2
450,000
300,000
750,000
A-3
300,000
2,400,000
2,700,000
Total
$1,500,000
$3,000,000
$4,500,000
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The following comparison of the resultant overhead
allocation by using a single rate based on direct labor
hours and the two rates as illustrated above highlight the
significant differences that can be achieved by utilizing
different overhead allocation methods.
One Rate
(Direct Labor
Hours)
Two Rates
(Basic and
Machine)
A-1
$2,250,000
$1,050,000
A-2
1,350,000
750,000
A-3
900,000
2,700,000
Total
$4,500,000
$4,500,000
Summary
Difference
(Substract One
from Two)
$(1,200,000)
( 600,000)
1,800,000
$ -0-
In summary, operations overhead is a significant cost
element in estimating the cost of providing a product or
service. It is extremely important that elements of
indirect expense included in the operations overhead pool
are appropriate and the amounts thereof are carefully
estimated. It must be determined by careful study whether
more than one pool of expenses is required. Also, the
selection of a proper base(s) for allocation is essential to
accurate estimating. As illustrated above, significant
differences can result from the use of different methods for
allocating overhead. The choice of the appropriate method
should be based on a review of the functions and their
related costs within the work center. The pools and bases
should be selected based on supported facts and
circumstances. They should not be selected on the basis of
arbitrary assumptions, or the fact that the data for a
particular base are readily available. The main purpose of
the overhead rate must always be kept in mind. It is
developed to permit the allocation of overhead expenses to
the products/services being provided on the basis of the
benefits they receive from the incurrence of the cost.
Supporting Documentation
The supporting documentation needed for the amount of
operations overhead allocated to product/service A-3 will be
a listing of the expenses included, the base used to develop
the rate(s), and the supporting detail for each. Figure 5
is an illustration of the operations overhead costs of Work
Center "A."
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FIGURE 5
WORK CENTER "A"
COMPUTATION OF OPERATIONS OVERHEAD RATE
FOR THE YEAR 197x
Operations
Overhead Expenses
Basic
Machine
Total
Indirect Labor
Supervision
Clerical
Indirect Time of Direct
$ 70,000
700,000
$ 300,000
300,000
$ 100,000
1,000,000
Personnel
400,000
600,000
1,000,000
Indirect Materials and
Supplies
30,000
370,000
400,000
Depreciation
40,000
400,000
440,000
Rent
10,000
50,000
60,000
Maintenance and Repair
40,000
385,000
425,000
Support Costs
10,000
65,000
75,000
Utilities
60,000
610,000
670,000
Insurance
10,000
20,000
30,000
Other
Allocations Costs
127,000
168,000
295,000
Minor Direct Costs
3,000
2,000
5,000
TOTAL OPERATIONS OVERHEAD (A) $1,500,000
Allocation Bases
Direct Costs
Machine Hours
(B)
Overhead Rate (A)?(B)=(C) 16.67% of
Direct Costs
Application to Product/
Service A-3
Direct Costs Applicable
To A-3 (D) $1,800,000
Machine Hours Applicable
To A-3 (D)
$3,000,000 $4,500,000
$9,000,000
50,000
$60 Per
Mach. Hour
40,000
Amount of Operations
Overhead Allocated to
A-3 (C)x(D) $ 300,000
$2,400,000 $2,700,000
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INTERAGENCY SUPPORT
In developing the estimates of Government costs, products or
services which are excess to the needs of other Federal
agencies should be used in preference to new procurements.
The agency that will be providing the excess product or
service must prepare cost estimates in accordance with this
Handbook and furnish its cost data on lines 1 through 9 and
its other considerations on lines 23 through 30 of the Cost
Comparison Form. The Form must be signed on the "prepared
by" and "audit certification" lines. The Cost Comparison
Form will be submitted to the agency receiving the product
or service. The receiving agency will classify the
providing agency's costs as other direct costs, operations
overhead, or general and administrative expense as
appropriate. The other considerations will also be added to
the appropriate classification. The providing agency's Cost
Comparison Form will be used as supporting documentation.
NOTE: Agency reimbursement charges for providing the
product or service to another agency may not be used as a
basis for the cost estimate unless such charges reflect all
costs as provided in this Handbook.
If a decision to contract out would cause the government
not to utilize available excess facilities, material or
service capacity, any resulting increase in cost to the
government must be included as an element in computing the
total cost of contracting for the product or service. For
guidance in developing and documenting such costs, see the
section under OTHER CONSIDERATIONS titled, "Utilization of
Government Capacity."
OTHER DIRECT COSTS
Other direct costs are the sum of all those direct costs
exclusive of direct material and direct labor, which are
identified as having been incurred specifically for a
particular product or service (the final cost objective).
Some examples of other direct cost are: service center
charges (e.g., ADP service center, printing shop, etc.),
travel, and purchased services.
There are certain types of effort that some organizations
treat as indirect expense and others classify as direct.
Examples of these costs are special travel expenses,
preservation, packaging and packing, plant rearrangement,
consultant's fees, certain clerical salaries, shop supplies,
transportation costs, plant protection, royalties, computer
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expenses, and telephone and telegraph expenses. Whenever an
organization decides to classify a cost as direct it
normally will be included under Other Direct Cost unless it
is direct material or direct labor. When an organization
decides to reclassify a cost from an indirect to a direct
charge, it is necessary to ascertain that the organization's
accounting and estimating practices provide consistent
treatment of these special costs during the period under
review. To prevent duplication, it must be established that
when these items of expense are treated as direct costs,
similar costs are excluded from indirect costs applied to
the estimate. Conversely, when an organization reclassifies
a cost from direct to indirect, care must be taken to
include these costs in the appropriate indirect costs pool.
Refer to the DIRECT LABOR and DIRECT MATERIALS sections of
this handbook for cost estimating instructions and
supporting documentation requirements which are appropriate
for estimating and documenting other direct costs.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses are those
financial, management or other expenses which are incurred
for the benefit of an organizational unit as a whole. They
do not include expenses which should be classified as
material or operations overhead expenses which have been
discussed previously in this Handbook. Because of their
nature, general and administrative expenses may be incurred
at various levels within the Governmental structure. The
following simplified diagram depicts the various levels
within the Government where G&A expenses may be incurred:
Judicial
Executive
Legislative
Independent
Department
Department
Agencies--
of
of
VA, GSA, etc.
Agriculture
Defense
Department
of
Energy
Department
of
Army
Major
Commands
Department
of
Navy
Department
of
Air Force
Installations
Work
Center
A
Work
Center
Other
Functions
Department
of
Labor
By looking at the above organization structure, it can
readily be seen that certain administrative expenses
incurred by the executive, legislative or judicial branches
of the Government are applicable to the various departments
and independent agencies. Similarly, certain administrative
expenses incurred at the department level would be
applicable to the activities in their organization (e.g.,
Departments of Army, Navy, and Air Force). This flow would
continue on down to the organization level.Within the
organization itself, general and administative expenses may
be incurred which are applicable to all the functions being
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performed there. This flow-down of G&A expenses will vary
based on the organizational structure of each department or
agency, but will exist in some form in each. A portion of
the general and administrative expenses incurred above the
installation level are applicable to the product or service
being estimated. However, for purposes of this Handbook,
only those G&A expenses which contribute directly to the
actual operation of the organization will be included in the
estimate. This decision is based on materiality of amount
and the conclusion that the efforts involved in funding,
policy-making, long-range planning, direction, etc.
(commonly referred to as staff functions) would continue and
be equally applicable to either contractor or Government
effort.
In deciding at what level to discontinue the allocation of
G&A expenses to the product or service to be provided, a
self-sufficiency criterion should be used. A
self-sufficient organization is one that operates as an
independent unit, receiving only funds, policy direction,
and guidance from the next higher organizational unit. If
any general and administrative-type activities are provided
at no cost or on an incremental cost basis, the organization
is not self-sufficient. In these circumstances, an
appropriate allocation of the applicable expenses of the
incurring organization, should be included in the
recipient's G&A expenses to be allocated to the products
and/or services it provides.
To illustrate, assume the organization we are concerned with
is a laundry. If that laundry is located on its own land,
does its own maintenance, budgeting, accounting, etc., it
can be considered self-sufficient and no further G&A costs
will be allocated to it from the next higher organizational
unit. The G&A costs incurred by the laundry itself will be
allocated to the various products or services it provides.
However, if that laundry was collocated on the same grounds
or in the same building of another organization, say a
hospital, and the.hospital staff provides it with certain
maintenance, budgeting and accounting effort, on a no-cost
or incremental cost basis, then the laundry would not be
self-sufficient. The applicable portion of the hospital's
G&A expense must be allocated to the laundry. Assume
further that the hospital to which the laundry is attached
is located on a military base and the hospital receives
certain support from the base, such as road and parking lot
maintenance, security, fire protection, etc. If the
hospital receives these services on a no-cost or incremental
cost basis, it is not a self-sufficient unit. The allocable
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portion of the costs incurred by the base that benefits the
hospital should be included in the hospital's G&A expenses
and an equitable amount thereof allocated to the laundry.
For purposes of this illustration, we will assume that the
military base is self-sufficient (they all are not); that
is, it receives only funding, policy direction, and guidance
from its next higher level of command. Accordingly, none of
the G&A expenses incurred by the next higher level of
command would be allocated to the military base.
In addition to the self-sufficiency criterion, materiality
of amount must be kept in mind in determining the level
above which G&A expenses will not be considered in the
estimate. When the costs involved are minor in amount and
their ultimate allocation to the product or service is not
likely to have a bearing on the decision to contract-out or
perform in-house, they may be excluded if not readily
available.
The G&A rate to be used to allocate the organization's G&A
expenses to its activities will be developed in much the
same manner as the operations overhead rate was developed.
That is, a pool of annual G&A expenses will be developed and
the total divided by the allocation base.
A significant difference between general and administrative
expense rate development and that for operations overhead is
that G&A expenses must be accumulated in a single pool.
This differs from the operations overhead where certain
circumstances may require the establishment of more than one
pool. The reason that only one G&A pool of expenses will be
needed is the nature of G&A expenses. As previosuly stated,
G&A expenses are incurred for the benefit of the
organization as a whole. If an incurred expense does not
meet this criterion, it should not be included in the G&A
pool.
Typical examples of the types of cost to be included in the
G&A expense pool are the expenses connected with the
following offices or functions:
The Office of the Organization Director (Commander)
The Office of the Comptroller
The Office of the General Counsel (Judge Advocate)
Centralized Personnel Services
Centralized Administrative Services (Adjutant General)
Centralized Procurement
Public Relations
Internal Review (Audit)
Security
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To develop a G&A expense pool, the costs associated with
each of the functions incurred for the benefit of all
products/service provided must be estimated. The cost of
performing each function is the total of the expenses
(indirect labor, indirect material, etc.) incurred for that
purpose during the year. The nomenclature for the types of
expenses to be included in G&A overhead pool are similar to
those included in operations and material overhead. The
characteristic which distinguishes these three types of
overhead costs, one from the other, is the purpose for which,
it was incurred. Accordingly, the G&A pool will be made up
of elements of expense similar to those for operations
overhead in nomenclature but which are related to performing
functions and services such as those performed by the
offices listed above. The methods of estimating the amounts
of these costs will be the same as those described in the
Operations Overhead section and are not repeated here.
Since all G&A expenses must be incurred for the benefit of
the organization as a whole, the base used to allocate these
costs to the final cost objectives must be representative of
the overall operations of the organization. For this
reason, the total costs incurred (exclusive of G&A expenses)
has been chosen as the allocation base. This base should
include the cost of all the mission functions of the
organization whether these are commercial, industrial or
governmental functions. If, because of the use of this
base, the G&A expenses allocated to any final cost objective
are significantly different from the benefits it received
from their incurrence, a special allocation of G&A expenses
to that final cost objective should be made. The amount of
the G&A expenses so allocated should be removed from the
pool and the costs of the final cost objective, exclusive of
G&A, should be removed from the base.
The following steps depict the development of a G&A rate:
Step 1: Develop the G&A expense pool
General and Administrative Expenses
Executive, Professional, Technical, and
Supervision Salaries $1,450,000
Clerical and Other Salaries 1,175,000
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C.)
Other Expenses (Training, Depreciation,
Indirect Materials, Allocated Support
Costs, etc.)
46
3,100,000
Total G&A Expenses $5,725,000
.Step 2: Develop the Base of Allocation
(costs incurred by Organization A, ex-
clusive of G&A expense)
Direct Costs
Operations Overhead Costs
Material Overhead Costs
Total Cost Incurred Exclusive of
G&A Expenses
Step 3: Develop the Organizational G&A
rate (divide the pool by the base)
$ 5,725,000= 11.12%
$51,500,000
$42,500,000
8,900,000
100,000
$51,500,000
To estimate the amount of the annual G&A expenses applicable
to the product or service being estimated, the above
developed rate will be applied to the total estimated annual
cost (exclusive of G&A) of providing the product or service
as illustrated below:
Direct Material
Material Overhead
Direct Labor
Fringe Benefits
Other Direct Costs
Operations Overhead
Subtotal
General & Administrative Expense
($3,255,000 x 11.12%)
$ 450,000
5,000
1,000,000
250,000
50,000
1,500,000
3,255,000
361,956
TOTAL COST $3,616,956
The detail required to support the amount of G&A expense
allocated to the product or service being estimated will be
a listing of the expenses related to the functions and
offices classified as general and administrative expenses.
The amount to be included in the pool is the annual amount
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of the G&A expense expected to be incurred during the
year(s) in which the period of performance is encompassed.
These amounts will be predicated on past experience,
adjusted to provide for inflation and any change in
operations. If the period of performance occurs in more
than one fiscal year, a separate G&A rate will be developed
for each fiscal year in which a portion of the performance
will take place. For instance, if a service is to be
provided for 18 consecuritve months beginning on October 1,
197X, two rates will have to be developed. The rates will
be applied to the estimated cost of the service provided in
each fiscal year. The base of allocation will be the total
estimated cost (exclusive of G&A) expected to be incurred by
the organization in each fiscal year. The supporting detail
for each year will indicate the source of the estimates and
where supporting documentation can be found.
INFLATION OF OUT-YEAR COSTS
In preparing the Government's estimate, all known or
anticipated increases in posts to be incurred in the first
year of operation should be provided for in each element of
cost, as stipulated by the instructions contained in this
Handbook. For all subsequent years, anticipated changes in
scope of work may be added but no inflation factors will be
added to the individual elements of cost. Rather, an amount
equal to 4% of the preceding year's total cost (adjusted for
any scope changes) will be added to each subsequent year's
costs. These amounts will be entered on line 8 of the Cost
Comparison Form under the appropriate year.
For example, if the first year's costs on line 9 are
$150,000, then the amount on line 8 in the second year will
be $6,000 (4% of $150,000); assuming there is no change in
other cost elements, the amount on line 8 in the third year
will be $6,240 (4% of $156,000), etc.
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CHAPTER V - DEVELOPING AN ESTIMATE OF
CONTRACTING-OUT COSTS
This section of the Handbook deals with the determination of
the cost to the Government of acquiring the product or
service being analyzed by letting a contract. It includes
determination of not only the amount to be paid to the
contractor (contract price) but also the related in-house
costs that will be incurred by the Government as a result of
contracting out. The cost comparison form (Exhibit 1)
identifies the following categories of Government cost which
might be incurred in connection with contracting out:
Contract Price
Transportation
Contract Administration
Government-Furnished Property
Standby Maintenance
Other Costs
General and Administrative Expense (on the above)
Comments on each of these categories are contained in the
following paragraphs.
CONTRACT PRICE
The contract price included in the cost comparison must be
supported by a firm bid or proposal. The contractor's bid
or proposal must be predicated on the same statement of work
utilized in preparing the Government's estimate. Also, the
solicitation for bids or proposals will notify the bidders
or offerors that a comparison will be made between the cost
of contracting the effort and performing it in-house.
In determining the amount to be recorded as the contract
price, consideration must be given to the contract type.
The following guidance is provided in this regard.
a. In the case of an advertised firm fixed price
contract, the price of the low bidder or offeror will be
entered without adjustment. If a firm fixed price contract
is to be negotiated, the negotiated low bid price will be
entered.
b. When fixed price contracts with flexible pricing
arrangements are contemplated; e.g., fixed price incentive
fee, the target price of the apparent low bidder or offeror
will be entered.
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c. If a contract with an award fee is proposed, the
performance level comparable to that attributed to
Government employees in preparing the Government's estimate
will be used to estimate the amount of the fee. The
estimated award fee, plus the contract costs of the apparent
low bidder or offeror will be entered.
d. If a time and material or labor-hour contract is
proposed, the estimated total cost of performance may be
calculated and entered. Alternatively, comparable rates can
be developed for the Government cost estimate and the
comparison can be made on the basis of rates, rather than
total costs.
e. If a cost reimbursement-type contract is required by
special circumstances, the apparent low bidder or offeror's
estimated costs must be subjected to a meticulous technical
and cost evaluation to assure that the estimated costs are
neither over nor understated. Adjustments to the bidder or
offeror's estimate need to be reviewed with the bidder or
offeror before the adjusted contract price is entered.
TRANSPORTATION COST
The Government may incur transportation costs whether a
product/service is provided by an in-house operation or by a
contractor's operation. Transportation for an in-house
operation is normally associated with the applicable
overhead. This section deals with the cost to the
Government for transportation provided in connection with a
product/service obtained by contract.
The contract documents or negotiation memoranda will
indicate the additional transportation that is to be
furnished by the Government. These items are usually
clearly indicated. There . may be some transportation in
addition to that spelled out in the contracts which require
an estimate. The best source for obtaining estimates of the
cost of this transportation is the local transportation or
purchasing office.
Typical of the transportation dosts that may be incurred by
the Government are:
a. Cost of transporting a contractor's employees;
b. Cost of transporting Government material, equipment,
or supplies to and from a contractor's site, such as:
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o Cartage cost from airport, bus, rail or marine
terminals;
o The cost of special equipment, like
refrigerated vans or heated containers;
o The cost of demurrage on rail cars or detention
charges for trucks;
o In exceptional cases, the cost of special
insurance.
The supporting documentation for these costs should describe
the transportation to be provided, the mileage and/or rates
utilized in arriving at the estimates, and the source from
which they were obtained. If transportation costs were
derived in some way other than by extending applicable
mileage and rates, the methodology used to arrive at the
estimate should be fully explained.
CONTRACT ADMINISTRATION
Contract administration includes the costs incurred by the
Government in assuring the contract is faithfully executed
by both the Government and the contractor. In addition to
reviewing contractor performance and compliance with the
terms of the contract, contract administration consists of
processing payments, negotiating change orders, and
monitoring close-out of contract operations.
The costs of contract administration will be determined by
applying four percent (4%) to the contract price, line 10.
The result will be entered on line 12 as the cost of
contract administration.
GOVERNMENT-FURNISHED PROPERTY
When Government property is furnished to a contractor in
connection with the performance of a contract, the cost
connected with its use must be considered in determining the
overall cost of the contract. Government-furnished property
includes (1) that property that is in the possession of, or
acquired directly by, the Government and subsequently
delivered or otherwise made available to the contractor, and
(2) property acquired by a contractor in accordance with the
terms of the contract that does not become a part of the end
item or is not consumed during contract performance and
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title thereto vests in the Government. Examples of
Government-furnished property are land, buildings,
facilities, equipment, special tooling, materials, and
supplies.
The methods for determining the costs related to furnishing
Government property will vary with the use made of the
property. Where Government property becomes a part of the
end product (material) or is consumed in providing a product
or service (supplies) the full cost to the Government of
acquiring and furnishing these materials and supplies must
be added to the cost of contracting. When property such as
land, buildings, facilities, equipment, and special tooling
are provided for the contractor's use during the performance
of the contract but will be returned to the Government upon
contract completion, the costs of ownership of these assets
by the Government during the period of contract performance,
plus any other costs incurred in connection with furnishing
the property to the contractor must be added to the cost of
contracting. More specific guidance is contained in the
following paragraphs. The sum of the costs for Government-
furnished materials and supplies and for Government-
furnished facilities, in accordance with these paragraphs,
will be entered on line 13 of the Cost Comparison Form.
Government-Furnished Materials and Supplies
Government-furnished material and supplies (GFM&S) is
property which may be incorporated into or attached to a
product/service to be delivered under a contract and those
supplies which may be consumed or expended in the
performance of a contract. It includes, but is not limited
to, such items as raw materials, parts, subassemblies,
components, and manufacturing supplies. Care must be taken
to exclude the cost of any material and supplies that are
included in the contract price.
The instructions for estimating the costs of GFM&S are
identical to those for estimating the cost of in-house
material and supplies. Therefore, the sections of this
Handbook entitled, "DIRECT MATERIALS" and "MATERIAL
OVERHEAD" should be referenced for guidance in estimating
the cost of GFM&S. See the section entitled,
"TRANSPORTATION COST," for instruction on the treatment of
costs that are associated with transporting GFM&S to and
from the contractor's site.
The supporting documentation for GFM&S shall include a
detailed listing of all the .items to be furnished with
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(4..) C.")
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quantities, unit prices, suppliers, details of adjustments
and the source of the information. See Figure 1 in the
MATERIALS section of this Handbook for an illustration of
the supporting documentation requirement.
Government-Furnished Facilities (Buildings and Other Land
Improvements) and Equipment
The costs applicable to facilities and equipment furnished
to contractors by the Government must be added to the cost
of contracting out for purposes of Circular A-76
comparisons. These costs consist of depreciation of
capitalized equipment or facilities, or the full expense of
minor items of equipment which do not meet agency
capitalization criteria. Depreciation on Government-
furnished facilities and equipment shall be computed in
accordance with the instructions on computing depreciation
contained in the Handbook section entitled, "OPERATIONS
OVERHEAD." Only the depreciation costs applicable to the
proposed contract period will be considered for purposes of
the cost comparison.
When the Government rehabilitates, modifies, or expands
existing Government-owned facilities or equipment for the
purpose of providing it to a contractor as Government-
furnished property, the related costs will be treated as
follows:
a. If the rehabilitation, modification or expansion of
the Government facilities or equipment increases the useful
life of the assets to the Government or the asset value of
the property, the related costs shall be amortized over the
remaining useful life of the assets. The amount to be
included in the Circular A-76 cost comparison as an add-on
to the contract cost shall be limited to the cost
amortization applicable to the period covered by the
proposed contract.
b. If the rehabilitation or modification work consists
primarily of plant rearrangement, minor repairs, or other
work which does not extend the useful life of the assets or
does not increase the value of the property to the
Government, the related costs shall be considered as
additional costs of contracting out. The entire cost of
such rehabilitation or modification will be charged to the
first year of contract operations or spread over the
contract period depending on the period the costs are
determined to benefit.
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c. While the acquisition cost of land is not
depreciable, the costs of any improvements or alterations
made to land utilized in performance of the contract, such
as landscaping, special grading, etc., should be accumulated
and amortized over the estimated useful life of the
improvements or alteration. The add-on to the contract cost
will be limited to the cost amortization applicable to the
period covered by the proposed contract.
Cost estimates will be supported by a summary listing of all
the above types of cost and the location of the detailed
records used to determine them as follows:
Government-Furnished Facilities and Equipment
Depreciation
Land Improvements $ XXX
Buildings X,XXX
Equipment XX,XXX
Other Expenses
Plant Rearrangement X,XXX
Minor Repairs XXX
Other XXX
Total
Amount Source
X,XXX
$XX,XXX
Supporting data should include details on original cost,
residual value, annual depreciation, etc., of the equipment
and facilities.
STANDBY COSTS
When equipment and/or facilities must be held in standby
status to assure contract performance, the cost of holding
them must be added to the contract price. Costs related to
holding equipment and facilities for any other purpose are
not standby costs for purposes of this Handbook, and should
not be added to the contract price. Standby costs are.
defined as expenses necessary for the upkeep of property in
standby status which neither add to the permanent value of
the property nor appreciably prolong its intended life, but
keep it in an efficient, operating condition or available
for possible use in performance of the contract.
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Standby cost is not to be confused with UTILIZATION OF
GOVERNMENT CAPACITY or DISPOSAL OF FIXED ASSETS. Each of
these factors is discussed separately in Chapter VI of this
Handbook. Normally, Government property is disposed of or
put to other use when a decision is made to obtain a product
or service from the private sector instead of continuing to
produce it in-house.
If it is determined that it is necessary to hold Government
property in a standby status, all related costs must be
estimated for inclusion in the cost comparison analysis.
The estimate of standby costs begins with a determination of
the facilities and/or equipment that will be placed in a
standby status to support a commercial procurement action.
The next step is to estimate the cost, if any, of preparing
the facilities and equipment for standby status. The cost
of holding the facilities or equipment in a standby status
must also be estimated in order to determine the total
standby maintenance cost which would result from a
commercial procurement versus in-house production. These
costs may be estimated by utilizing engineering estimates,
prior experience, or experience of other organizations. If
similar standby costs have been inccured previously, these
may be used as a basis for subsequent costing provided
appropriate adjustments have been made for facilities,
equipment, and pricing variations. When computing the
depreciation cost of property in standby status it will be
necessary to review the useful life of the property since
useful life may be increased by the change from production
to standby status. This review will be necessary even if
the depreciation is based on machine hours usage because,
while wear and tear may cease, obsolescence may continue.
When the estimated standby cost is determined, as described
in the previous paragraph, the total of this cost will be
entered on line 14 of the Cost Comparison Form. Backup data
must be included for all the cost elements associated with
preparation for and maintenance in standby. See Chapter IV
of this Handbook for cost estimating instructions, types of
cost elements to be included, and documentation
requirements. Since .Government property is normally
disposed of or put to another use when a product/service is
procured from the private sector, a detailed justification
is required for holding the Government property in standby
status.
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OTHER COSTS
This cost category encompasses any additional Government
costs which would result from commercial procurement and
which are not covered elsewhere in the cost comparison.
This cost category is included to provide for unusual
circumstances which may be encountered in particular cost
comparisons.
Supporting data will include a complete description of the
costs involved, together with cost detail as outlined for
the various cost elements in Chapters IV and V of the
Handbook.
GENERAL AND ADMINISTRATIVE EXPENSE
The general and administrative (G&A) expense applicable to
the in-house effort related to contracting for a product or
service must be included as part of the cost of contracting
out. The amount of such expenses to be included will be
determined by applying the G&A rate developed in Chapter IV
to the total costs of the in-house effort (the sum of lines
11 through 14).
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CHAPTER VI - OTHER CONSIDERATIONS
Up to this point, the Handbook has been concerned with
determining the cost to the Government of acquiring a
product or service either by contracting-out or by in-house
performance. The decision as to which alternative to follow
will not necessarily be made on the basis of the costs of
providing the product or service developed in accordance
with Chapters IV and V. Additional costs and other factors
may have to be considered to determine the most economical
of the two methods.
In order to make an informed decision, the full impact of
the two alternatives on the overall cost of Government
operations must be known. This will require the decision-
maker to evaluate the following:
o Loss of opportunity to employ resources in other
areas if performed in-house (cost of capital);
o The one-time costs that will be incurred to start or
terminate a Government operation;
o The impact on remaining operations of contractingout
a portion of a work center's effort (utilization of
Government capacity);
o Loss of revenue (Federal taxes) due to in-house
performance;
o Any other impact of contracting-out or in-house
performance that can be quantified.
Comments on the determination and application of the amounts
related to the above are contained in the following
paragraphs.
COST OF CAPITAL
The cost of capital is defined as an imputed charge on the
Government's investment in all of the plant facilities and
other assets necessary for the work center to manufacture
products or to provide services. For purposes of
simplifying the comparisons required by this Handbook, a
distinction is being made between those assets which will be
retained and those that will be disposed of if the product
or service is contracted out. However, as will be noted
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below, all of the required assets will be considered.
Determination of the amount applicable to those assets that
are to be retained, regardless of whether or not the product
or service is contracted out, will be determined in
accordance with the provisions of the following section
entitled, "DETERMINATION OF THE COST OF CAPITAL FOR RETAINED
ASSETS." The amount applicable to those assets to be
disposed of if the product or service is contracted out will
be determined in accordance with the section entitled,
"DISPOSAL OF FIXED ASSETS." Basically, the imputed charge
for the cost of capital is an opportunity cost; that is, if
the capital had not been devoted to the production of the
current-period, it could have been devoted to another use
which would have provided other income or avoided interest
expense; it is not an attempt to recover interest on
borrowed money.
Determination of the Cost of Capital for Retained Assets
When assets are to be retained by the Government, there are
four possible reasons therefor. The first and most obvious
reason would be to provide the product or service being
estimated by in-house effort. The second reason would be
that they are to be provided to the contractor in order to
perform the contract. The third reason would be that they
must be held to assure performance in the event of a
significant contract interruption or delay. The fourth
reason is a need for the Government to retain the industrial
or commerical capability to meet possible future
contingencies. If the assets are retained for any of the
first three reasons, consideration of the opportunity cost
related thereto must be given in making the cost comparison.
It is to be noted that some of the same assets may be
retained for any of the first three reasons. The reason for
retaining such assets governs whether the cost of capital
related thereto will be added to the in-house or
contracting-out effort. Since the fourth reason is not
germane to the question of contracting out or in-house
performance, no cost comparison consideration will be given
to the Government's ownership of those assets.
In order to estimate the cost of capital, it is necessary to
obtain the net book value (acquisition cost less
depreciation accumulated to date) of each tangible capital
asset (land, improvements, buildings, equipment, etc.) which
is to be retained. The acquisition cost of land and the net
book value of each depreciable tangible asset should be
obtained from the accounting records. However, if the
accounting records are unavailable, it will be necessary to
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utilize engineering estimates; prior experience, or
experience of other organizations. The cost of capital will
be computed by applying an opportunity cost rate of 10% to
the total net book value of the assets to be retained. If
the assets invOlved are used solely to provide the product
or service being estimated, the total amount of the cost of
capital will be added. If the assets involved are used not
only to provide the product or service being estimated, but
other products or services as well, a proration of the cost
of capital will be made.
Prorating Cost of Capital - If the cost of capital were a
real rather than an imputed cost, it would be properly
classified as a General and Administrative (G&A) expense.
Accordingly, its proration to the product or service being
estimated will be in the same proportion that the total
estimated costs to be incurred (less G&A expense) for the
product or service being estimated bears to the total
estimated cost to be incurred (less G&A expense) for ,the
performing organization. This latter amount is the base for
allocation of the G&A expenses and should be readily
obtainable from the supporting documentation. An example of
this computation is shown below:
From the illustration in the G&A EXPENSE section of this
Handbook the following data are obtained:
Total costs incurred (less G&A expenses)
for the product/service being estimated $ 3,255,000
Total costs incurred in Organization A
(less G&A expenses) 51,500,000
Assume total annual cost of capital
for assets required 250,000
Then cost of capital applicable to the
product or service being estimated would
be computed as follows:
$ 3,255,000 x $250,000 = $ 15,800
$51,500,000
Assigning Cost of Capital -- After the cost of capital for
retained assets is determined, amounts must be assigned, as
appropriate, to the cost of in-house performance and the
cost of contracting out.
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a. In-house Performance -- In the case of assets
retained because they are required for in-house performance,
the entire amount of the cost of capital for those assets
(or the pro rata share when appropriate) will be added to
the cost of in-house performance by entry on line 18 of the
Cost Comparison Form.
b. Contract Performance -- Assets retained in
connection with contract performance may include one or both
of the following:
1. Assets retained in order to provide them to a
contractor for use in contract performance.
2. Assets retained by the Government to assure
provision of the product or service in the event of
interruption of contract performance.
The total cost of capital for any assets retained for 1 and
2 above must be considered as costs of contracting. The
total of these amounts will be entered on line 23 of the
Cost Comparison Form.
Supporting Documentation -- Supporting documentation for the
cost of capital related to the assets to be retained shall
include a detailed listing of such assets and the net book
value of each. If these assets have been previously listed
in connection with the computation of depreciation, a
reference may be made to that listing rather than
duplicating it. Where, because of the magnitude of the
assets involved, it would not be practical to prepare such a
list, the assets may be supported by a listing of logical
groupings by types of assets and reference made to where the
detailed supporting property records may be examined.
Disposal of Fixed Assets
When a product/service is being performed in-house by
Federal employees, a decision to contract that operation may
eliminate the need for all or some portion of the fixed
assets used in providing the product or service. The value
to the Government of reducing this need must be included as
a consideration in the comparative cost analysis. This
section deals with those fixdd assets which will be disposed
of if a decision is made to contract for the product or
service.
In determining such costs for consideration in a comparative
analysis, the current market value of each of the fixed
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assets must be ascertained. If the property is to be
disposed of by either GSA or Defense Property Disposal
Service, assistance may be obtained from them as to current
market value and disposal costs. Also, for equipment items,
the market value may be estimated, based on commercial
publications which list sales prices of used machinery and
equipment of all types. Assistance in this regard may also
be available from dealers in the specific equipment for
which an estimate is needed.
After an estimate is made of the current market value of the
fixed asset to be disposed of, an estimate will be. made of
the expenses connected with the disposition; i.e., sales
commission, advertising, legal fee, relocation, etc. The
total expenses related to the disposal will be deducted from
the estimated market value to determine the net value to the
Government of the fixed asset. Note well: The book value
of the asset should not be deducted from the market value
to arrive at the net value to the Government. The approach
taken in this section precludes the necessity of considering
any gain or loss on disposal of the asset.
The net value of each fixed asset will be calculated as
described above, and the net value of all fixed assets to be
sold will be totalled. This total will be the base for
calculating the amount to be included in the comparative
cost analysis. The base figure will be multiplied by a
factor of 10% representing the annual value to the
Government of the amount of the net proceeds. For purposes
of this cost comparison, the proceeds that could be realized
by disposal of the assets are considered to be a source of
additional revenue to the Government. Accordingly, the
amount determined from the above calculations is considered
as potential revenue to the Government and will be treated
as an offset (reduction) to the cost of contracting out and
entered on line 28 of the Cost Comparison Form.
ONE-TIME COSTS
In every case where the Government either starts or
discontinues an in-house activity it incurs one-time costs
resulting from changing the source of the product or service
it uses. For new starts, the one-time costs are those
associated with establishing the in-house capability and
discontinuing a contract arrangement. For conversions, the
one-time costs arise from terminating the in-house activity
and starting a contract arrangement. Even though these
costs are incurred only once and will not recur unless the
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mode of performance again changes, the total costs may be
significant. The significance is measured in relation to
the difference between the Government's costs of obtaining
the product or service by contract and the Government's cost
of in-house performance. The estimated savings to the
Government by effecting a proposed new start or conversion
must be sufficient to offset the one-time costs over a
reasonable time period. As a general rule, a changeover
will not be justified on the basis of a cost comparison
unless the total one-time costs will be recoverable from
estimated savings within five years.
Guidance for determining one time costs for new start and
conversion situations is contained in the following
paragraphs.
One Time Costs Related to a New Start
While a new start may require substantial new investment by
the Government in facilities and equipment, these costs
should be annualized in accordance with guidance contained
in this Handbook concerning cost of capital and
depreciation, and not be included as one-time costs under
this section. The costs of acquiring the facility, however,
and costs incurred for the acquisition and installation of
equipment, unless included in the capitalized cost, would
need to be included in one-time cost estimates. Other
examples of one-time costs would include office and plant
rearrangements, employee relocation expenses, and expenses
which are the direct result of discontinuing an existing
contract. If a contract is completed, it is not normal that
any additional costs will be borne by the Government.
Determination of the full scope of the Government's one-time
new start costs should be made in consultation with
engineering, production, management, and procurement
personnel. Supporting documentation should indicate clearly
the type of new start costs anticipated and the methodology
used to estimate the amounts to be incurred. The detail
supporting the estimate of each element of cost should be
similar to that provided for in Chapter IV. For comparison
purposes, one-fifth of the total should be added to each
year of the cost comparison up to and including the fifth
year. The one-fifth figure should be added to the cost of
in-house performance by entering it on line 19.
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One-Tme Costs Related to a Conversion
When the Government discontinues an in-house activity to
obtain the product or service by contract there are usually
substantial one-time costs associated with the conversion.
These costs are identified and discussed in the following
paragraphs.
Material-Related Costs -- A conversion will normally result
in certain items of material being held in inventory (either
unissued material, work in process, or finished goods)
becoming excess. It may be possible to transfer certain of
this material to the contractor who is going to provide the
product or service in the future. In this case, the
material will be treated as Government-furnished material
and priced in accordance with Chapter V. In other cases,
the material may be diverted to other uses of the
Government; in this case, only the additional costs incurred
in connection with making the material available for the
other use will be included as conversion costs. When
neither of the above dispositions of the material is
practical, the material will normally be disposed of by
sale. If it is anticipated that the material will be sold,
the estimated gain or loss on the sale must be considered'in
determining conversion costs. The estimated gain or loss
will be computed by deducting from the estimated sales price
the acquisition cost of the material plus material overhead
(at the rate developed in Chapter IV) and all other expenses
related to disposition, such as packing, shipping, etc. If
the material is to be disposed of by either GSA or Defense
Property Disposal Service, these agencies should be
consulted in arriving at these costs. The supporting
documentation for such costs should contain a listing of the
items and the quantity to be disposed of, their acquisition
cost, and the estimated sales price. In addition, all other
expenses such as packing, shipping, disposal, etc., should
be adequately supported by documentation describing how the
amounts were determined.
Labor-Related Costs -- A conversion will also normally
result in the incurrence of certain labor-related expenses
that are considered one-time costs. These include severance
pay, homeowner's assistance, grade pay retention, relocation
expenses and retraining expenses. The amount of these
expenses should be computed in consultation with management
and personnel department employees. Historical data from
the agency or from other agencies gathered from similar
circumstances should be considered in arriving at the
appropriate cost. The supporting documentation should
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contain appropriate detail and indicate how the various
amounts were arrived at.
Other Costs -- A conversion will normally necessitate
certain actions that would not be necessary if the activity
were to be continued. For example, a special physical
inventory may be necessary to ascertain the material
(supplies, equipment, small tools, etc.) on hand. The cost
of taking such an inventory would be a proper conversion
costs. Also, it may not be possible to avoid the
continuation of some costs, such as lease or rental
agreements for facilities or equipment, beyond the time that
they are no longer required. These types of costs are also
properly includable as conversion costs. Supporting
documentation for such costs should clearly state the
purpose for each item of costs, and how the amount thereof
was determined.
General and Administrative Expense -- An amount for general
and administrative expense must be included. That amount
will be determined by applying the G&A rate developed in
Chapter IV to the sum of the material-related, labor-related
and other costs.
Documentation and Comparison -- The amount for general and
administrative expense must be added to the sum of the costs
to which the G&A rate was applied to establish the total
one-time costs related to a conversion. The detail
supporting the estimate of each element of cost should be
similar to that provided for in Chapter IV. For comparison
purposes, one-fifth of the total one-time costs should be
added to each year of the cost comparison up to and
including the fifth year. The one-fifth figure should be
added to the cost of contracting by entering it on line 25.
UTILIZATION OF GOVERNMENT CAPACITY
The potential impact on a work center of contracting out for
a product or service which it currently provides must be
taken into consideration before a decision is made. The
decision to contract out can result in the work center
becoming completely idle, operating at a reduced capacity,
or operating at the same or increased capacity.
When the decision to contract out will result in the work
center becoming completely idle because no other use of its
capacity is planned, its facilities will either be disposed
of or placed in a stand-by status- The circumstances under
which the costs related to placing assets in a stand-by
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status will be considered as an additional cost to
contracting out are set forth in the Standby Costs portion
of this Handbook. When the assets are to be disposed of, an
opportunity cost will be added to the Government's in-house
estimate as prescribed by the Cost of Capital section of
this Handbook.
When it is planned that the efforts of the work center will
not be reduced because the product or service to be
contracted out will be replaced by others, consideration
should be given to any savings or additional costs to the
Government resulting from transferring the replacement
products or services. Where the transfer of effort will
rsult in the disposal of Government assets related to the
replacement product or service or the avoidance of rental
costs, these occurrences should be treated the same as if
they were happening in the work center which currently
provides the product or service being estimated. See the
appropriate sections of this Handbook for further guidance
in this regard.
Where the decision to contract out will result in the work
center(s) operating at less than its present level of
utilization, the costs attributable to this underutilized
capacity must be determined. In these cases, some overhead
costs allocable to the product or service being contracted
out may continue. These continuing overhead costs must be
absorbed by the remaining in-house activities. The
additional amount to be absorbed by the remaining activities
is a cost of contracting out.
For purposes of this Handbook, the cost of underutilization
will be determined as follows:
Step 1: From the supporting documentation for
operations overhead, determine the total operations overhead
expense pool(s), the total amount of the base of allocation
and the resultant overhead rate. From the example shown in
discussing operations overhead, these amounts would be as
follows:
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Basic Machine
Pool Pool
Overhead Expense $1,500,000 $3,000,000
Base of Allocation $9,000,000 50,000/mach. hours
Overhead Rate 16.67% of 60/mach. hours
direct costs
Step 2: Again, from the supporting detail of the
Government's estimate, ascertain the amount of the base of
allocation applicable to the product or service being
estimated. These amounts will then be deducted from the
total base of allocation. As illustrated under the
Operations Overhead section, the product/service A-3
incurred direct costs of $1,800,000 and 40,000 machine
hours. Thus, we would show:
Total Base of Allocation
Less:
Applicable to Product/
Service Being Estimated
(A-3)
Adjusted Base of Allocation
Direct Costs Machine Hours
$9,000,000 50,000 hours
$1,800,000
$7,200,000
40,000 hours
10,000 hours
Step 3: In consultation with accounting and management
personnel, ascertain the decreases in overhead expenses that
can be expected to occur if the product/service is
contracted out. Deduct these decreases from the appropriate
overhead pool. Assume that, as a result of contracting out,
the total basic overhead pool will be reduced by $500,000
and the machine pool by $2,000,000. This would result in
the following:
Total Overhead Expense
Less Reductions due to
Contracting Out
Adjusted Overhead Pool
Basic Machine
$1,500,000 $3,000,000
500,000 2,000,000
$1,000,000 $1,000,000
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Step 4: Ascertain the overhead rate to be applied to
the remaining effort. The overhead rate will be developed
by dividing the adjusted overhead pool developed in Step 3,
above, by the adjusted allocation base developed in Step 2,
as follows:
Adjusted Overhead Pool
(From Step 3)
Adjusted Base of Allocation
(From Step 2)
Overhead Rate (Pool - Base)
Basic Machine
$1,000,000 $1,000,000
$7,200,000 10,000 hour
13.89% $ 100 per hour
Step 5: Ascertain the difference between the amount of
overhead costs applicable to the effort not to be contracted
out in both circumstances. In our illustration, this would
be done as follows:
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Product/Service
Basic
67
Machine
Portion of Allocation Base
A-1
A-2
Total (A)
Overhead Rates if Per-
formed In-House
(Direct Costs)
$4,500,000
2,700,000
(Machine Hours)
5,000 hrs.
5,000 hrs.
$7,200,000
10,000 hrs.
(From Step 1) (B)
16.67%
$60/hour
Overhead Amount if Per-
formed In-House (A) x
(B) = (C)
$1,200,240
$ 600,000
Overhead Rates if Con-
tracted Out (From
Step 4) (D)
13.89%
$ 100/hour
Overhead Amount if Con-
tracted Out (A) x (D)=(E)
$1,000,000
$1,000,000
Increase (Decrease) in
Overhead Charged to
Remaining Products
Due to Contracting
Out (E) - (C)
($200,160)
$ 400,000
The increase in cost due to contracting out is the sum of
the differences shown above, or $199,840 ($400,000 +
($200,160). This increased cost should be added to the cost
of contracting out. The supporting documentation should
contain the adjustments made to the overhead expense pool
and explain how they were computed.
If the product or service being estimated represents more
than 5% of the general and administrative expense allocation
base (total costs incurred minus general and administrative
expenses), similar computations to those above for
operations overhead should also be made for the general and
administrative expense rate. Similarly, the impact of
contracting-out a product or service on material overhead
should be determined if the material content of the product
or service is 5% of the total material costs.
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FEDERAL TAXES
When comparing the cost to the Government of a product or
service to be obtained by contract with the cost of in-house
performance, the potential Federal income tax revenues must
be considered. Since contract performance would provide the
contractor with income subject to tax, an estimated amount
for such taxes is an appropriate deduction from the net cost
to the Government of acquiring the product or service by
contract.
To simplify the tax computation, a table (Figure 6) prepared
by the Internal Revenue Service, provides by types of
industries, appropriate tax rates in relation to business
receipts. The industry groupings conform to the Enterprise
Standard Industrial Classification issued by the Office of
Management and Budget. To determine the amount of the
estimated Federal income tax, the contract price (line 10 of
the Comparative Cost Form) shall be multiplied by the tax
rate, selected from Figure 6, applicable to the industry
identified with the product or service under consideration.
The result of this computation will be the estimated amount
of Federal income tax to be entered on line 27 as a
deduction from the cost of contracting.
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Figure 6
TO BE ADDED LATER WHEN PROVIDED BY IRS
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OTHER ADDITIONS/DEDUCTIONS
Space has been provided on the Cost Comparison Form by
inclusion of lines 20, 21, 26, and 29 for any other
additions or deductions to the cost of in-house or
contracting-out performance not specifically covered by any
of the foregoing classifications of costs. Amounts entered
on these lines should be supported by definition of the type
of cost, the methods of its computation, and if appropriate,
a detailed listing of specific cost elements included
therein.
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CHAPTER VII COST DIFFERENTIALS
Different cost margins have been established by OMB Circular
A-76 that must be exceeded before performing a "new start"
in-house, and before converting an in-house activity to a
contract. Details pertaining to these cost margins and the
methods by which they are to be determined are set forth in
the following paragraphs.
New Start
A new start for purposes of OMB Circular A-76 and his
Handbook refers to any activity not currently being done
in-house at a particular location. When a comparative cost
analyis is conducted for a possible "new start", a cost
margin equal to 10% of the estimated personnel related costs
plus 25% of the estimated cost of ownership of the required
facilities and equpment must be added to the cost of
in-house performance on the Cost Comparison Form. For this
purpose, ownership costs will be considered to be the
product's or service's prorata share of the depreciation and
cost of capital that are applicable to the required assets.
The , margin of 10% of estimated personnel costs is
consistent with the margin favoring the status quo in
studies of existing Government activities. The additional
margin of 25% of the cost of ownership of the required
facilities and equipment provides a tangible expression of
the basic policy of the Circular; it also recognizes the
risks inherent in Government investment in industrial
facilities.
The method of computing the cost margin for a "new start" is
illustrated in the following steps. Data from the figures
provided in the OPERATIONS OVERHEAD and GENERAL AND
ADMINISTRATIVE EXPENSE sections of this Handbook as they
pertain to. Product A-3 will be use to the extent possible.
Since these examples do not contain all the data necessary
to the computation (e.g., direct labor, and material
overhead data) certain additional assumptions pertaining to
Product A-3 are necessary. These assumptions and the steps
in the computation of the cost margin are shown below:
STEP 1. Determine the amount of direct labor applicable to
the product or service being estimated. This
will be the amount shown on line 3 of the cost
comparision form.
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EXAMPLE: For product A-3, this amount is assumed to be
$1,000,000 of its $1,8000,000 direct costs.
Based on this assumption, the direct labor
amount that would be shown on line 3 is
$1,000,000.
STEP 2. Determine the prorata share of the indirect labor
and depreciation contained in each overhead
pool that is applicable to the product or
service being estimated. The total indirect
labor and depreciation contained in each
overhead pool should be readily available from
the detail utilized to develop the various
overhead rates and which are to be included as
supporting documentation.
EXAMPLE: To the extent data were availabe in the
examples used in various sections of the
Handbook, they have been utilized; otherwise,
the assumptions made are stated.
Material Overhead Assume that $600,000 of the direct costs
of $1,800,000 shown for Product A-3 in the OPERATION
OVERHEAD section represent direct material costs. This
would normally be obtained from line 1 of the cost
comparison form. Also, assume that in the material overhead
pool there are total indirect labor costs of $500,000 and
depreciation aosts-of $100,000; also, ; the total material
costs (direct and indirect) in the allocation base are
$4,800,000. These data should normally be available from
the documentation supporting material overhead. The
following computation for Product A-3 then can be made:
a. Determine the rate of Product A03's direct
material cost to the total allocation base:
600,000
4,800,000 = 1/8 or 12.5%
b. Apply the above ratio to the total indirect
labor and depreciation in the material over-
head pool to arrive at the amounts thereof
applicable to Product A-3:
Indirect labor, $500,000 x 12.5% = $ 62,500
Depreciation, $100,000 x 12.5% = $ 12,500
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Operations Overhead From the illustration in the OPERATIONS
OVERHEAD section, the following data are available:
Total indirect labor in Basic Pool
Total indirect labor in Machine Pool
Total depreciation in Basic Pool
Total depreciation in Machine Pool
Total allocation base (direct costs)
Basic Pool
Total allocation base (machine
hours) of Machine Pool
Direct costs of Product A-3
Machine hours applicable to
Product A-3
$1,170,000
$ 930,000
$ 40,000
$ 400,000
$9,000,000
50,000
hours
$1,800,000
40,000
hours
The computations for the two pools would be as follows:
Basic Pool
a.
$1,800,000
$9,000,000 = 1/5 or 20%
b. Indirect labor, $1,170,000 x 20%
Depreciation, $40,000 x 20%
Machine Pool
a. 40,000 hours
50,000 hours = 4/5 or 80%
b. Indirect labor, $930,000 x 80%
Depreciation, $400,000 x 80%
$ 334,000
$ 8,000
$ 744,000
$ 320,000
SUMMARY
Total indirect labor in operations overhead applicable
to Product A-3 = $1,078,000
Total depreciation in operations overhead applicable tO
Product A- = $ 328,000
General and Administrative (G&A) Expense From the
illustrations in the G&A EXPENSE section, the following data
are available:
Executive, Professional, and Technical Supervision
Salaries $1,450,000
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Clerical and Other Salaries
Total indirect labor
$1,175,000
$2,625,000
Total allocation base (total cost incurred,
exclusive of G&A) $51,500,000
Assume:
Depreciation included in the $3,100,000 of
Other Expenses is $ 100,000
The total incurred costs, exclusive of G&A,
applicable to Product A-3 are $4,940,000
Then the computation to determine the indirect labor and
depreciation in G&A applicable to product A-3 would be as
follows:
a. $ 4,940,000
$51,500,000 = 9.6%
b. Indirect labor, $2,625,000 x 9.6%
Depreciation, $100,000 x 9.6%
$ 252,000
$ 9,600
STEP 3. Accumulate all the labor costs applicable to
the product or service being estimated as
developed in STEPS 1 and 2:
EXAMPLE: Direct labor from STEP 1 $1,000,000
Indirect labor from STEP 2
Material Overhead $ 62,000
Operations Overhead $1,078,000
G&A Expense $ 252,000
Total labor applicable to Product A-3 $2,392,500
STEP 4. Apply the fringe benefits rate developed in
accordance with the FRINGE BENEFITS RATE section of this
Handbook to the total labor costs developed in STEP 3,
above.
EXAMPLE: Assume a fringe benefit rate of 38% has been
developed then.
$2,392,500 x 38% = $ 909,150
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STEP 5. Combine the amounts developed in STES 3 and 4
arrive at total personnel related costs.
EXAMPLE: $2,392,500 + $909,150
75
= $3,301,650
STEP 6. Compute 10% of the amount developed in STEP 5 to
determine the personnel related cost margin.
EXAMPLE: $3,301,650 x 10%
$ 330,165
STEP 7. Accumulate the depreciation applicable to the
product or service being estimated as developed in
STEP 2.
EXAMPLE: Depreciation from STEP 2:
Material Overhead $ 12,500
Operations Overhead $ 328,000
General and Administrative Expense $ 9,600
Total depreciation applicable to Product A-3 $ 350,100
STEP 8. Determine the Cost of Capital that is applicable to
the product or service being estimated. The Cost of
Capital will be computed in accordance with the
applicable section of this Handbook and entered on line
18 of the cost comparison form.
EXAMPLE: Assume the cost of capital applicable to the
facilities and equipment required to provide Product
A-3 is $ 300,000
STEP 9. Combine the amounts of Depreciation and Cost of
Capital developed in STEPS 7 and 8 to arrive at the
total ownership costs of the required facilities and
equipment.
EXAMPLE: Amounts Applicable to Product A-3
Depreciation
Cost of Capital
Total ownership costs
$ 350,100
$ 300,000
$ 650,100
STEP 10. Compute the ownership cost margin by applying
25% to total ownership costs.
EXAMPLE: $650,100 from STEP 9 x 25% $162,525
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STEP 11.
in
to
Combine the personnel related margin developed
STEP 6 and the ownership margin developed in STEP 10
arrive at the total cost margin for a new start.
EXAMPLE: Personnel margin from STEP 6
Ownership margin from STEP 10
Total cost margin for newstart
$ 330,165
$ 162,525
$ 492,690
STEP 12. Enter the cost margin developed in STEP 11
on line 31 of the cost comparison form.
CONVERSION
Conversion for purposes of OMB Circular A-76 and this
Handbook concerns only the change from in-house to contract
performance. The opposite change, that is, from a contract
to in-house performance, is considered a "new start" and is
covered by the preceding subsection. When a possible
conversion is being considered, a cost margin equal to 10%
of the in-house personnel related costs must be added to
the cost of contracting out on the cost comparsion form.
This amount is added to give consideration in the cost
comparison to the loss of production, the temporary decrease
in efficiency and effectiveness, and other unpredicable
risks that result anytime a change is made in the method of
operation from in-house to contract. It also takes into
consideration the personnel turbulence that results from
such a change.
Computation of this personnel-related cost margin is
identical to the computation of the personnel-related
portion of the cost margin for a new start. Accordingly,
the personnel-related portion of STEPS 1 through 6, above,
will be followed to compute the cost margin. The resulting
amount will be added to the cost of contracting out by entry
on line 32 of the cost comparison form.
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CHAPTER VIII SUMMARY
Submission of the Government's Cost Estimate
When all the costs connected with in-house performance have
been estimated (lines 1 through 9, 18 through 22, and 31, if
appropriate), they should be totalled and entered on line 33
of the Cost comparison Form. This will then complete the
action necessary to submit the Government's in-house cost
estimate. This action should be completed in time for
estimate, along with its supporting data, to be submitted to
the contracting officer within the prescribed dates for bid
or proposal submission. The form should be signed and dated
by the person responsible for its preparation in the line
entitled, "In-house Estimate Prepared By." If preparation of
the form was done by a task force, the Chairman of the task
force should sign, indicating that he was the Chairman.
Simplified Cost Comparison When Inhouse Costs Are Below Best
Offer
After the contracting officer opens the bids or completes
negotiations, he will ondicate in line 10 of the form the
lowest responsible bid or proposal. He will then return the
form to the preparer for completion. If the contract price
that has been entered on line 10 is higher than the
Government's in-house cost estimate on line 33, a simplified
cost comparison can be accomplished provided the
Government's estimate has been properly prepared.
When the annotated contract price (line 10) exceeds the
total in-house costs (line 33) it can be assumed that the
cost of in-house performance will be less than the cost of
contracting-out. This assumption precludes the necessity
for completing those portions of the form dealing with the
cost of contracting-out. Completion of these portions would
only serve to document the net additional costs which must
be added to the, contract ptice. Since the contract price
alrady exceeds the cost of in-house performance, such
information would not alter the recommendation. Therefore,
there is no need to complete those portions of the form. In
these circumstances, the contract ptice entered as line 10
will also be entered on line 34. The ammount by which the
cost of in-house performance as shown on line 33 ia under
the contract price shown on line 34 will be determined and
entered on line 35. The form will then be signed, on the
line entitled, "Cost Comparison Completed By,: by the Task
Force Chariman or such other individual who was assigned the
responsibility.
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After the comparison is completed and the Form signed, it
will be submitted to a qualified activity independent of the
cost analysis preparation to ensure the Government's
estimated costs have been prepared in accordance with the
provisions of this Handbook. If no, or only minor,
discrepancies are noted during the review, the reviewing
activity will execute the audit certificate and return the
form to the preparer for resubmission to the contracting
officer.
If significant discrepancies are noted during the review,
they will be reported to the party preparing the cost
comparison. The reviewing agency should indicate the impact
of the discrepancy or recommend that the preparer correct
and resubmit its estimate. If the revised estimate results
in the government's costs of in-house performance exceeding
the contract price on line 10, a simplified comparison is no
longer warranted. The full cost comparison as indicated
below must now be performed. As indicated in Chapter III,
if the procurement action pertains to a new-start and the
estimated cannot be corrected in a timely manner, the
in-house figure will be rejected and the contract awarded.
Conversely, if the contemplated procurement pertains to an
activity presently being performed in-house, and the
estimate cannot be corrected within the validity date of the
bids or proposals, the procurement action may be terminated
and the comparison rescheduled for a later date.
When the cost comparison has been audited and, with any
necessary corrections, approved by the reviewing agency, the
party responsible for preparing the cost comparison will
originate the Decision Summary Form, Exhibit 2, including
the recommendation to award a contract or to perform the
work in-house. This form and the Cost Comparison Form will
be forwarded to the Contracting Officer, who will indicate
the action taken to award a contracat or to cancel the
procurement action, signing and dating the form where
indicated.
Completion of the Cost Comparison Form
When the lowest responible bid or proposal is below the
Government cost estimate, the contracting officer will
advise the preparer of the Form of the amount of the low bid
by inserting it on line 10 of the Cost Comparison Form and
returning it for completion. The preparer will then
complete lines 11 through 17, 23 through 30, and 32, if
appropriate. The amou4s on these lines should then be
totalled and entered on line 34 of the Form. The amount to
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be entered in line 35 should then be computed by deducting
line 34 from line 33.
After the comparison has been completed, it should be
submitted, along with its supporting documentation, to an
organization which is independent of the preparing
organization for verification. This verification is
intended to assure that all the amounts contained on the
Form are predicated on the most current data available to
the preparer, that the data are accurate and complete, and
that it has been prepared in accordance with the provisions
of this Handbook. Any discrepancies noted will be treaded
in the same manner as indicated in the preceding subsection
dealing with Simplified Cost Comparisons. If no
discrepancies are noted (or those noted have been
corrected), the audit certification will be completed. Any
significant discrepancies not corrected will be reported to
the preparer and the contracting officer. The prepare will
originate the Decision Summary Form, submitting it to the
contracting officer with the Cost Comparison Form. Based dn
the guidance contained in Chapter III, the contracting
officer may either disqualify the Government estimate or
terminate the procurement action.
When the contractaing officer receives the completed cost
comparison with the audit certification and the Decision
Summary Form, he will take the appropriate steps to complete
the procurement action and indicate it on the Decision
Summary Form. When the amount on line 35 indicates that the
cost of in-house performance exceeds the cost of
contracting-out. Conversely, when it is indicated that the
cost of in-house performance is less than (under) the cost
of contracting-out, then the recommendation should be to
perform in-house.
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(DEPARTMENT OR AGENCY)
COMPARATIVE COST OF IN-HOUSE AND CONTRACTING-OUT
PERFORMANCE OF (PRODUCT/SERVICE)
(Date)
LINE A Cost Elepent
IN-HOUSE PERFORMANCE (CHAPTER IV)
ADDITIONAL YEARS
FIRST YEAR SECOND YEAR THIRD YEAR AS APPROPRIATE
(Enter Amounts Rounded to Neatest Dollar) (NOTE 1)
REFER-
TOTAL ENCE
(NOTE 2)
1.
DIRECT MATERIAL
A
2.
MATERIAL OVERHEAD
3.
DIRECT LABOR
4.
FRINGE BENEFITS ON DIRECT LABOR
5.
OPERATIONS OVERHEAD
6.
OTHER DIRECT COSTS
7.
GENERAL AND ADMINISTRATIVE EXPENSE
8.
INFLATION
Not applic.
9.
TOTAL
PERFORMANCE BY CONTRACTING-OUT (CHAPTER V)
10. CONTRACT PRICE
it. TRANSPORTATION
12. CONTRACT ADMINISTRATION
13. GOVERNMENT-FURNISHED PROPERTY
14. STANDBY MAINTENANCE
15. OTHER COSTS
16. GENERAL AND ADMINISTRATIVE EXPENSE
17. TOTAL
NOTE 1: If more than four years are involved, use another form(s) to detail the annual cost of each year and enter the
total here.
i:10TE 2: Attach supporting documentation as prescribed for each element of cost for which an entry is made and identify
It with the established reference. Pages should be separately numbered with the prescribed alphabetic reference and in
numerical sequence; e.g., A-1, A-2, A-3, etc. The reference column in this column indicates the total number of pages
submitted; e.g., A-1 through 14.
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T 4TqTtixa
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LINE # Cost Element
OTHER CONSIDERATIONS (CHAPTER VI)
ADDITIONAL YEARS REFER-
FIRST YEAR SECOND YEAR THIRD YEAR AS APPROPRIATE TOTAL ENCE
ADDITIONS AND (DEDUCTIONS) TO IN-HOUSE PERFORMANCE
ADD:
18.
COST OF CAPITAL
19.
ONE-TIME NEW-START COSTS
20.
OTHER COSTS
DEDUCT:
21.
OTHER COSTS
)
(
)
?
22.
TOTAL
ADDITIONS AND (DEDUCTIONS) TO CONTRACTING-OUT PERFORMANCE
ADD:
23.
COST OF CAPITAL ON GOV'T'FURNISHED FACILITIES
24.
UTILIZATION OF GOVERNMENT CAPACITY
25.
ONE-TIME CONVERSION COSTS
V
26.
OTHER COSTS
DEDUCT:
27.
FEDERAL INCOME TAXES
)
(
)
(
)
(
)
(
)
X
28.
NET PROCEEDS FROM DISPOSAL OF ASSETS
(ANNUAL VALUE)
)
(
)
(
)
(
)
29
OTHER COSTS
)
(
)
(
)
(
)
(
)
30.
TOTAL
MINIMUM COST DIFFERENTIAL (CHAPTER VII)
31. NEW-START
32. CONVERSION
SUMMARY (CHAPTER VIII)
33. ADJUSTED COST OF IN-HOUSE PERFORMANCE
(LINE 9+ LINE 22 + 31)
34. ADJUSTED COST OF CONTRACTING-OUT PERFORMANCE
(LINE 17 + LINE 22 + 31)
35. COST OF IN-HOUSE OVER (UNDER) COST OF
CONTRACTING-OUT PERFORMANCE
(LINE 33 - LINE 34)
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IN-HOUSE ESTIMATES PREPARED BY: COST COMPARISON PREPARED BY:
(Name)
(Title)
APPROVED BY:
(Date) (Name)
(Telephone)
(Name) (Date)
(Title) (Telephone)
PERFORMANCE RECOMMENDATION (IN-
HOUSE OR CONTRACT) APPROVED BY:
(Name) (Date)
(Title)
(Telephone)
(Date)
(Title) (Telephone)
AUDIT CERTIFICATION
We have reviewed the above form and substantiated the
currency accuracy and completeness of the data. We
further verified that the procedures followed were in
compliance with ONE Circular A-76 and the related Cost
Comparison Handbook.
(Name) 1Date)
(Title) (Telephone)
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Ckzo) LI
DECISION SUMMARY
FOR
IN-HOUSE OR CONTRACT PERFORMANCE
BASED ON
COST COMPARISON PER OMB CIRCULAR A-76
I. Department/Agency
Location
Function or Activity
Currently Performed In-house/by Contract
II. Contract Data:
Solicitation date
Number of bids
Exhibit 2
Solicitation No.
Closing date
Contract proposal is for year(s) with options for
year(s).
Cost comparison covered years, from , 19
to , 19 .
Proposed changeover date
III. Total Adjusted Cost of In-House
Performance (Line 33)
Total Adjusted Cost of Contract-
ing-Out Performance (Line 34)
Cost of In-House Performance
Over (Under) Cost of Contract-
ing-Out Performance (Line 35
IV. Non-Monetary Considerations (Attach Supplemental Sheets
if Necessary)
V. Final Recommendation - Perform In-House
Contract Out
Prepared by: Approved by:
/s/ /s/
(Name)
(Date) (Name)
(Title)
(Date)
(Telephone) (Title)
(Telephone)
VI. Action of Contracting Officer:
Perform In-House Bidders Notified
Contract Out Contract No.
Awarded To
(Name) (Date)
(Title) (Telephone)
Exhibit 2. Decision Summary Form
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APPENDIX
GLOSSARY OF TERMS
The definitions presented below are taken from the text of
this handbook, the Cost Accounting Standards, procurement
regulations, and other authoritative publications.
ACQUISTION COST. The amount paid to acquire an asset
(Chapter IV - Operations Overhead).
ACTUAL COST. An amount based on cost incurred as
distinguished from estimated costs. Includes standard
cost properly adjusted for applicable variance (Chapter
IV - Fringe Benefits).
ALLOCATE. To assign an item of cost or a group of items of
cost to one or more cost objectives. This term includes
both direct assignment of cost and the reassignment of a
share from an indirect cost pool (Chapter IV, Operations
Overhead).
ALLOCATION BASE. The denominator in the fraction used to
develop overhead rate. It is either the total of some
element of expense (or goup thereof) or a quantitative
measure that is common to all items or activities to
which the indirect costs are to be allocated (Chapter
IV, Material Overhead, Operations Overhead, G&A
Expenses).
AMORTIZATION. The gradual extinguishment of any amount over
a period of time, such as the write-off of a portion or
all the cost of an asset, or the retirement of a debt
over a period of years (Chapter V, Government-Furnished
Facilities).
AWARD-FEE CONTRACT. A cost reimbursement-type contract with
special fee provisions. It provides a means of applying
incentives in contracts which are not susceptible to
finite measurements of performance necessary for
structuring incentive contracts (Chapter V, Contract
Price).
BASIC LABOR RATE. For Wage Board employees, the basic labor
rate is the hourly rate to be applied to all hours
worked and to all hours of annual leave earned, and
sick, holiday and other leave taken to ascertain the pay
of a Wage Board employee. The General Schedule (GS)
basic rate is the published annual rate of pay for the
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2
particular GS grade and step level (Chapter IV, Direct
Labor).
BILL OF MATERIAL. A detailed listing of the material
requirements for performing a service or providing a
product (Chapter IV, Direct Material).
CAPITALIZED COST The cost of acquiring, installing and
modifying a tangible capital asset that has been added
to an asset account. (Chapter VI, One-Time Costs).
CARTAGE. Transportation from a freight terminal to the
point of use or consumption (Chapter V, Transportation).
CONTRACT ADMINISTRATION COSTS. The cost incurred to assure
faithful execution of a contract by both the Government
and the contractor (Chapter 5, Contract Administration).
CONVERSION. The transfer of work from a Government
commerical or industrial activity to performance by a
private commerical source under contract (Chapter VI,
One-Time Costs).
COST COMPARISON. An accurate determination of whether is is
more economical to acquire the needed products or
service from the private sector or from an existing or
proposed Government commerical or industrial activity
(Chapter II, Policy).
COST DIFFERENTIALS. The cost margins established by OMB
Circular A-76 that must be exceeded before performing a
"new-start" in-house and before converting an in-house
activity to a contract (Chapter VII, Cost
Differentials).
COST ELEMENT. A basic unit of cost, such as labor or
material. The accummulation of all the basic units
related to a given product or service provides the total
cost of that product or service (Chapter IV, General).
COST OF CAPITAL. An imputed charge on the Government's
investment in all of the plant facilities and other
assets necessary for the work center to manufacture
products or provide services (Chapter VI, Cost of
Capital).
COST OF CAPITAL COMMITTED TO FACILITIES. An imputed cost
determined by applying a cost of money rate to
facilities' capital (Chapter VI, Cost of Capital).
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COST REIMBURSEMENT CONTRACT. A type of contract that
provides for reimbursement to the contractor of
allowable costs incurred in the performance of a
contract, to the extent prescribed in the contract
(Chapter V, Contract Price).
CURRENT COSTS. Costs incurred in the current accounting
period (Chapter IV, Direct Material).
CURRENT MARKET VALUE. The amount for which an item could be
sold in today's market (Chapter VI, Cost of Capital).
DEMURRAGE. YThe compensation paid for the delaying of a
ship, freight car, etc., as by the failure to load,
unload, or dispatch within the time allowed (Chapter V,
Transportation Cost).
DEPRECIATION. The method used to spread the cost of
tangible capital assets (plant, machinery, etc.), less
residual value, over their estimated useful lives in a
systematic and logical manner (Chapter IV, Operations
Overhead).
DIRECT COST. Any cost which can be identfiied specifically
with a particular final cost objective. Direct costs
are not limited to items which are incorported in the
end product as material or labor. Costs which can be
identified specifically with a product/service are
direct costs of that product/service. All costs
identified specifically with other products/services are
direct costs of those products/services. (Chapter IV,
General).
DIRECT LABOR. That portion of salaries and wages which, as
a practical matter, can be identified with and charged
only to a specific product or service (Chapter IV,
Dire6t Labor).
DIRECT MATERIAL. The costs of such goods as raw material,
parts, sub-assemblies, components and supplies which as
a practical matter, can be identified specifically with
the product/service (the final cost objective) under
review (Chapter IV, Direct Material).
DOUBLE-COUNTING. The treatment of certain costs as direct
costs of the product/service, while similar costs
related to other products/services are treated as
indirect costs and a portion thereof is allocated to the
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product/service for which the estimate is being prepared
(Chapter IV, General).
ESTIMATING COST. The process of deterMing a future or past
result in terms of cost, based upon information
available at the time (Chapter IV, General).
FAIR MARKET VALUE. A realistic valuation of what an item
could be sold for in open market (Chapter V, General).
FINAL COST OBJECTIVE. A cost objective which has allocated
to it bothdirect and indirect costs, and, in the cost
accumulation system, is one of the final accumulation
points (Chapter IV, General).
FIRM-FIXED-PRICE CONTRACT. A contract which provides for a
price which is not subject to any adjustment by reason
of the cost experience of the contractor in performance
of the contract (Chapter V, Contract Price).
FISCAL YEAR. The accounting period for which annual
financial statements are regularly prepared. The
Government's Fiscal Year begins on October 1, and ends
on September 30 (Chapter IV, Operations Overhead).
FIXED PRICE CONTRACT WITH FLEXIBLE PRICING ARRANGEMENTS.
This type of contract provides for either a
firm-fixed-price for an initial period and for
prospective price redeterminations at stated times
furing the performance of the contract or a ceiling
price and retroactive price redetermination after
completion of the contract Chapter V, Contract Price).
FRINGE BENEFITS. Allowances and services provided employees
as compensation in additon to basic salaries and wages
(Chapter IV, Fringe Benefits).
FULL COSTS. The total of all direct and indirect costs
allocable to a product or service (Chapter IV, Direct
Material).
GENERAL AND ADMINISTRATIVE (G&A) EXPENSE. Any management,
finanal and other expense which is incurred by or
allocated to an organizational unit and which is for the
general management and administration of the unit as a
whole. G&A expense does not include those management
expenses whose beneficial or causal relationship to cost
objectives can be more directly measured by a base other
than a cost input base representing the total activity
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of the unit during a cost accounting period. (Chapter
IV, General and Administrative Expense).
GOVERNMENT-FURNISHED FACILITIES AND EQUIPMENT. Facilities
and equipment in the possession of, or acquired directly
by the Government and subsequently delivered or
otherwise made available to the contractor (Chapter V,
Government-Furnished Property).
INCREMENTAL COST. The increases or decreases in total cost,
or the changes in specific elements of cost, that result
from variations in operations (Chapter IV, Operations
Overhead).
INDIRECT COST. Any cost not directly identified with a
single finalcost objective, but identified with two or
more final cost objectives or with at least one
intermediate cost objective (Chapter IV, General).
INDIRECT COST (OVERHEAD) POOL. A grouping of incurred (or
projected) costs identified with two or more cost
objectives but not identified specifically with any
final cost objective (Chapter IV, Operations Overhead).
INDIRECT LABOR. All labor that is incurred for the benefit
of more than one product or service or the business as
whole. It may be included as material overhead,
operations overhead, or general and administrative
expense (Chapter IV, Operations Overhead).
INDIRECT MATERIALS AND SUPPLIES. Includes items of
materials and suppli-e- which are not identifiable to a
single product or service but which are necessary to
performance of the various functions of an entity. It
also includes the minor amounts of direct material for
which accounting as direct costs is not practical.
(Chapter IV, Material Overhead, Operations Overhead,
General and Administrative Expense).
INFLATION. An increase in the amount of money in
circulation resulting in a decline in its value and rise
in prices (Chapter IV, Inflation of Out-Year Costs).
INSURANCE. The cost to the, Government arising from
liabilities and losses not covered by insurance. The
costs are incurred in consonance with the Government's
policy of acting as a self-insurer (Chapter IV,
Operations Overhead).
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6
INTERAGENCY SUPPORT. Products or services furnished from
the capacity of another Government agency or
organization to the agency which will provide the
product or service being . estimated (Chapter IV,
Interagency Support).
LABOR HOUR CONTRACT. A variant of the time and material-
type contract, differing only in that materials are not
supplied by the contractor (Chapter V, Contract Price).
LABOR-TIME STANDARD. A preestablished measure expressed in
temporal terms, of the quantity of labor required to
perform a task (Chapter IV, Direct Labor).
MAINTENANCE AND REPAIR Cost incurred to keep buildings and
equipment in normal operating condition (Chapter IV,
Operations Overhead).
MATERIAL OVERHEAD COSTS. Indirect costs related to an
activity or group of activities for acquiring, handling,
and/or controlling required materials, until the
materials are used or consumed in the production of
goods and services or are sold without processing
(Chapter IV, Material Overhead).
MATERIAL-QUANTITY STANDARD. A preestablished measure,
expressed in physical terms, of the quantity of material
required for a specific purpose (Chapter IV, Direct
Material).
NET BOOK VALUE. The capitalized cost of an asset or group
of assets shown in the accounting records, less
accummulated depreciation or other applicable offset
(Chapter VI, Cost of Capital).
NEW START. A newly established Government commerical or
industrial activity, including a transfer of work from
contract to in-house performance (Chapter VI, One-Time
Costs).
NO-COST BASIS. The provision of a product or service
without charge or remuneration (Chapter IV, General and
Administrative Expense).
NOMINAL COST. Cost of a very minor amount (Chapter IV,
Direct Material).
ONE-TIME COSTS. The nonrecurring costs to the Government
when it either starts or discountinues an in-house
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activity as a result of a decision to change the source
of a product or service (Chapter VI, One-Time Costs).
OPERATIONS OVERHEAD COSTS. The indirect costs which are
? necessarily IEZUrred during a fiscal year to produce or
deliver the products or services being provided by a
particular organizational element (Chapter IV,
Operations Overhead).
OPPORTUNITY COSTS. Other income, or expense avoidance,
foregone by usinglimited resources for a particular
purpose (Chapter VI, Cost of Capital).
OTHER DIRECT COSTS. All those direct costs exclusive of
diria-riboi?iiirdirect material which are identified as
having been incurred specifically for a particular
product or service (Chapter IV, Other Direct Costs).
OVERHEAD RATE. A percentage, or monetary unit related to a
quantitative measure, derived by dividing an indirect
cost pool by an allocation base. (Chapter IV, General,
Material Overhead, Operations Overhead).
OVERTIME AND PREMIUM PAY. Additional amounts added to basic
salarIii for working longer than the regularly scheduled
hours or under unusual conditions. (Chapter IV,
Operations Overhead).
PHYSICAL INVENTORY. The actual amount of material on hand
(Chapter VI, One-Time Costs).
PRICING. The process of establishing the amount or amounts
to be paid in return for goods or service (Chapter IV,
Direct Materials).
PROPOSAL. Any offer or other submission used as a basis for
pricing a contract, contract modification or termination
settlement or for securing payments thereunder (Chapter
V, Contract Price).
RENT. The cost incurred for the use of a non-Government
entity's tangible assets (land, plant and machinery,
etc.) in providing the product/service being estimated
(Chapter IV, Operations OVerhead).
RESIDUAL VALUE. The proceeds (less removal and disposal
costs-77r- any) realized upon disposition of a tangible
capital asset. It usually is measured by the net
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proceeds from the sale or other disposition of the
asset, or its fair value if the asset is traded on
another asset. (Chapter IV, Operations Overhead).
STANDARD COSTS. Any cost computed with the use of
preestablished measures (Chapter IV, Direct Material,
Direct Labor).
STANDARD LEVEL USER CHARGE (SLUC). The amount which the
General Services Administration (GSA) assesses Federal
agencies for thier assigned space in GSA controlled
building. This SLUC note is a composite of three
ingredients:
a. the fair annual rental appraisal rate for
space, utilities and normal services;
b. an escalation of this rate; and
c. an added charge for standard protection.
STANDY MAINTENANCE COSTS. The costs necessary for the
upkeep of property held in a standby status to assure
contract performance. This maintenance neither adds
value to the property nor appreciably prolongs its
useful life. Rather, the mainenance keeps the property
in an efficient operating condition so that it will be
available for possible use in case of nonpefformances by
the contractor (Chapter V, Standby Maintenance Costs).
STRAIGHT-LINE DEPRECIATION. A method of depreciating an
asset by charging an equal amount of its depreciable
cost (captialized cost less residual value) to each
accounting period covered by its useful life, or by
charging an equal amount of its depreciable cost to each
hour of use, each product produced, etc. (Chapter IV,
Operations Overhead).
SUPPORT COSTS. Costs incurred by one organizational unit
for the benefit of another (Chapter IV, Operations
Overhead).
SURCHARGE. An additional amount added to the basic charge
to cover expenses incurred in providing the products or
services. (Chapter IV, Direct Material; Material
Overhead).
TANGIBLE CAPITAL ASSET. An asset that has physical
substance, more than minimal value, and is expected to
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be held for continued use or possession beyond the
current accounting period.(Chaptet IV, Depreciation).
TIME AND MATERIAL CONTRACT. A type of contract which
provides for the procurement of supplies and services on
the basis of (i) direct labor hours at specified fixed
hourly rates (which shall include wages, overhead,
general and administrative expense, and profit) and (ii)
material at cost and in addition, where appropriate,
material handling costs as a part of material cost
(Chapter V, Contract Price).
WORK CENTER. The lowest organizational unit at which cost
are accumulated (Chapter IV, Operations Overhead).
WORK STATEMENT. A comprehensive description of what is to
be done, including performance standards as appropriate.
The work statement should describe all duties, tasks,
responsibilities, frequency of performance of repetitive
functions and requirements for furnishing facilities and
materials (Chapter III, Preparation of Work Statement).
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