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I have a cost reimbursement contract (no fee), with provisional rates established.  

I'm trying to determine the correct way to determine the non-burdened hourly labor rate - is it a person's salary divided by 2080, or if our company pays semi-monthly, do I take a person's salary, divide it by 24 (number of timesheet periods in a year), and then by the hours worked by that employee in the timesheet period to establish an hourly rate?

For example - Person A has a salary of $150,000, and worked 80 hours in a timesheet period.  Is the non-burdened, hourly labor rate:

$150,000/2080 = $72.12 or

$150,000/24/80 = $78.13

Thank you in advance!

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I'm a bit unclear as to why you need this information, but I can tell you that there are many ways to calculate a wage rate. Some companies use 2,180 (52 weeks of 40 hours) and others use the actual pay divided by the actual number of hours worked (which would include both compensated and uncompensated overtime). Other companies use actual pay divided by the standard number of hours in pay period, ignoring any uncompensated overtime. Still others look for the effective hourly wage rate, based on the number of available productive labor hours (i.e., 2,080 hours less expected or actual Paid Time Off hours).

There is no absolutely correct way to make the calculation. You need to do what works for you, given your circumstances and business objective.

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  • 1 month later...

Why not just ask KTR's Payroll dept., they can tell you that, it is done all the time.  Get the employee badge number, that way you keep the names out of it. On T&M contracts, using a select group of employees with specialized skill sets, KTR supplies the badge numbers of the employees, we verify the DL rates with, payroll.  Done.

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37 minutes ago, LuketheNuke said:

Why not just ask KTR's Payroll dept., they can tell you that, it is done all the time.  Get the employee badge number, that way you keep the names out of it. On T&M contracts, using a select group of employees with specialized skill sets, KTR supplies the badge numbers of the employees, we verify the DL rates with, payroll.  Done.

This post tells me you didn't read my post, up above.

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I most certainly did read the post above.  I don't disagree with the point made about there being several ways to account for a 'full year'  relative to the amount of hours worked, however those calc's have more bearing when turning hours into full time equivalent heads (number of employees).  I don't think we have the full story from the original post, as provisional billing rates are 'fully burdened rates' not just the direct labor rate. But that is all we have to go on at the moment.  We can assume we operating under FAR 52.216-7 Allowable cost and Payments,  and so the challenge is to set a billing rate for the expected full year rate FAR 42.704 Billing Rates.  And the gov't will pay invoices for all allowable costs.  Direct labor dollars are allowable costs, so the gov't is going to reimburse what the KTR is paying its employees.  Ask the KTR's payroll department and they will tell you the direct labor rate.  That direct labor rate being paid is likely the prevailing wage for the market, and agreed upon between the KTR and the employee in an employment contract ahead of time, checking the boxes for allowability per FAR 31.205-6 Compensation for Personal Services. 

With that being said, the mystery still remains, why an ACO would be setting billing rates based only on the DL rate and not the fully burdened rate (OVHD, G&A, FRINGE).

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On 3/9/2022 at 7:09 PM, Caitlin W said:

I have a cost reimbursement contract (no fee), with provisional rates established.  

I'm trying to determine the correct way to determine the non-burdened hourly labor rate - is it a person's salary divided by 2080, or if our company pays semi-monthly, do I take a person's salary, divide it by 24 (number of timesheet periods in a year), and then by the hours worked by that employee in the timesheet period to establish an hourly rate?

11 minutes ago, LuketheNuke said:

I most certainly did read the post above. ... We can assume we operating under FAR 52.216-7 Allowable cost and Payments,  and so the challenge is to set a billing rate for the expected full year rate FAR 42.704 Billing Rates.

LuketheNuke -- per the OP, provisional [billing] rates have already been established. That's not what the OP wants to know.

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On 3/9/2022 at 10:09 PM, Caitlin W said:

I'm trying to determine the correct way to determine the non-burdened hourly labor rate

You still have not told us why you need this information.  Is it to price an action or are you asking to determine what to bill the government on an interim voucher or is it for some other reason?

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53 minutes ago, LuketheNuke said:

why an ACO would be setting billing rates based only on the DL rate and not the fully burdened rate (OVHD, G&A, FRINGE).

What do you mean by "billing rate"?  It seems you are using this term other than it is defined in FAR 42.701.

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Here_2_help--yes you're right, I have made a wrong turn.  This is more confusing, if one has 'provisional rates', which usually means a 'fully burdened rate', and which is the sum of the (direct labor  + the indirect labor rate) = fully burdened rated, then why don't they know the direct labor rate.  

Provisional rate is also referred to  as the 'billing rate', they are  the same thing.  There are three rates, 1- Incurred Cost (what the rate was last year, determined thru a DCAA audit, negotiated with KTR),2-  the Billing Rate (the rate this year) and 3-  Forward Pricing Rate, rates to be used pricing proposals into the future. 

What does one allow the KTR bill the gov't, in the current accounting period (this year),  on cost type contracts?  Answer is : allowable costs plus fee.  Allowable costs is direct material and direct labor. The question is what rate to allow the KTR invoice.  The provisional or billing rate is used (direct labor + OVHD, G&A and Fringe) until DCAA can audit the KTR's Incurred Cost submission for that year.  Hopefully, you as the ACO set the rate close to where the KTR will end up for the year, low enough to protect gov'ts interest for known unallowables, but high enough as not to put the KTR into a position of 'starving for cash'.

Maybe the original post  , Caitlin, doesn't realize, the provisional rate contains the direct labor rate.  

 

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2 hours ago, LuketheNuke said:

This is more confusing, if one has 'provisional rates', which usually means a 'fully burdened rate', and which is the sum of the (direct labor  + the indirect labor rate) = fully burdened rated

 

2 hours ago, LuketheNuke said:

Provisional rate is also referred to  as the 'billing rate', they are  the same thing. 

This is how FAR 42.701 defines billing rate. 

Billing rate, as used in this subpart, means an indirect cost rate-

           (1) Established temporarily for interim reimbursement of incurred indirect costs; and

           (2) Adjusted as necessary pending establishment of final indirect cost rates.

This same definition applies to "billing rate" as used in FAR 52.216-7.  In light of this definition, why do you say the billing rate usually includes the cost of direct labor?

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On 3/9/2022 at 10:09 PM, Caitlin W said:

I have a cost reimbursement contract (no fee), with provisional rates established.  

I'm trying to determine the correct way to determine the non-burdened hourly labor rate - is it a person's salary....

A cost analysis should be built up from cost elements, not backed into from top-line totals.

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Billing rates allow KTR to recover both the direct and indirect costs at the same time, with a single rate often called a 'fully burdened rate'.   The 'burden' part is the indirect cost rate on top of the direct cost rate.  What one sees is rolled up into the one billing rate is actually the sum of :direct labor rate + OVHD rate + G&A rate + FRINGE rate.  There are variations on this theme, by substituting  'material costs' for the direct labor in the equation above.  For example, a KTR may choose  to recover (spread the costs over the production run) the indirect costs associated with running its shipping, receiving, warehouse, parts inventory system etc.  by using material dollars,  other KTR may choose to use  direct labor dollars.  Which ever way makes the most sense to allocating the indirect costs to appropriate cost objectives.  Think pool over base. The pool(s) are the indirect costs and the base can be direct labor dollars, direct labor hours, or material dollars (just to name a few). It depends how sophisticated is the KTR  with its costs accounting system.  In manufacturing, it is easy to see the logic in using direct labor dollars, the more touch labor used, the more indirect costs used (electricity, steam, tooling etc.) . 

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4 hours ago, LuketheNuke said:

Billing rates allow KTR to recover both the direct and indirect costs at the same time, with a single rate often called a 'fully burdened rate'.   The 'burden' part is the indirect cost rate on top of the direct cost rate.  What one sees is rolled up into the one billing rate is actually the sum of :direct labor rate + OVHD rate + G&A rate + FRINGE rate.  There are variations on this theme, by substituting  'material costs' for the direct labor in the equation above.  For example, a KTR may choose  to recover (spread the costs over the production run) the indirect costs associated with running its shipping, receiving, warehouse, parts inventory system etc.  by using material dollars,  other KTR may choose to use  direct labor dollars.  Which ever way makes the most sense to allocating the indirect costs to appropriate cost objectives.  Think pool over base. The pool(s) are the indirect costs and the base can be direct labor dollars, direct labor hours, or material dollars (just to name a few). It depends how sophisticated is the KTR  with its costs accounting system.  In manufacturing, it is easy to see the logic in using direct labor dollars, the more touch labor used, the more indirect costs used (electricity, steam, tooling etc.) . 

Luke, I don't especially want to pick a fight with you. But you have at least two errors in your post, quoted above.

1.  Billing rates are defined in the FAR at 52.216-7, as others have already pointed out. The clause does not permit contractors to bill at a single rate. If you're thinking T&M contract type, then maybe. But never cost-type contracts. You can also use a wrap rate for ROM estimates, but not for FAR 15 proposals where cost analysis will be performed.

2. In manufacturing, it has been traditional to use a DL $ base. But in the 21st century, automation is taking over and the percentage of touch labor in the average factory is declining. Thus, the connection between touch labor hours/dollars and indirect factory expenses is becoming more tenuous by the year. At this point, it makes as much sense (if not more sense) to use a machine usage hour base. Continuing to use a DL $ base tends to result in Manufacturing Overhead rates that are well north of 100%; I saw a 400% rate once. It's not wrong, but it's not right either. A decent Activity Cost analysis should be performed to figure out what costs are driving factory activity. At many places it is no longer touch labor costs.

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Here_2_help, No problem, this is a place for CIVIL DISCOURSE. As for #1.   I do see your point, at 52.216-7 (b)(1)(ii)(A) thru (F), a proper invoice will have have all those individual cost elements broken out, and DCAA will verify.  I may have taken a short-cut in my argument, of course each of those may have its own 'rate', however it is easier when working with it every day to speak in terms of the composite rate or the billing rate.  On fixed price incentive contracts I do only see one number  for 'cost'.  We did get side-tracked, from the original post,  the question remains why just looking for only DL rate?

As for #2.  You do make a good point here as well, the allocation base for indirect costs needs scrutiny from time to time to ensure it is in step with current production methods.  But, direct labor is still a large part of many acquisitions.  Think  big engines from Caterpillar, or Pratt & Whitney,  or smaller areas like an airplane cockpit and all that instrumentation, and back to large projects like shipbuilding, all are labor intensive. 

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