Monday, March 17, 2014

Estimates of Future Costs and Government's Use of Global Insights

Here's something to consider when using historical costs to estimate and negotiate future contracts.

When contractors use historical costs as a basis for estimating future costs, they must add an escalation factor.Contractors, starting out with historical costs, must estimate what those costs will be during the contract performance period. For example, if wages were increasing at five percent a year, contractors might take their 2013 actual labor rates and increase them by five percent for work performed in 2014 and by five percent again for work performed in 2015.

What many contractors have found is that it doesn't really matter what rate they use for escalation, DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) will use rates published by Global Insights in lieu of accepting (or even analyzing) contractor escalation estimates.

The Government is a major customer of Global Insights' economic forecasts. For most contractors, the cost of a subscription to Global Insights is cost-prohibitive. Since most contractors do not have the time or resources to purchase or to develop their own economic forecasting model, the end result is that the Global Insight projections become the negotiated projections. In doesn't matter how good your negotiating skills - this is one area of Government intransigence.

However, as we reported last January following the President's State of the Union Speech, minimum wages for Government contractors is about to rise to $10.10 per hour. That means, for example, if you're paying grass cutters $8.50 per hour, you're going to need a 19 percent increase to your historical wages in order to comply with the mandate. Right now, labor rate escalation, depending on skill, geographic area, and the particular index, is hovering in the two percent range. Obviously, the Global Insights forecasts are not going to apply in these situations.

Not only would Global Insights not apply to minimum wage situations, but there is also the likelihood that the new minimum wage for Government contractors will impact wages for other non-minimum wage labor categories. A supervisor earning $10 an hour isn't going to be satisfied with $10 per hour when his/her subordinates are making $10.10 per hour.

When negotiating contracts where the performance period extends into 2015, the economic forecasts of Global Insights might not be reasonable. Contractors need to make a careful assessment of their environment before succumbing to the Global Insights juggernaut.

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