PART II
PREPARING THE COST COMPARISON ESTIMATES
Chapter 1--Implementation Instructions
A. General
- 1. Part II provides generic and streamlined cost comparison guidance
to comply with the provisions of the FAIR Act and Circular A-76. This includes
guidance for developing in-house costs based upon the Government's Most
Efficient Organization (MEO) and other adjustments to the contract and
inter-service support agreement (ISSA) price. It also sets out the principles
for development of cost-based performance standards or other measures that are
comparable to those used by commercial sources. Appendices 6 and 7 provide
sector-specific cost comparison guidance.
- 2. The guidance provided by this Part relies on the managerial cost
accounting and performance standards established in support of the CFO Act,
GPRA and Federal Accounting Standards. Cost and performance information
developed for competitions subject to the Circular and this Supplement should
be drawn from the data base established by these standards and adjusted as
appropriate. This guidance is to be used by Federal agencies to ensure that
cost comparisons are fair and reasonable.
- 3. A cost comparison between in-house, contract or ISSA performance
seems straight-forward, but, in fact, is complicated by the very different ways
Government agencies and commercial sources account for cost. For example, the
Government buys capital equipment and may recognize the entire expense when
payment is made. The commercial sector may borrow funds and recognize the
expense of capital equipment as it is used. All costs incurred by commercial
sources are ultimately charged to a "customer," whereas agency costs may be met
by several different appropriations accounts, revolving funds or mixes thereof.
Insurance is a real cost of doing business in the commercial sector, while the
Federal Government is a "self-insured entity." Taxes are paid by most
commercial sources and received and used by the public sector. Assets are
purchased from owners equity in the commercial sector, yet they are purchased
by the taxpayer in the public sector. The Government may incur employee
retained pay or save pay as a way of mitigating the adverse impacts of a
management decision, without assessing these costs to the activity. The
commercial sector passes these types of costs on to the customer. These and
other differences necessitate cost comparison requirements that equalize the
systems to reflect the total alternative costs to the Government and the
taxpayer. Such costs may or may not be fully reflected by agency accounts.
- 4. The procedures set forth in this Part recognize the absence of a
uniform accounting system throughout the Federal Government and are intended to
establish a practical level of consistency to assure that all substantive
factors are considered.
B. Organization
- 1. Part II is divided into five chapters.
- 2. Chapter 2 provides the generic principles and procedures for
developing the cost of in-house performance to the Government. The principles
and procedures of Chapter 2 represent a competitive cost comparison.
- 3. Chapter 3 provides the generic principles and procedures for
developing the cost of contract or ISSA performance to the Government. The
principles and procedures of Chapter 3 represent a competitive cost comparison.
- 4. Chapter 4 provides procedures for computing the minimum
conversion differential, calculating the financial advantages to the Government
associated with Government or contract performance and the cost comparison
decision.
- 5. Chapter 5 provides an alternative cost comparison methodology for
activities involving 65 in-house FTE or less at the time of study announcement.
While the principles and procedures of Chapter 5 represent a competitive cost
comparison, this non-mandatory alternative approach is provided to minimize the
administrative costs associated with cost comparisons, ensure timely completion
and preserve the equity and cost comparability requirements of this Supplement.
A. General
- 1. Overview.--
a. This Chapter provides the policies and procedures that will be
used when the Government determines that a cost comparison between in-house
(agency), contract or interservice support agreement (ISSA) performance is
warranted.
b. The procedures of Part I of this Supplement regarding cost
comparison waivers, the certification of the Government's MEO, review by an
Independent Review Officer and the Administrative Appeals process apply. Cost
comparisons will be based upon the same scope of work and performance
requirements contained in the Performance Work Statement (PWS).
c. Cost comparisons are conducted in accordance with this guidance,
modified to the extent applicable by Chapter 5 of this Part. The procedures
differ for the conversion of work from contract or ISSA to in-house
performance, however, in four basic areas: (1) the identification of new or
increased in-house costs, (2) one-time conversion costs and (3) the calculation
of the minimum cost differential, and (4) certain other adjustments that may be
necessary if an ISSA is being considered.
- 2. Standard Cost Factors.--Standard cost factors are to be used as
prescribed in this Part. Agencies are encouraged to collect agency or
sector-specific data to update and improve upon the standard cost factors
provided herein. The official in paragraph 9.a. of the Circular, or designee,
may develop alternative agency-wide or sector-specific standard cost factors,
including overhead, for approval by OMB.
- 3. Common Costs.--Costs that would be the same for in-house,
contract or ISSA performance, without organizational, workload, or
responsibility changes need not be computed or entered into the cost
comparison. Common costs or "wash" items will be identified in the Management
Plan for review.
- 4. Retained and Save Pay.--Retained and save pay are not included in
the in-house cost estimates. Agencies are encouraged to seek their Most
Efficient Organization (MEO), without penalty of historical inefficiencies.
Agencies cost only the "positions" in the MEO.
- 5. Cost of Conducting a Cost Comparison.--The cost of conducting a
cost comparison is not added to the in-house cost estimate or contract price.
This is an administrative expense associated with good management practices and
is irrelevant to the cost of performance.
- 6. Proration of Performance Periods.--Cost comparisons are conducted
using not less than three years of proposal/cost data, submitted by the
Government and commercial sources. In-house cost estimates and contract prices
will reflect the same multi-year basis. If permitted by statute and the Federal
Acquisition Regulations (FAR), performance periods for cost comparisons in
excess of five years may be approved by the official in paragraph 9.a. of the
Circular, or designee. Multi-year procurement or pre-priced renewal options
provide advantages such as continuity of operations, the possibility of lower
prices, and reduced turbulence and disruption. However, in extending the
performance period, the official in paragraph 9.a. of the Circular, or
designee, must certify that no known cost comparison advantage be conveyed to
the in-house, contract or ISSA bid by the extension.
- 7. In-House Costs.--
a. The competitive cost of in-house performance includes all
significant performance costs associated with the activity that are not common
to the in-house, contract or ISSA options. The in-house cost estimate is based
upon the following:
--Personnel Costs
--Materials and Supply Costs
--Other Specifically Attributable Costs
--Depreciation
--Cost of Capital
--Rent
--Maintenance and Repair
--Utilities
--Insurance
--Travel
--MEO Subcontracts
--Other Costs
--Overhead Costs
--Additional Costs
b. In addition to costs generally associated with the in-house
performance of an activity, including personnel, material and overhead costs, a
conversion from contract or ISSA performance to in-house performance may
require increased costs for facilities and equipment. The cost of all capital
assets not currently provided to the contractor will be computed using the
depreciation and cost of capital methods provided in this Chapter. Increases
for the rent, maintenance and repair, utilities, travel and their associated
overhead is also calculated. Government costs that would be the same for
in-house, contract or ISSA operation, should be identified, but need not be
computed.
- 8. Minimum Cost Differentials.--
a. This Supplement establishes a minimum threshold of undefined
costs that must be exceeded prior to a conversion to or from in-house, contract
or ISSA performance. The minimum differential is also established to ensure
that the Government will not undertake a conversion for marginal estimated
savings.
b. An activity will not be converted to or from in-house, contract
or ISSA performance, on the basis of a cost comparison, unless the minimum cost
differential is met. The minimum cost differential is the lesser of 10 percent
of in-house personnel-related costs (Line 1) or, $10 million over the
performance period. Factors such as decreased productivity, and other costs of
disruption that cannot be easily quantified at the time of the cost comparison
are included in this differential.
c. Whenever a cost comparison involves a mix of existing in-house,
contract, new or expanded requirements, or assumes full or partial conversions
to in-house performance, each portion is addressed individually and the total
minimum differential is calculated accordingly.
- 9. Rounding Rule.--Round all line entries on the Cost Comparison
Form (CCF) to the nearest dollar.
- 10. Inflation.--
a. Agencies will use the annual inflation guidance developed
annually for the President's Budget and provided by OMB for use in cost
comparisons conducted in accordance with this Supplement.
b. In preparing cost estimates, all known or anticipated increases
incurred before the end of the first performance period; e.g., salary increases
for Government employees, are included in each cost element--prorated as
appropriate. For subsequent periods, the cost of anticipated changes in the
scope of work, as described in the PWS, is determined. Inflation factors for
pay and non-pay categories will then be applied to the estimated year-end costs
for the first year of performance. There are some exceptions to the inflation
adjustments as discussed later, such as personnel costs subject to economic
price adjustment clauses of the Service Contract Act, Davis-Bacon Act,
depreciation costs for facilities and equipment, and the cost of minor items.
c. To calculate out-year costs: (1) determine the cost elements
affected by inflation during each performance period. For each period, ensure
that the number of months in the period and the changes in the PWS for each
period have been considered; (2) multiply each cost element for each
performance period by the respective salary/wage or material cost inflation
factors to the applicable performance period, and (3) once adjusted for
inflation, calculate the total cost of that CCF Line item.
- 11. Other ISSA Adjustments.--
a. It is not the intent of this Supplement to require an ISSA
offeror to significantly alter its methods of operation to provide unique or
site specific services. While such services may meet agency missions and may
legitimately be included in the solicitation, additional adjustments to the
ISSA cost estimate may be necessary to reflect differences in in-house and
contractor bids.
b. Agencies should identify the minor differences between the
requirements of the solicitation (contractor bid) and the ISSA cost estimate.
The agency determines if any item or combination of items will impact the
agency's ability to perform. If the agency's ability to perform would be
adversely impacted, the ISSA cost estimates may be rejected as non-responsive.
If the differences will have minimal agency performance implications, and/or
can continue to be performed by agency personnel, the ISSA cost estimates will
be adjusted for purposes of comparison with the contractor and MEO offers,
based upon the comparable costs contained in the agency's MEO.
c. A complete record of all adjustments to the contractor and ISSA
cost estimates should be maintained and made available to the public upon
request.
B. Personnel--Line 1
- 1. This Line includes the cost of all direct in-house labor and
supervision necessary to accomplish the requirements specified in the PWS.
Included are salaries, wages, fringe benefits, and other entitlements, such as
uniform allowances and overtime. To determine Line 1 Personnel costs, identify
the in-house staffing estimate and proper wage/grade classifications as
described in the Management Plan.
- 2. In-house cost estimates that assume a mix of in-house labor and
existing contract support should include the cost of labor for the Government's
administration and in-house inspection of those support contracts on Line 1.
Table 3-1, of this Part, may be used to estimate contract administration costs,
based upon the estimated number of contract employees involved. The cost of the
support contracts themselves, including the cost of related Government
furnished equipment and facilities not provided to the contractor under this
cost comparison, should be entered on Line 3 Other Specifically Attributable
costs.
- 3. Line 1 includes all competitive costs that could change if
performance is converted to or from in-house, contract or ISSA. Thus, Line 1
may also include certain management and oversight activities, such as personnel
support, environmental or OSHA compliance management, legal or other direct
administrative support costs.
- 4. The conclusion that an activity may be performed by contract or
ISSA also reflects a decision that the work need not be accomplished by
military or other uniformed Government personnel. The cost of military labor in
a cost comparison, even if the work will remain military if retained in-house,
will be determined by the composite rate for uniformed personnel established by
the DOD or other applicable Comptroller.
- 5. Generally, in-house staffing should be expressed in terms of
productive work hours. With the establishment of the number of productive work
hours required, a conversion to the number of full-time equivalents (FTE) is
needed. For full-time and part-time positions, estimate the total hours
required by skill and divide by 1,776 annual available hours to determine the
number of FTE positions required. For intermittent positions to be expressed in
FTE, estimate total hours required by skill and divide by 2,007 annual
available hours to determine the number of FTE positions required. The military
agency comptroller will establish comparable productive hours for military
personnel included in an MEO as military positions. The productive hours
exclude annual leave, sick leave, administrative leave, training and other
nonproductive hours. The factors result from differences in nonproductive time
between types of positions.
- 6. The following considerations are used to compute personnel costs:
a. Position Title or Skill--Identify the job. Example: carpenter,
driver, janitor, supervisor, foreman, administrative clerk or department head.
b. Grade--Identify the appropriate GS/FWS grade for each position
title or skill.
c. Number of FTE Required--Identify the FTE required for each
grade. Identify the temporary and intermittent employee work years. This is
important for later fringe benefit calculations, since intermittent and
temporary employees get fewer benefits than full-time or part-time employees.
d. Annual Salary/Wages--Pay information can be obtained from the
personnel or finance office. Use current pay rates based on the Government-wide
representative rate of step 5 for GS and step 4 for FWS employees. Multiply
that pay rate by the number of FTE, except for intermittent positions where
actual hours are used. As a rule, GS salary is expressed as an annual rate of
pay and the FWS salary is expressed as an hourly rate. For positions to be used
on a prearranged regularly scheduled tour of duty, this hourly rate is
multiplied by 2,087 (the number of hours employees are paid annually).
e. Other Entitlements--Include entitlements that will also earn
fringe benefits. Work closely with the personnel office to make sure all
entitlements are considered and to obtain current factors. Examples include:
night differential pay for FWS employees, environmental differential pay and
premium pay for Federal civilian fire fighters and law enforcement officers.
f. Fringe Benefits or FICA--The following fringe benefit factors
are estimated according to the Federal Accounting Standards for
Liabilities-Exposure. Multiply the following Governmentwide standard factors by
the appropriate basic pay:
(1) Full or part-time permanent Federal civilian employees:
(a) The standard retirement cost factor represents the Federal
Government's complete share of the weighted CSRS/FERS retirement cost to the
Government, based upon the full dynamic normal cost of the retirement systems;
the normal cost of accruing retiree health benefits based on average
participation rates; Social Security, and Thrift Savings Plan (TSP)
contributions. The current (1996) rate is 23.7 percent of base payroll for all
agencies. The comparable retirement cost factors for special class employees
are 32.3 percent for air traffic controllers and 37.7 percent for law
enforcement and fire protection employees.
(b) The cost factor to be used for Federal employee insurance and
health benefits, based on actual cost, is 5.6 percent, plus an additional 1.45
percent for Medicare.
(c) The cost factor to be used for Federal employee miscellaneous
fringe benefits (workmen's compensation, bonuses and awards, and unemployment
programs) is 1.7 percent.
(2) Intermittent or temporary Federal civilian employees.--The
Federal Insurance Contribution Act (FICA) employer cost factor of 7.65 (or the
current rate established by law) will be applied to civilian employees not
covered by either of the two civilian civil service retirement systems
(normally intermittent and temporary employees). Apply the FICA rate only to
wages and salaries subject to the tax; there is an annual salary limitation for
FICA tax.
g. Other Pay--Include entitlements that do not earn fringe
benefits. Some examples are night differential pay for GS employees, overtime,
holiday, awards, bonuses, and uniform allowances.
h. Personnel Cost--Add Basic Pay, Fringe Benefits or FICA and other
pay for all positions and total for both Federal Wage System (FWS) and General
Schedule (GS) categories. This figure can now be used as a basis to compute the
annual personnel costs for each performance period.
- 7. Adjustments to annual personnel costs for each performance period
are made to reflect anticipated pay increases.
- 8. All in-house wages, salaries and other costs are adjusted for
inflation consistent with the economic assumptions used in the President's most
recent Budget, through the end of the first year of performance. Federal wages
and salaries for contracts that contain an economic adjustment clause or are
subject to the Service Contract Act (SCA) (41 USC 351-357) or the Davis-Bacon
Act (DBA) (40 USC 276a--276a-7) are inflated to the end of the first
performance period. However, when using the Department of Labor criteria,
certain potential contract positions may not be covered under the SCA/DBA
provisions; accordingly, the in-house related costs for such positions are
escalated through the end of the cost comparison period.
C. Material and supply--Line 2
- 1. Material and supply costs are incurred in each performance period
for goods such as raw materials, parts, subassemblies, components and office
supplies. Material costs are calculated only if the materials are used by the
activity and will not be provided to the contractor or ISSA provider by the
Government.
- 2. Review the PWS to determine the materials required for in-house
performance that will not be furnished to the contractor or ISSA provider.
Normally, the contractor or ISSA provider will be expected to provide the
supplies and materials necessary to perform the work described in the PWS. The
policy regarding contractor or ISSA use of Government provided supplies and
materials is set forth in FAR 51.101. Adjust historical material use and cost
data to reflect the requirements of the PWS.
- 3. Determine if materials can be obtained on the open market at less
cost than from other Government agencies. Material cost includes material,
transport, handling and availability/delay costs. If so, obtain any necessary
waivers from the other Government agency(s) to purchase materials on the open
market. Include established allowances for normal scrap, spoilage, overruns and
defective work. List required material by quantity needed, unit price,
escalation for out-years and total cost. A single entry may be made for
miscellaneous items such as office supplies.
- 4. If the furnishing agency establishes and certifies that all costs
of acquiring, managing, storing and transporting its material are included in
its pricing structure, including overhead, no material mark-up is required. If
not, escalation factors based upon the principles and procedures of this
Supplement should be developed.
- 5. Material and supply costs are projected for all performance
periods, including adjustments for inflation, consistent with the economic
assumption contained in the President's most recent Budget and the rate of
transition to the contractor or ISSA provider, as provided in the PWS. Ensure
that unit prices are calculated to the end of the first performance period.
Future performance period material costs may not be inflated, if the PWS
includes an escalation or economic adjustment clause. Such a clause enables a
contractor or ISSA provider to be reimbursed for future price increases. The
Management Plan shows the computations used to derive the entries for all
performance periods.
D. Other specifically attributable--Line 3
- 1. Overview.--Personnel and material costs are normally the primary
sources of Government costs. The remaining elements of competitive cost are
also attributable to the activity. When requirements differ by period due to
changes in the PWS or the Transition Plan, additional adjustments will be
necessary. Ensure that such adjustments are made before applying inflation
factors, if appropriate. Costs that would be the same regardless of the
eventual decision, should be identified for each cost element.
-----------------------------------------
Elements of Cost Paragraph
-----------------------------------------
Depreciation.................. 2D2
Cost of Capital............... 2D3
Rent.......................... 2D4
Maintenance and Repair........ 2D5
Utilities..................... 2D6
Insurance..................... 2D7
Travel........................ 2D8
MEO Subcontracts.............. 2D9
Other Costs................... 2D10
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- 2. Depreciation.--
a. Depreciation represents the cost of ownership and the
consumption of an asset's useful life.
b. Unless an asset is fully depreciated, the Federal Accounting
Standards for Property, Plant and Equipment will be used. If an applicable
asset is fully depreciated, is to be used by the MEO during the performance
period and is not to be provided to the contractor or ISSA provider, extend the
life of the asset through the end of the performance period. The cost of
depreciation is then recalculated using the extended life and original
acquisition cost.
c. Individual assets costing less than $5,000 are considered minor
items and will not be depreciated, but will be added to other costs (see
paragraph D.10). The joint use of minor items need not be prorated to the
function under study. Assets costing more than $5,000 are major items for
depreciation.
d. If an in-house activity shares an asset with another activity
not under review or cost comparison and that asset will not be provided for use
by the contractor or ISSA, allocate depreciation to the in-house estimate on
the basis of use or other appropriate methodology. If the activity is converted
to contract or ISSA performance, the asset's life and utilization rate may
change.
e. To find the cost of depreciation added to each option year,
subtract the residual value from the total of the acquisition cost plus any
capital improvements and, then, divide by the estimated useful life of the
asset. Include the resultant annual depreciation for each year of the cost
comparison. If the asset was acquired through transfer, seizure or forfeiture,
an industry specific standard or engineering appraisal may be used to establish
the market or "acquisition" value of the asset at transfer.
f. Facilities are generally categorized as permanent,
semi-permanent or temporary and the useful life will be standardized for the
entire grouping. The useful life expectancies listed below may be used by type
of facility. If useful life has been exceeded, obtain an engineering projection
of anticipated remaining useful life. These costs will be prorated to the
activity under study by a unit of measure that varies directly with consumption
(e.g., floor space, type of facility, number of telephones). Estimates of
expenses to be incurred for the first year of performance should be based on
current experience, appropriately adjusted for anticipated requirements.
Engineering estimates should be used when historical data are not available.
All estimates should be appropriately documented with supporting detail.
------------------------------------------
Facility Category Useful Life
-------------------------------------------
Permanent (P).................. 75 years
Semi-Permanent (S)............. 50 years
Temporary (T).................. 25 years
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- 3. Cost of Capital.--
a. The annual cost of capital is added to the depreciation cost of
any asset costing more than $5,000 acquired by the Government if: (1) not
provided for the contractor's or ISSA provider's use, (2) is purchased less
than two years prior to the cost comparison date or (3) is scheduled for
purchase within the performance period.
b. The cost of capital is defined as an imputed charge on the
Government's investment in capital assets necessary for the activity to provide
the product or service.
c. To estimate the annual cost of capital, it is necessary to
identify the total depreciable acquisition cost of new assets or, if acquired
by transfer, forfeiture or seizure, the market value of the assets. The total
cost results from the value of the asset, transportation costs (if not already
included in the purchase price) and any installation costs to place the asset
in operation. The cost of capital will be computed by applying the nominal rate
provided by OMB Circular A-94 to the determined total cost of the asset.
- 4. Rent.--Rent is incurred for the use, operation and maintenance of
land, building space, plant and machinery, etc., by the activity under study.
Compute only those costs that are associated with the MEO, on an allocated
basis, not provided to the contractor or ISSA provider.
- 5. Maintenance and Repair.--This cost is incurred to keep buildings
and equipment in normal operating condition. It does not include capital
improvements that add value to an asset and are accounted for under
depreciation. Allocate maintenance and repair costs for those assets that will
not be furnished to the contractor or ISSA provider but are: (1) needed for MEO
performance and (2) are not covered by rental fees.
- 6. Utilities.--This category includes charges for fuel, electricity,
telephone, water and sewage services, etc., that will not be furnished to the
contractor or ISSA provider by the Government but are needed for in-house
performance of the activity. The amount of these costs applicable to the
activity under study will be determined either on a metered or allocated basis
of consumption.
- 7. Insurance.--
a. Operation of any Government activity involves risks and
potential costs from property losses (fire, flood, accident, etc.) and
liability claims. These risks are normally covered by insurance included in any
commercial cost estimate.
b. To the extent assets are not provided to the contractor or to
the extent that property losses may be assessed against a contractor who uses
Government space, facilities or equipment, in-house casualty premiums must be
computed. Generally, the Government's casualty premium equivalent cost will be
computed by multiplying .005 times the net book value of Government's equipment
and/or facilities, plus the average value of material and supplies.
c. Insurance to be computed on assets will depend on the
requirements of the Performance Work Statement (PWS). If the contractor or ISSA
provides special casualty insurance on all Government furnished assets, compute
insurance for all assets used by the activity under study. If the contract does
not require the contractor to furnish special casualty insurance, e.g., the
Government will self indemnify, compute casualty insurance on only those assets
to be used by the activity under study that would not be provided to the
contractor or ISSA provider, as appropriate.
d. Personnel liability losses will be computed by multiplying .007
times the Government's total personnel-related costs on Line 1. Additional
liabilities assigned to the contractor or ISSA provider by the PWS that are not
associated with personnel will also be computed by applying the standard .007
factor to the estimated liability ceiling identified in the PWS and included in
the in-house cost estimate.
- 8. Travel.--This category covers the expected cost of in-house
travel that would not continue in the event of contract or ISSA performance.
These costs should be readily available from budgeted amounts of per diem and
transportation cost for the activity under study.
- 9. MEO Subcontract Costs.--Solicitations that include work currently
performed by contract and by Federal employees, should include the MEO cost of
labor for the Government's administration and inspection of the continued
support contracts on Line 1. The cost of the support contract itself, including
the cost of related Government furnished equipment and facilities not provided
to the contractor or ISSA, should be entered on Line 3. Escalate to each
performance period as appropriate. Support contract costs should also be
adjusted (downward) to offset for potential Federal income tax revenue to the
Government. This is done by applying the appropriate tax rates in Appendix 4 of
this supplement.
- 10. Other Costs.--
a. Other Costs is a general category for specifically attributable
costs that do not properly fit into one of the other cost elements, but would
change in the event of contract or ISSA performance. Some examples are
purchased services packaging and crating (if not already a part of material and
supplies); transportation costs; and royalties. Ensure these costs are not also
covered in Line 4 overhead costs.
b. Include the cost of minor items that are not immediately
consumed by the activity and not provided to the contractor or ISSA provider.
This includes items such as overhead projectors, office equipment, tools,
chairs, desks, cabinets, etc. Estimate the cost of minor items for each
performance period by allocating 10 percent of the total estimated replacement
cost of all such items. Should the supply source mark-up increase the item's
cost to more than $5,000, it will still be considered a minor item.
E. Overhead--Line 4
- 1. While direct labor, supervision and material costs are prorated,
as appropriate, to Lines 1 and 2, overhead expenses, which include general
management and administrative expenses, are entered on Line 4.
- 2. Line 4 includes two major categories of cost. The first is
operations overhead and is defined as those costs that are not 100 percent
attributable to the activity under study, but are generally associated with the
recurring management or support of the activity. The second is general and
administrative overhead and includes salaries, equipment, space and other
activities related to headquarters management, accounting, personnel, legal
support, data processing management and similar common services performed
outside the activity, but in support of the activity. These costs are affected
by the conversion of work to or from in-house, contract or ISSA.
- 3. For each year of the cost comparison, Line 4 is calculated by
multiplying Line 1, including fringe, by 12 percent (.12) and entering the
total on Line 4. If military personnel are included in Line 1, apply the 12
percent factor to civilian MEO Line 1 costs only. The composite military rate
should include all military related overhead.
F. Additional--Line 5
- 1. This cost element includes costs not otherwise properly
classified on Lines 1 through 4. This cost category should reflect those
additional costs resulting from unusual or special circumstances that may be
encountered in particular comparisons. Examples include office and plant
rearrangements, transport, employee recruitment, training, relocation, and
other expenses.
- 2. Amounts entered on Line 5 should be supported by a definition of
the type of cost reported, a justification for its inclusion in the cost
comparison, an explanation of the underlying assumptions, and methods of
computation.
- 3. The additional costs of an expansion, new requirement or
conversion from contract or ISSA to in-house performance, which are added to
the in-house costs, should be made on Line 5 in consultation with engineering,
production, management and contracting personnel.
a. New investment by the Government in facilities and equipment
should not be included as one-time costs. The costs incurred in acquiring
facilities or equipment and installing the equipment should be included in the
capitalized cost of in-house performance.
b. Government facilities and equipment will not normally be
expanded to accommodate new or expanded work if cost-effective contract or ISSA
facilities and equipment are available. Likewise, agency ownership shall not
preclude a contractor or an ISSA provider from competing for the service. If
in-house operation is dependent upon the Government's purchase or construction
of new facilities or other major capital asset purchases, the cost comparison
and conversion to in-house performance will be delayed until the approval to
purchase or construct such items is obtained, subject to the cost comparison.
G. Total cost--in-house performance--Line 6
Enter the sum of Lines 1 through 5 on Line 6.
A. General
- This Chapter provides guidance for the determination of the cost to
the Government of obtaining a commercial product or service by contract or
interservice support agreement (ISSA). It includes a determination of not only
the amount to be paid to the contractor/provider (price) but also a
determination of the additional costs to the taxpayer that would be incurred in
the event of a conversion.
B. Contract price--Line 7
- 1. Overview.--The contract or ISSA price reflects the cost to
perform the requirements of the PWS as presented by the offeror selected to
compete with the in-house work force. The solicitation for bids or proposals
will notify the offerors that a comparison will be made between the cost of
contracting, the cost of the in-house performance and, if appropriate, the cost
of performance through an ISSA. A contract may or may not be awarded as a
result.
- 2. Contract Types.--
a. In determining the amount to be recorded as the contract price,
consider the contract type. The following guidance is provided in this regard.
b. In the case of a sealed bid, firm fixed price contract, the
price of the low responsible, responsive offeror will be entered. If a firm
fixed price contract is to be negotiated, the negotiated price will be entered.
c. If a cost-reimbursement or cost-sharing type contract is
proposed, enter the low negotiated estimate.
d. If a contract with an incentive or award fee is proposed, enter
65 percent of the potential maximum incentive or award fee plus the contract
costs of the most advantageous offer to the Government.
e. If a time and material or labor-hour contract is proposed, enter
the estimated total cost of performance. Alternatively, comparable rates can be
developed for the Government cost estimate, developed in accordance with this
Supplement, and the comparison can be made on the basis of rates, rather than
costs.
- 3. Tax Exempt Organizations.--
a. If the apparent low contract offeror is a tax-exempt
organization, the tax-exempt's contract price is adjusted by an amount equal to
the estimated Federal income taxes that the lowest non tax-exempt offeror would
pay. This adjustment is necessary to determine which offeror has the lowest
overall cost to the Government.
b. Calculate the Federal tax adjustment by using the procedures in
paragraph G of this Chapter. Add the Federal taxes calculated to the
tax-exempt's offer for comparison with other non tax-exempt offerors.
c. Compare the tax-exempt's adjusted offer to the low non
tax-exempt offer. The lowest cost offeror, after this comparison, will then
compete against the Government's in-house cost estimate and any ISSA proposals.
If the tax-exempt's adjusted offer is lower than the low non tax-exempt offer,
enter the unadjusted tax-exempt's offer on Line 7.
- 4. Procurement Preference Eligible Organizations.--
a. If a preference eligible contractor meets the requirements of an
unrestricted solicitation, and is an otherwise fully responsive offeror, the
preference eligible may compete with non-preference eligible offerors. This is
accomplished by adding 10 percent of each non-preference eligible's offer to
their offer for initial comparison purposes only. The lowest offer, after
adjustment, will be chosen to compete with the Government's in-house cost
estimate and ISSA offers.
b. If the preference eligible's offer is lower than all other
commercial sources--after adjustments--enter the preference eligible's price on
Line 7. If the non-preference eligible's adjusted price is lower, enter the
unadjusted non-preference eligible's price on Line 7.
C. Contract administration--Line 8
- 1. Contract administration costs are incurred in administering a
contract or ISSA. It includes the cost of reviewing compliance with the terms
of the contract, processing payments, negotiating change orders, and monitoring
the closeout of contract operations. It does not include inspection and other
administrative requirements that would be common to contract and Government
performance to assure acceptable performance.
- 2. The contract administration costs entered on Line 8 are limited
to the personnel shown at Table 3-1.
- 3. Table 3-1 represents the estimated additional cost to administer
a contract or ISSA over and above the cost to administer the same work
performed by in-house employees.
- 4. Contract administration organization and grade structure should
be certified as being in compliance with all applicable personnel regulations.
Table 3-1. Contract Administration Factors
----------------------------------------
MEO Staffing Contract Administration
FTE
--------------------------------------------------
10 or less.................... .5
11-20......................... 1
21-50......................... 2
51-75......................... 3
76-100........................ 4
101-120....................... 5
121-150....................... 6
151-200....................... 7
201-250....................... 8
251-300....................... 9
301-350....................... 10
351-450....................... 11
451 and above.................. 2.5 percent of
in-house MEO
staffing
--------------------------------------------------
D. Additional--Line 9
- 1. This cost element includes any additional costs to the Government
such as transportation or purchased services resulting from unusual or special
circumstances that may be encountered in particular cost comparisons.
- 2. The supporting documentation for additional costs should describe
the nature of the cost item and indicate the reason the additional cost will
not be incurred if the activity is performed with the agency's in-house
resources.
- 3. The costs entered on Line 9 should be supported by a definition
of the type of cost reported, justification for inclusion, methods of
computation, and, if applicable, a detailed listing of the cost components.
- 4. When an in-house activity is terminated in favor of contract or
ISSA performance and the agency elects to hold MEO equipment and facilities on
standby, solely to maintain performance capability, the standby costs are not
to be charged to the cost of the contract.
E. One-time Conversion--Line 10
- 1. Overview--When the Government converts to or from in-house,
contract or ISSA performance, there are usually one-time costs incurred as a
result of the conversion.
- 2. Material Related Cost--
a. A conversion may result in certain items of Government material
or equipment, that would otherwise have been used by the in-house MEO, becoming
excess and available for transfer to another in-house activity or to the
contractor.
b. It should be possible to transfer the material to the contract
or ISSA offeror. In this case, it may be appropriate to conduct a special joint
physical inventory and include the Government's cost of conducting the joint
inventory (costs may be shared with the winning bidder) on Line 10.
c. If the transfer of existing materials to the contract or ISSA
offeror is feasible, and the agency elects not to provide the material, no
charge for conducting the inventory is permitted.
- 3. Labor-Related Costs--
a. A conversion will also normally result in certain one-time
labor-related expenses. These may include health benefit costs, severance pay,
homeowner assistance, relocation and retraining expenses and initial contractor
security clearance requirements.
b. Estimated severance pay is calculated at four percent of the
annual basic pay (performance period 1 only) entered on Line 1, without fringe
benefits.
c. If there is a requirement for the commercial source to have
access to classified information or other security clearances under existing
agency directives, only those costs that would be necessitated by the
conversion may be calculated. Recurring requirements necessitated by in-house
attrition or by employees that may be hired under the Right-of-First-Refusal
will not be included.
- 4. Other Costs.--A conversion to contract or ISSA performance may
require an agency to take certain actions that would not be necessary if the
activity were continued in-house. Agencies have an obligation to mitigate these
costs and justify why such costs are necessary. For example, it may not be
possible to terminate a rent or lease agreement without a penalty fee, or it
may be necessary to move materials that are not associated with the activity
under study to another location in order to facilitate conversion or the
contractor's or ISSA's use of a facility. Such termination, penalty or
facilitation costs are also costs caused by the conversion.
- 5. One-Time Cost Computation.--Supporting documentation should
clearly state the type of cost anticipated, justification for inclusion or
exclusion and methods of computation.
F. Gain from disposal/transfer of assets--Line
11
- 1. As the Government develops its MEO, certain assets may be found
to be no longer needed. These assets may be disposed of or transferred without
consideration in a cost comparison. The cost comparison is concerned with
comparing the Government's MEO with that of the best commercial or ISSA
provider. Therefore, only those assets that are to be used by the Government's
MEO and not made available to the contractor or ISSA are considered on Line 11.
- 2. The Government should not dispose of or transfer MEO assets
unless there is an economic advantage to the Government to do so. If the cost
of transfer exceeds the net book value of the asset, such that there is a net
loss, no such losses are assessed against the contractor or ISSA. Management
has made a decision not to make such assets available to the contractor or ISSA
irrespective of the economic costs related to such a decision.
- 3. The net gain generated to the Government as a result of a
conversion to a contract or ISSA and a decision not to provide certain MEO
assets to the contractor or ISSA should equate to the net book value of the
asset less any costs incurred to remove the asset.
G. Federal income tax--Line 12
- 1. When developing the Government's cost of contract performance,
the potential Federal income tax revenue should be considered. Since contract
performance would provide the contractor with income subject to tax, an
estimated amount of such taxes is an appropriate deduction from the net cost to
the Government, unless the prospective contractor is a tax-exempt organization.
- 2. To simplify the tax computation, Appendix 4, prepared by the
Internal Revenue Service, provides, by types of industry, appropriate tax rates
in relation to business receipts. The industry groupings conform to the
Enterprise Standard Industrial Classification issued by the Department of
Commerce. To determine the amount of estimated Federal income tax, the contract
price (Line 7 of the GCCF) for each performance period will be multiplied by
the applicable tax rate. The estimated amount of Federal income tax will be
entered on Line 12 as a deduction, i.e. negative, reducing the cost of
contracting.
H. Total cost--contract or ISSA performance--Line
13
- Add Lines 7, 8, 9 and 10. If there is a number in parenthesis, i.e.,
a deduction, in Line 11, add to Line 12 and subtract this total from the total
of Lines 7 through 10 and enter the difference on Line 13.
A. Conversion differential--Line 14
- 1. A minimum cost differential of the lesser of; (1) 10 percent of
personnel costs (line 1) or (2) $10 million over the performance period, has
been established that must be met before converting to or from in-house,
contract or interservice support agreement (ISSA) performance. The minimum
differential is established to ensure that the Government will not convert for
marginal estimated savings.
- 2. Whenever a cost comparison involves a mix of existing in-house,
contract, new or expanded requirements, or assumes full or partial conversions
to in-house performance, each portion is addressed individually and the total
minimum differential is calculated accordingly.
B. Adjusted total in-house cost--Line 15
- If the cost comparison is being conducted to determine if an
activity should be converted from contract or ISSA performance to in-house
operation, the conversion differential as calculated above (Line 14) is added
to the In-house performance cost estimate (Line 6, Total Column only) and the
sum is entered under Adjusted Total Cost of In-House Performance (Line 15). The
amount in the Total Column for Line 13 is replicated on Line 16.
C. Adjusted total contract or ISSA cost--Line 16
- If the cost comparison is being conducted to determine if an
activity should be converted from in-house operation to contract or ISSA
performance, the conversion differential as calculated above (Line 14) is added
to the Contract performance cost estimate (Line 13, Total Column only) and the
sum is entered under Adjusted Total Cost of Contract or ISSA Performance(Line
16). The amount in the Total Column for Line 6 is replicated on Line 15.
D. The cost comparison decision--Lines 17 and 18
- Subtract Line 15 from Line 16 and enter the result on Line 17. A
positive amount on Line 17 supports a decision to perform the activity with
in-house resources. A negative amount on Line 17 supports a decision to
accomplish the work with contract resources. Indicate in the appropriate block
on Line 18 the decision supported by Line 17.
ILLUSTRATION II-1
THE GENERIC A-76 COST COMPARISON FORM (GCCF)
IN-HOUSE VS. CONTRACT OR ISSA PERFORMANCE
Performance Periods
---------------------------------------
1st 2nd 3rd Add'l Total Reference
----- ----- ----- ----- ----- ---------
In-House Performance
1. Personnel
2. Material and Supply
3. Other Specifically
Attributable
4. Overhead
5. Additional
----- ----- ----- ----- -----
6. Total In-House
Contract or ISSA Performance
7. Contract/ISSA Price
8. Contract Administration
9. Additional
10. One-time Conversion
11. Gain on Assets ( ) ( ) ( ) ( ) ( )
12. Federal Income Taxes ( ) ( ) ( ) ( ) ( )
----- ----- ----- ----- -----
13. Total Contract or ISSA
Decision
14. Minimum Conversion
Differential -----
15. Adjusted Total Cost of
In-house Performance -----
16. Adjusted Total Cost of
Contract or ISSA
Performance -----
17. Decision--Line 16
minus Line 15 -----
18. Cost Comparison Decision: Accomplish Work
In-House (+) -----
Contract or ISSA (-) -----
19. In-House MEO Certified By:
Date:
Office and Title:
"I certify that, to the best of my knowledge and belief, the
in-house organization reflected in this cost comparison is the
most efficient and cost effective organization that is fully
capable of performing the scope of work and tasks required by
the Performance Work Statement. I further certify that I have
obtained from the appropriate authority concurrence that the
organizational structure, as proposed, can and will be fully
implemented - subject to this cost comparison, and in accordance
with all applicable Federal regulations.
20. In-House Cost Estimate Prepared By:
Date:
21. Independent Reviewer:
Date:
Office and Title:
"I certify that I have reviewed the Performance Work Statement,
Management Plan, In-house cost estimates and supporting
documentation available prior to bid opening and, to the best
of my knowledge and ability, have determined that: (1) the ability
of the in-house MEO to perform the work contained in the
Performance Work Statement at the estimated costs included in
this cost comparison is reasonably established and, (2) that all
costs entered on the cost comparison have been prepared in
accordance with the requirements of Circular A-76 and its
Supplement.
22. Cost Comparison Completed By:
Date:
23. Contracting Officer:
Date:
24. Tentative Cost Comparison Decision Announced By:
Date:
25. Appeal Authority (if applicable):
Date:
A. General
- 1. This chapter provides procedures that may be used when the
Government determines that a simplified cost comparison will serve the equity
and fairness purposes of Circular A-76 for conversion to or from in-house,
contract or interagency support agreement (ISSA). The methodology is limited to
activities that meet the following criteria:
a. possible conversion to or from in-house, contract or ISSA
performance involving 65 FTE or less;
b. activities that will compete largely on a labor and material
cost basis such as, but not limited to, custodial, grounds, guard, refuse, pest
control, warehousing and maintenance services;
c. activities for which significant capital asset purchases are not
required or for which all equipment requirements will be Government
Furnished/Contractor Operated (GOCO), and
d. activities that are commonly contracted by the Government and/or
private sector, e.g., there are not less than four comparable agency contracts
of the same general type and scope and the range of the existing service
contract costs are reasonably grouped.
- 2. In no case, shall any commercial activity involving 66 or more
FTE be modified, reorganized, divided or in any way changed for the purpose of
circumventing the requirements of this section or other procedures of this
Supplement.
- 3. A Streamlined Cost Comparison Form (SCCF) is provided at
Illustration II-2.
B. Procedure
- 1. The streamlined A-76 cost comparison process assumes that the
activity being considered is regularly performed by contract. Thus, it assumes
that existing fixed price contracts can be used, with only minor modification,
to define the scope of the competition and to avoid the need for the
development of a new or original Performance Work Statement (PWS) or a formal
solicitation.
- 2. The employee participation and notification provisions of Part I
apply.
- 3. The Government will base its in-house costs on the current
organization.
- 4. The Government's in-house Labor and Material costs (Lines 1 and 2
of the Generic A-76 Cost Comparison Form) will be calculated in accordance with
Chapter 2 of this Part. Overhead costs will be calculated as provided by
Chapter 2 of this Part for Line 4. Any contract support costs normally included
in Line 5 of the GCCF will be calculated. No other in-house costs will be
calculated. The provisions for an Independent Review apply. Upon acceptance by
the agency's A-76 IRO, the in-house cost estimate will be sealed and submitted
to the contracting officer.
- 5. Upon receipt of the in-house cost estimate, the contracting
officer will develop a range of contract cost estimates, based upon not less
than four comparable service contracts or ISSA offers. Adjustments for
differences in scope may be necessary. The contracting officer is not required
to issue a solicitation for bids from the private sector. If, however, the
contracting officer finds that four comparable contracts or ISSA offers are not
available, the contracting officer may issue a solicitation for bids and the
agency may conduct a cost comparison as otherwise provided by this Supplement.
- 6. At cost comparison, the in-house cost estimate will be compared
with ISSA offers and the range of estimated contract costs developed by the
contracting officer. The range of estimated contract costs will then be
adjusted for the cost of contract administration (limited to Table 3-1) and
Federal tax impacts. In calculating the Adjusted Total Costs, the minimum
conversion differential shall be added to the total cost of contract or ISSA
performance if the cost comparison is being conducted to determine if an
activity should be converted from in-house operation to contract or ISSA
performance. If the comparison is being conducted to determine if an activity
should be converted from contract or ISSA performance to in-house operation,
the differential is added to the total cost of in-house performance.
- 7. If the Government's Adjusted Total In-house Cost estimate is
greater than the range of Adjusted Total Contract or ISSA Cost estimates, the
contracting officer will announce a tentative decision to contract or enter
into an ISSA. Upon notification of adversely affected Federal employees and
publication of this tentative decision in the Commerce Business Daily, the A-76
Administrative Appeal process outlined in this Supplement will be initiated.
With the A-76 Administrative Appeal Authority's confirmation of all costs
entered on the SCCF and certification of the reasonableness of the contract and
ISSA pricing adjustments made by the contracting officer, the contracting
officer will solicit for award to contract or ISSA performance. The
Right-of-First-Refusal will be offered to employees adversely affected by the
award.
- 8. If the Government's Adjusted Total In-house Cost estimate is
below or within the range of Adjusted Total Contract or ISSA Cost estimates,
the contracting officer will announce a tentative decision that the activity
will be performed in-house. Again, upon notification of Federal employees and
publication of the tentative decision in the Commerce Business Daily, the A-76
Administrative Appeal process will be initiated.
- 9. Activities to be performed or retained in-house as a result of a
streamlined cost comparison should be submitted to Post-MEO Performance Review,
in compliance with this Supplement. This recognizes that, for retained
activities, the existing organization is assumed to be the MEO and no
management plan is required.
ILLUSTRATION II-2
THE STREAMLINED A-76 COST COMPARISON FORM (SCCF)
(LIMITED TO 65 FTE OR LESS)
IN-HOUSE VS. CONTRACT OR ISSA PERFORMANCE
Performance Periods
---------------------------------------
1st 2nd 3rd Add'l Total Reference
----- ----- ----- ----- ----- ---------
In-House Performance
1. Personnel
2. Material
3. Overhead
4. Other
----- ----- ----- ----- -----
5. Total In-House
Contract or ISSA Performance
6. Contract and ISSA
Price Range
7. Contract Administration
8. Federal Taxes (-)
----- ----- ----- ----- -----
9. Total Contract and
ISSA Price Range
Decision
10. Minimum Conversion
Differential -----
11. Adjusted Total Cost of In-house Performance -----
12. Adjusted Total Cost of Contract or ISSA
Performance -----
13. Cost Comparison (Line 12 minus Line 11) -----
14. Cost Comparison Decision:
Perform In-House -----
Convert to Contract or ISSA -----
15. In-House Cost Estimate Prepared By:
Date:
16. Independent Reviewer:
Date:
Office and Title:
"I certify that I have reviewed the proposed contract, in-
house and ISSA cost estimates and contract prices and find
them to be reasonable and calculated in accordance with the
principles and procedures of Circular A-76 and its
Supplement.
17. Cost Comparison Completed By:
Date:
18. Contracting Officer:
Date:
19. Tentative Cost Comparison Decision Announced By:
Date:
20. Appeal Authority (if applicable):
Date:
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