Appendix 6
Independent Government Estimates
The independent government estimate (IGE) is the government's estimate of the resources and projected cost of the resources a contractor will incur in the performance of a contract. These costs include direct costs such as labor, products, equipment, travel, and transportation; indirect costs such as labor overhead, material overhead, and general and administrative (G&A) expenses; and profit or fee (amount above costs incurred to remunerate the contractor for the risks involved in undertaking the contract).
This appendix addresses key elements of an IGE; it is not intended to cover every possible acquisition. Large, complicated acquisitions costing millions of dollars have dozens of cost elements, while acquisitions for single items of relatively low dollar value have only a few cost elements. Their application will vary with the circumstances of the specific acquisition and market situations. The IGE should include only those elements applicable to and developed from the statement of objectives/ statement of work/performance work statement (SOO/SOW/PWS) or description of the supplies, services, or construction to be acquired.
An IGE is required for every procurement action in excess of the simplified acquisition threshold. For declared outside the continental United States (OCONUS) contingency or peacekeeping operations, the simplified acquisition threshold (SAT) is $1M,1 while the threshold for acquisition of commercial items is $11M. Commercial items are supplies or services sold to the general public that require no major modification to meet the government's specific requirements.
The IGE is developed by the requiring unit and used to establish a realistic price/cost for budget purposes. In addition, the contracting officer uses the IGE for technical and management information. The IGE is the baseline for evaluating an offeror's contract price/cost. The format and contents of the IGE vary with the complexity and value of the requirement.
Acquisition statutes require analysis of price/cost to determine either a reasonable price in the event of a fixed-priced contract or a realistic cost resulting from award of a cost-reimbursement contract (cost-plus fixed-fee). The results of any contract action in terms of quality and reasonableness of price/cost rely heavily on the accuracy and reliability of the IGE. Any significant variation between an offeror's proposal and the IGE requires analysis. When variations exist, the government can identify and correct inaccuracies in the IGE or use the IGE to negotiate a more realistic price.
The IGE is a procurement-sensitive document and should be handled accordingly. Access to the IGE is on a need-to-know basis.
The first step in developing the IGE is establishing a mindset as if the developers would be working in a commercial environment. Standards, practices, and procedures that are normally used by industry should be used as the basis for developing the IGE.
A simple estimate of current market prices or historical prices may be adequate for requirements up to the SAT. Above that level, a more complete cost or price estimate is required. The differences between a cost estimate and a price estimate can be summarized as follows:
- Cost estimate. The cost estimate is a detailed estimate that requires a breakdown of costs anticipated in performance of the contract. A detailed estimate is required for services, construction, and noncommercial products estimated to exceed the SAT. Review of current or previous contract documents and the previous IGE is usually an excellent place to start research. These documents may be obtained from the supporting contracting office files.
- Price estimate. The price estimate is generally used for products, equipment, and simple services that are routinely available on the open market at competitive prices. The price estimate is required on all contract requirements over the SAT and must be independently developed based on a comparison and analysis of factors such as published catalog prices, historical prices paid, market survey information, and contractor price quotes. The price estimate is not broken down into specific cost elements and depends more upon bottom-line prices paid or available in the marketplace. Typically, the contracting officer or specialist helps with research for pricing information.
The following sections contain basics on developing an IGE for costs and prices.
Cost Estimates
Costs are generally divided into the following primary cost elements: labor, payroll additives (labor burden or fringe benefits), other direct costs, indirect costs (overhead), G&A, and profit/fee. This section describes these cost elements, as well as escalation considerations.
Labor Costs
Labor costs are often the most significant part of the IGE in terms of dollars for either services or construction contracts. Direct labor is the labor directly applied to the performance of the contract requirements. In contracts for services and construction performed within the continental United States (CONUS), most direct labor is covered by the Department of Labor wage determinations provided under the provisions of the Service Contract Act (SCA) for services or the Davis-Bacon Act (DBA) for construction. Neither the statutes nor the related wage determinations apply to declared contingency or peacekeeping operations OCONUS. Accordingly, the COR should contact the contingency contracting activity to inquire whether any host nation labor laws, any applicable labor rates, or special considerations are applicable to the contract place of performance.
Labor categories and skills that, in CONUS operations, are covered by the SCA or DBA, are considered nonexempt. All nonexempt wages must be paid at a rate no less than that identified on the applicable wage determination. Exempt personnel (management and professional salaried staff) are not paid on an hourly basis and are not covered by the wage determinations. They will receive comparable benefits and wages to like employees in comparable industries or the government.
Setting reasonable estimates for required labor categories will also assist the contracting officer's representative (COR) with combating coercive and abusive labor practices during contract administration (see the discussion of human trafficking in Chapter 11).
The IGE should identify the labor categories and the level of effort (work hours) required for each category. For instance, the effort of a carpenter for renovation of one set of kitchen cabinets may be limited to 100 hours, with proportional benefits, whereas a contract requiring a full-time carpenter working under the terms of a contract year, would project a full-year cost with all benefits.
The IGE must consider realities of the work environment. Employee benefits (leave and holidays) must be factored into the cost estimate of any government contract. To estimate costs for a typical service contract year, the COR should begin with the average work year of 2,080 hours (40 hours per week, 52 weeks per year). These are available hours, which are used to estimate how much each employee will be paid under the contract. However, the COR's estimate must be adjusted to also consider productive hours to determine the number of contract employees required. Productive hours are the number of hours an employee actually performs his or her duties. When full-time employees are anticipated, a good rule of thumb is to use 1,880 hours (2,080 hours less 80 hours for holidays, 80 hours for vacation, and 40 hours for sick leave) as productive hours. When part-time employees are anticipated, productive hours may be estimated using a basis of 1,920 hours per year (2,080 hours less 80 hours for holidays, 80 hours for vacation, and 0 hours for sick leave). Actual available/ productive hour patterns may vary by host nation, service/industry, or contract requirement.
Payroll Additives (Labor Burden)
Once the basic labor categories and hours have been determined, payroll additives or labor burdens must be calculated. Typical payroll additives for CONUS situations are as follows:
- Health and welfare (H&W). H&W includes life, accident, and health insurance plans; pension plans; civic and personal leave (vacation and holidays); severance pay; savings and thrift plans; and so on. H&W costs are based on the most recent wage determination issued by the Department of Labor. Currently, the figure of $2.15 is approved for all wage categories covered by the SCA (services). Reference individual DBA wage determinations for specific fringe benefits for H&W. Because all figures are subject to change, they should be verified before developing the IGE. The rate should then be multiplied by available hours. Similar fringe benefits should also be projected for exempt labor hours.
- Federal Insurance Contributions Act (FICA). The FICA tax rate is 7.65 percent (6.2 percent for Social Security and 1.45 percent for Medicare). This rate has been constant for a number of years and rarely changes. Multiply 7.65 percent by total wages up to the FICA maximum rate of $84,900 (as of 2003).
- Federal unemployment taxes. Federal unemployment taxes are paid on the first $7K of total wages, multiplied by a factor of 0.8 percent. This rate changes periodically; the current rate is available on the Internal Revenue Service (IRS) Web page at http://www.irs.gov/ formspubs/.
- State unemployment taxes. State unemployment taxes are set by individual state governments and are paid on the first $9K of total wages. The tax rate varies based on the type of business involved. Rates may be available from the states' workers compensation Web sites. However, if state unemployment tax rates are not available, the COR could use an average rate of 3.0 percent. This percentage is then multiplied by the first $9K in wages per employee.
- Workers compensation. Workers compensation is insurance designed to cover injuries and associated benefits that arise from work-related injuries. The rate varies from state to state and, for the most part, depends on a contractor's years of business in the state and claims-related experience. Workers compensation is applied to total wages and will vary between 2 and 5 percent of the total payroll. The state tax code should contain details.
A straight-line approach using an average overall burden rate of 30 to 35 percent may be used to estimate fringe benefits. It may be used in place of the separate computation of benefits as outlined above. This may not be adequate for some high-cost areas of the country or for all DBA categories. Whichever method is used, the rationale for the method used should be documented on the IGE.
In an OCONUS contingency or peacekeeping operation, some of these additives may not be encountered, depending on the host nation and common practices within industry. The COR should contact the contingency contracting activity to inquire about applicable host nation labor practices and common payroll additives. Comparable information may also be available from the Defense Contract Audit Agency (DCAA) or the Defense Contract Management Agency (DCMA).
Other Direct Costs
When estimating other direct costs, the emphasis should be on accuracy of type and quantity required to complete the contracted work. The following are general groupings of other direct costs.
- Materials and equipment. Item descriptions and related cost estimates can be obtained using catalogs, price quotes, market surveys, historical data, and so on.
- Travel. To estimate travel costs, the COR must first determine the need for travel by the contractor, including destinations (both local and long distance), the number of trips anticipated, the number of personnel traveling, and the number of days per trip. Using that information as a starting point, the cost per trip can be calculated. Then the individual trip totals must be summed to arrive at a total for all travel under the contract. The Federal Travel Regulation (FTR), issued by the General Services Administration (GSA), contains useful information on travel costs. It establishes per diem rates (lodging, meals) that may be used to estimate such costs under any type of proposed contract. The FTR also establishes the reimbursable mileage rates for travel by privately owned automobile. Other travel costs (airfare, rental car) can easily be obtained from commercial Web sites. (See also FAR Subpart 31.2, Contracts with Commercial Organizations)
- Consultants. Any tasks or work that may require the use of consultants must be identified. For example, some tasks may require unique, specialized expertise, not normally available to the contractor performing the work required by the contract. The COR should estimate the number of hours needed for each consultant.
- Subcontracts. Some tasks may need to be subcontracted. For example, the prime contractor may not have (and would not be expected have) some specialized labor, equipment, or facilities needed to complete the contract. The COR can estimate the other direct costs for each potential subcontract using the same estimation techniques as those used for the prime contract.
- Bonds. Most common in construction contracts, the direct costs of these securities must be identified and incorporated into the IGE. Performance and payment bonds will generally cost the contractor anywhere from 1 percent to 3 percent of the total bid or proposal price. A review of past bonding requirements may provide a reasonable range for the IGE. In the absence of specific data on similar contracts, the COR may use 2 percent of the total cost estimate to cover bonding costs, when applicable to the acquisition.
Indirect Costs (Overhead)
Overhead includes any costs not directly identified with a single, final cost objective, individual project, or contract. In other words, indirect costs are general business costs such as rent, utilities, telecommunications, general office supplies, and depreciation. Indirect costs are recouped by the contractor by applying a percentage to direct labor costs, manufacturing costs, or another appropriate base consistent with the firm's established accounting practices.
Methods and rates to recover indirect costs can vary significantly. One firm may pool all indirect costs and apply one percentage rate to total direct costs to recoup its expenses. Another may group costs associated with labor costs into one overhead account and separately group its corporate-level expenses (G&A expenses).
General and Administrative Expenses
G&A expense accounts capture the costs of company-wide support functions (accounting, personnel, purchasing, legal) that are not directly chargeable to any single project or contract. G&A expenses also may include executive compensation for corporate officers and management, financial, or other expenses incurred for the overall operation of a business. These costs are distributed equally across all of the company's contracts, both government and private sector.
Like overhead, G&A expenses are grouped together and recouped by applying a percentage to other cost categories consistent with the cost accounting practices of the firm. These costs vary significantly with the size of the firm and within industry groupings (construction, service, information technology). Thus, the use of a set percentage number or range for the IGE is not appropriate. Instead, the COR should consult with the contracting officer to obtain any historical information from similar purchases and industry practices relevant to the current acquisition. DCAA may also be able to provide a representative G&A rate based on prior audit information concerning similar contract situations.
Profit and Fee
Profit and fee are generally regarded as remuneration for the risk involved in undertaking the contract tasks. Profit or fee is the amount of money that the contractor expects to earn above and beyond the costs incurred to complete the contract. Under fixed-price contracts, profit is the amount of money (if any) remaining after all contract costs have been covered. Under cost-plus fixed-fee contracts, profit is a set amount that the contractor is guaranteed as long as it puts forth its best effort to perform the contract.
For the IGE, profit or fee may be calculated and expressed as a percentage of the total estimated cost. (For example, if the estimated cost totals $500K and a profit margin of 10 percent is deemed appropriate, the profit will be $50K) In very general terms, 7 percent should be the upper limit for routine efforts under a cost-plus fixed-fee contract and 12 percent for routine efforts under a fixed-price contract. Add 1 percent for moderately complex work, and add 2 percent for highly complex work (state-of-the art work) or work that will involve significant cost or performance risk to the contractor. These are by no means absolutes; other percentages may be more realistic and should be based on risk, market factors, and any unique factors that may affect the contingency operation or location. In all cases, the COR should document the basis for estimating the profit or fee.
Escalation Considerations for the IGE
The impact of inflation should be considered when developing an IGE for a contract with option years. After developing the estimated costs for the base year, the costs for option years can be estimated by applying appropriate escalation factors. Different escalation factors may be applied to different cost elements, depending on the labor/material mix as appropriate. The following methods may be used.
- The Consumer Price Index (CPI) provides data and percentage of change in inflation/escalation factors. CPI information is available at http://www.bls.gov/cpi/. When projecting inflation, major cost factors for the specific requirement should be reviewed. Inflation rates for specific supplies depend on the circumstances specific to the acquisition. In addition, geographic locations for work performance must be considered. Based on a long term view of changes in the CPI, an average factor between 2 percent and 4 percent is generally considered reasonable.
- Market trends should be considered when projecting escalation rates for option years and should be justified in a short narrative. A market survey will provide information on current market prices and potential volatility of prices in the marketplace. In addition, a review of previous Treasury interest rates may be useful.
Price Estimates
A commercial item (supplies or services) IGE is considered a price estimate and is much less complicated than the IGE discussed above. It is a matter of determining the market value of the supplies or services, using that figure as the IGE, documenting the research, and furnishing this information along with your funded requisition to the contracting officer. Below are methods that can be used to determine the market value.
- GSA schedules. The schedules are prepriced and awarded to multiple firms for specific supplies and services. GSA schedules may be found at http://www.gsaadvantage.gov/.
- Published price lists. These lists are published by individual companies for use by the general public.
- Catalogs. Many manufacturers publish catalogs describing their offerings and stating their prices. The catalogs may be made available to customers in hard copy, on a Web site, or some other format.
- Market surveys. A market survey is a comparison of the prices offered within the local area for an item. A survey is normally done in conjunction with the contracting officer.
- Previous buys. Previous purchases of the same item can be used as the basis for an estimate, assuming comparability in quantities, conditions, terms, and performance times. Adjustments should be considered for inflation and quantity discounts, when appropriate.
Pricing should not be obtained directly by contacting vendors, because disclosure of advance procurement information is considered sensitive, and because the vendor might consider the contact a commitment by the government. Only credit card holders acting within their spending limits and contracting officers or their representatives may commit the government. Any other person may be held personally liable and may be subject to disciplinary action.
Other Guidance
Although IGE documentation is a part of the government procurement cycle, statutes or regulations do not contain detailed guidance on preparing IGEs. The following are general guidelines that apply to most situations.
- Know the requirement. The first, and perhaps most crucial, step is to ensure that the cost estimate is based on the government's actual needs. Review the SOO/SOW/PWS or specification and make sure that it accurately identifies the contract requirements, clearly defines, and logically divides or aggregates the work (tasks), and includes all required supplies and services to be delivered. Then, estimate the labor categories and level of effort required, plus equipment, materials, and any other direct costs. Apply cost inflation factors if the contract covers multiple years.
- Use historical cost information. Like budgeting, cost estimation uses existing (past) information as a basis for projecting future costs. The same or similar work may have been done under contract before. It can be very useful to obtain the cost information submitted and negotiated during the award of any previous contracts. Consult the contracting officer to obtain this information and technical assistance in analyzing it.
- Know the marketplace. Costs and prices are often specific to geographic areas. There may be going rates for competitive businesses for certain costs. Rates of profit may also vary by locality even within the same host nation (especially for construction and commercial services). Costs for the same type of work may also vary significantly from place to place and over time. It is crucial, therefore, for the estimator to know the market.
- Consult contracting personnel. The contract specialist and contracting officer have considerable expertise in evaluating contract costs. The contracting office may also have historical cost data. Consult them, particularly when estimating overhead, fringe benefits, G&A, and profit or fee.
- Estimate one piece at a time. If preparing a detailed IGE, do not try to estimate the cost of the contract as a whole. Take it one task (or other division of the required work) at a time and, for each, estimate the types of costs involved.
When buying a commercial item with stable specifications, the estimator should research past price history and adjust for any changes in specifications, quantities, or inflation factors. For items that do not have a detailed pricing history, a detailed analysis of individual cost elements will be necessary.
The IGE should include a brief narrative describing how the costs were developed and what reference materials were used.
Notes
- See 10 USC 2302(7). For declared domestic contingency operations, the SAT is raised to $250K. Top
Appendix Acronyms
CONUS – Continental United States
COR – Contracting Officer's Representative
CPI – Consumer Price Index
DBA – Davis-Bacon Act
DCAA – Defense Contract Audit Agency
DCMA – Defense Contract Management Agency
FICA – Federal Insurance Contributions Act
FTR – Federal Travel Regulation
G&A – General and Administrative
GSA – General Services Administration
H&W – Health and Welfare
IGE – Independent Government Estimate
IRS – Internal Revenue Service
OCONUS – Outside the Continental United States
PWS – Performance Work Statement
SAT– Simplified Acquisition Threshold
SCA – Service Contract Act
SOO – Statement of Objectives
SOW – Statement of Work
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