Step 5: Establish the financial (cost estimate) baseline

There are two basic proposal cost estimating methods, top-down which is based on similar projects and bottom-up which is developed by estimating each cost or WBS element of a project.

Make sure you understand your cost proposal – including the year one, two and three pricing strategy since you will have to manage to this proposed budget. You can request proposal copies from the contracts department.  Where possible, you should support the proposal activities to validate pricing estimates.

Prior to award, it is a good idea to create an Microsfot Excel spreadsheet to track weekly or monthly labor hours by staff member fully burdened billing rate so upon award you are ready to keep track of your budget versus actual cost status. You should make sure the final contract burden and profit has been included in the hourly rates.

Since you will be the person responsible for managing to your budget, you should balance staff assignments to stay within proposed labor categories. Clearly this is also critical on fixed price contracts. Pay particular attention to labor rate changes if there has been a significant lapse of time since proposal submittal. Also, study the teaming arrangements with any subcontractors so that you can factor their labor and other costs into your budget. In some cases, subcontractor work share may decrease over time. Or, in other cases, the RFP may require a specific percentage of work be allocated or set aside for different categories of small business.

Financial rate terminology

Some of the common terms used to refer to labor rates and cost structure are:

  • A labor rate (sometimes called a direct rate) is a term that needs to be modified with either the word unburdened or burdened to make complete sense. An unburdened labor rate is the hourly rate being paid to an employee.
  • A sell rate is the hourly labor rate fully burdened with G&A, overhead and fee that your company is proposing to the government for a specific labor category. See your Project Control Analyst to get the financial related overhead structure you should be incorporating into your budget estimate.
  • A billable rate or fully burdened rate is the final negotiated hourly labor rate on the approved contract.
  • A wrap rate is a factor that when multiplied by an hourly labor rate equals the final fully burdened rate minus profit.
  • An operating unit is a collection of similar work within a defined organizational unit that applies the same wrap rate to hourly labor rates. In other words, an operating unit, sometimes called a cost center, has the same overhead & G&A structure.

The following table is an example from the transition-in phase of the same company project WBS.

Transition Costs Spreadsheet Table example

  Transition In Phase Cost Estimating Table (Word version)

This is only a part of the overall WBS but illustrates how you can document the labor hours for each of the WBS subtasks and then calculate corresponding budget dollars by multiplying the hours times the fully burdened labor rate. A general rule of thumb is that a task should be broken down until it is below 80 hours in order to adequately monitor and control that task.

Check the contract for specific financial reporting requirements. The Department of Defense specifies the CSSR system with associated Contract Data Requirement Lists (CDRL) and Data Item Descriptions (DID). Civilian agency contracts have a variety and, unfortunately, inconsistent set of financial requirements.

Cost Estimation

The PM should understand the two basic proposal cost estimating methods, top-down which is based on similar projects and bottom-up which is developed by estimating each cost or WBS element of a project.

If you are not aware how the project was priced in the proposal, then make sure you understand your cost proposal – including the year one, two and three pricing strategy since you will have to manage to this proposed budget.

On fixed price delivery and performance based contracts, your cost tracking will be for internal cost management to make sure you manage to your budget. The actual invoices will reflect pre-determined fixed price deliverables.

On labor hour contracts, your cost tracking will be reflected on the invoices you will be submitting through your biller to the client for approval and payment.

Specify the estimated cost for activity personnel, and include as appropriate, the costs for travel, meetings, computing resources, software tools, special testing and simulation facilities, and administrative support. By comparing a top-down estimate with your own bottom up estimate, you can identify any areas of staff or schedule risk and, in some cases, the need for additional resources.

Next, with the assistance of your Group Project Control staff, create an Excel spreadsheet (or use an approved Group project control spreadsheet/tool) to track weekly or monthly labor hours by staff member fully burdened billing rate. You should make sure the final contract burden or overhead and profit have been included in the hourly labor rates in your spreadsheet.

Specify the estimated cost for activity personnel, and include as appropriate, the costs for travel, meetings, computing resources, software tools, special testing and simulation facilities, and administrative support. By comparing a top-down estimate with your own bottom up estimate, you can identify any areas of staff or schedule risk and, in some cases, the need for additional resources.

Ultimately, you are the person responsible for managing to your budget. On labor based contracts, it is important to balance staff assignments with negotiated labor categories. Clearly this is also critical on fixed price contracts. In some cases, the cost proposal will have been constructed to achieve a lowest credible cost and will not include a management reserve budget amount to accommodate unplanned requirements. This management reserve is a certain percentage of the overall budget that is set aside for unplanned contingencies. In other instances you might be able to build a management reserve dollars into your budget estimate as a risk mitigation method.

Pay particular attention to labor rate changes if there has been a significant lapse of time since proposal submittal. Also, study the teaming arrangements with any subcontractors so that you can factor their labor and other costs into your budget. In some cases, subcontractor work share may decrease over time. Or, in other cases, the RFP may require a specific percentage of work be allocated or set aside for different categories of small business.

On fixed price delivery and performance based contracts, your cost tracking will be for internal cost management to make sure you manage to your budget. The actual invoices will reflect pre-determined fixed price deliverables.

On labor hour contracts, your cost tracking will be reflected on the invoices you will be submitting through your Biller to the client for approval and payment.

Assigning Charge Numbers

Upon award, the Your company Biller (or designated finance personnel) will set up the contract in your company’s cost accounting system (i.e. Deltek or Peoplesoft) according to the internal cost accumulation requirements and billing requirements in the contract. You should discuss your WBS with your designated contract set up personnel, prior to award if possible, so the coding structure they set up is consistent with your WBS. This will make it much easier for you to use the resulting financial reports to manage your project.

Companies have their own unique contract identification guidelines. A contract often has multiple projects or tasks. Each of these will need a unique project ID. Here is a simplified example of a Deltek project structure that was been set-up to be consistent with the project WBS.

  • Contract #XXXX (Department of Homeland Security)
  • Project ID #XXXX (specific project or task under this contract)
  • 12 – Direct Labor – Customer Site – $50K
  • 13 – Direct Labor – Contractor Site – $50K
  • Contract Line 1 – Labor – $100K
  • 20 –  Travel – $100K
  • 45 – Employee Travel
  • Contract Line 2 – ODC – $100K

There are often four key individuals who have a specific role in the development of the project financial baseline.

  • PM: provides project budget and financial setup information.
  • Program control analyst: Assists PM with setting up initial project budget and spreadsheet.
  • Finance analyst/accounts receivable specialist: sets up new cost, time, labor and billing structures in the cost accounting system.
  • Subcontracts administrator: sets up new vendors and subcontractors in the cost accounting system.

Note: Due to unique process differences, these functional roles may be performed by individuals with job titles not listed here. Regardless, your ability to work smoothly with each of these people will greatly contribute to your project’s success.

– Mike Lisagor

By | 2019-02-21T13:51:34+00:00 November 12th, 2014|post, Project Initiation & planning, Uncategorized|0 Comments