The direct labor rate is the cost of the labor of your employee per hour. It’s the cost of paying the employee and does not include the Overhead and General & Administrative costs of running your business.
The cost is derived by taking the total number of hours paid in a year and dividing it into the total amount paid to the employee. In most cases, the number of hours paid is 2080.
So, in the case where someone is paid $50,000, it would be calculated as:
$50,000 ÷ 2080 = $24.04 per hour
A question I get asked often is what do you multiply by then to get the Direct Labor Cost to a contract?
Isn’t it 2080?
And here is why.
The Direct Labor Cost per hour is based on the number of hours PAID. Once you know the Direct Labor cost per hour you then need to multiply by the total number of hours the employee will work on the contract and then add the associated Indirect Costs.
So, in this case, it is estimated the employee will work 1920 billable hours on the contract.
Hours Total in the Year 2080
Vacation – 80
Holiday – 80
Total Hours Billed 1920
The total hours (1920) is then multiplied by the Direct Labor Rate ($24.04) to get the Direct Labor Cost:
1920 x $24.04 = $46,156.80
So, while the employee is paid a total of $50,000 per year, the amount of his salary allocated to hours serving the customer actually only costs $46,156.80. The rest is allocated to Vacation and Holiday which would be covered under Indirect Costs in the Fringe Pool.
For more information on how to calculate the total cost to charge the customer on a Cost Reimbursable Contract, see Developing Rates for Government Contracts.
My Dad started dating pretty quickly after my Mom died. It shocked some. It shocked me.
Friends and family worried about how my sisters and I would react or feel. Some were angry with my father. They wondered how he could move on so quickly after my mother’s death. Didn’t he love her? Shouldn’t he mourn her longer?
Surprisingly, my sisters and I were the most comfortable with the idea. I can’t speak for them and their feelings, but for me, it was a sign my father did indeed love my mother deeply and he missed her terribly. It was a sign that he wanted to try to find the comfort and love he experienced during their marriage. Being with another was not a sign of disrespect for her but instead just the opposite. It was a visible declaration that he wanted to do what he could to find love again.
Let me be clear…. it still was not easy. I worked hard on not imagining what happened during more intimate moments with his dates. I sometimes had to look away when I saw him place a familiar arm around a woman’s waist or hold her hand. But seeing him experience the hug and touch of another woman was also comforting — I was glad to see him smile and feel happy again. Quite the mix of emotions!
The bottom line though was that I wanted my father to be happy. He had been a loving and faithful husband down to the last minute of their marriage and I, and everyone else, had to realize he was no longer married. We may not like the circumstances that made him a single man but that is what he was. I wasn’t the one having to go home to an empty house with all the memories of my mother around. I wasn’t the one sitting in church alone, in the pew he had sat with my mother for many years. I wasn’t the one eating dinner alone with only the cat for conversation. Who was I to tell him that he had to do a certain period of grieving before he could find happiness again?
What worked for me may not work for your and your family but here are some pointers that may help:
Moving on with our lives after a parent dies is not easy. This is just one more hurdle to cross and while it sounds cliché, it does get easier with time.
Hindsight is easy. I wish I could go back to my teenage self and let me know that I was okay and that despite all my social insecurities, I was not alone in them. But what would I tell myself now at age 50 when I am one day 70 years old? In this video I sit at my high school alma mater athletic fields and share some stories about myself during the awkwardness of middle school and high school.
I have a bunch of book ideas and not enough time or talent to get them to paper. I have pondered hiring a ghostwriter but needed to know more so I interviewed Courtney Kelly, an experienced ghostwriter. We went through the entire process… when to hire one, how to hire the best one and what it costs.
When do you hire a ghostwriter? Courtney suggests you hire a ghostwriter very early in the process but each ghostwriter is going to have a different approach. They can step in when you just have the idea and help do research on the topic. Others prefer you do the research and will step in when the writing is ready to start. The wrong time to hire a ghostwriter is after you have written a book and need editing. That is when you hire a developmental editor or copy editor.
Should you hire a ghostwriter who specializes in your topic? Sometimes you should but Courtney suggested it is most important to hire someone you get along with and like since this can be a long process. They can learn your topic. They can’t learn to be someone you like!
Where do you find a ghostwriter? There is no single source but some good places to check are:
What are some questions you should ask when hiring a ghostwriter? Courtney stressed it is most important the ghostwriter asks YOU questions about your project. If they are agreeing with everything you are saying without asking questions that is a big red flag. Questions you should ask though are: what services do they offer, how many revisions do they include, what does their revision process look like, how will you be involved in the revision process, can they provide samples of their work, and do they help with book pitches and getting the book published. (There were more but you need to watch the video!)
The most important thing I learned in this interview was that every author and every ghostwriter is different and the key is to find a good match. We covered so much more including how long it takes to complete the process and how much it costs so you definitely need to watch the video to get all the great information Courtney shared.
This was a jam packed interview and I learned so much. There is nothing like growing and eating the food your grow yourself and Woody DeLauder shared how to grow food whether you live on a farm, a suburban lot or a just have a city patio.
Woody suggested that if you are short on space, to think UP! Trellising plants up such at tomatoes, cucumbers and beans utilize your space more efficiently. Green leafy vegetables such as lettuce can also be grown in shallow flats very easily since they have shallow roots. Lettuce is also what is know as a “cut and come again” crop that can be harvested and it will regenerate for future harvesting.
Another important topic we discussed was how to create good soil via composting and adding other organic matter such as wood chips that are readily available from wood trimming companies. Utilizing a no-till method will also improve your soil by encouraging earthworms and decreasing weeds.
Woody highly suggested raised beds if you are first starting out and gave us some great suggestions on how to construct and start them including how to use cardboard to prevent weeds and what type of soil to use.
We covered so much more including how to trim tomatoes plants, how to trellis, the importance of shade cloths, and creating air flow for your plants. You need to watch this interview… Woody had so much knowledge to share!
I know many of us are scared and worried about the current business environment. And it’s true — these are more tumultuous times than usual. But from adversity comes innovation and challenges can shake up our normal routines so we are able to see new opportunities. None of us know what the “new normal” will be but challenges can be an opportunity to shape the new normal.
As a business, you have two choices… hunker down and wait for it to pass and hopefully go back to your business as usual or you can look at it as an opportunity to adjust and gasp!… maybe even thrive and improve!
Let me give you an example:
Retail is a difficult market in the first place and during a recession it is even more hard hit. During the 2000 recession, many retail establishments understandably did massive layoffs and cost cutting measures so they would survive.
Target did things a bit differently – it increased its marketing budget by 20% and increased the number of stores from 947 to 1,107. It also made strategic partnerships with Amazon and high-end designers to establish its role as an inexpensive but stylish brand. They also took steps to reduce costs by improving the efficiency of its operations.
The result? Target grew sales by 40% and profits by 50% during the recession and its profit margin which was 9% in the three years before the recession, was increased to 10% after it. (Harvard Business Review)
The key is not to just increase your product line and marketing. What set Target apart from their competitors was they took a hard look at HOW they delivered and made changes to reflect the needs of their customers. For example, it changed their store format to double the space devoted to food and differentiated themselves from Walmart with their designer lines.
The COVID-19 pandemic may be slowing your sales, or even stopping them entirely. Businesses that wait for things to go back to “normal” may not survive. The companies that will survive and may even do better than before the pandemic are ones that adjust and look for opportunities.
And there will be opportunities – and I’m not saying that you should take this as an opportunity to price gouge or take advantage of other’s misfortunes. What it DOES mean is that there are new needs that didn’t exist before and aren’t currently being met and with this “pause” in business, you have an opportunity to look at your business processes and improve and refine.
I know I’ve been doing lots more web-based meetings and my knowledge of technologies to help me with that have improved. I started doing web-based interviews with professionals that support my Retreat business (Retreat & Learn) and that would have never occurred if I wasn’t forced to stop and reevaluate my current methods of operation during the pandemic. I am continuing to explore other ways I can improve my businesses and I am sure these discoveries will be beneficial in the long term.
How are YOU making changes to YOUR business operations that will help your business thrive and grow?
I’ve been struggling with how to make eating well a long-term lifestyle. I feel great when I’m eating more vegetables, less carbs and exercising but it is hard to keep it going week after week so I reached out to Nirit Roddy, certified trainer and nutritionist from Fit With Nirit who gave me some great tips on how to see long-term results — but still enjoy the food I love.
Some of her top tips were:
Nirit also had some great tips for how to deal with picky eaters in your family. How many of you are creating a separate meal for your family members when you are trying to eat healthy? For these and so many great tips on getting healthy without stress watch the video!
Whether someone has lost a parent, a child, or a friend, we want to console and bring comfort but its hard to know what to say. I think every situation is different and what works for one person may not work for another but here are my suggestions based on my experience as someone grieving:
1) Just be there. Its not necessarily what you say (or don’t say). A person grieving just wants to know that people care. Its one of the main reasons we have funerals. Besides letting family and friends say goodbye and come to terms that the person is in fact dead, its also a time to come together and console one another. Don’t worry too much about what you are going to say. Just show up and be there. The simple phrase, “I care and I am here when you need me” is good enough. Too often people distance themselves from grieving people because they are afraid they will say the wrong thing. Don’t be afraid of saying the wrong thing – not being there is much worse.
2) Listen. Being nervous about saying the wrong thing means that sometimes people start running their mouth and don’t let the grieving person get a word in edgewise. Let us talk about whatever we want. It might be about how sad we are or the funeral arrangements or even something unrelated like the weather. We may laugh or we may cry or just sit there quietly but whatever we do, its okay.
3) You don’t need to fix the situation. In fact you can’t. We have to walk through the fire of grief to get to the other side and if we don’t deal with it today, we will deal with it later. Don’t try to defuse the grief by changing the subject away from the person who died. If we start talking about the person who died, that’s okay. It is also okay if we are crying. It is not your job, nor can you stop us from crying or feeling sad. Just be there and listen.
4) Don’t pretend it didn’t happen or the person who died never existed. Because people are afraid of making us cry, they stop talking about the person who died. We WANT to talk about our loved one and hear how they made a difference in your life. We want to hear your memories and we want to talk about our memories. Yes.. we might cry… but that is okay.
5) It is all normal. Each person is different and whatever works for them is what is normal. Some people want to sit at home and cry. Some people may want to actually go out to a party and try to forget for a bit about their grief. Whatever the response it is normal and fine.
6) Offer specific help. Grieving people frequently hear, “Let me know what we can do to help.” It is good intentioned and I’m sure the person offering really means it. The problem is that the grieving person doesn’t know what they need or if they do, they don’t want to ask for it. Instead, offer something specific — “My family would like to come clean your house before the funeral. Is Monday good?” Or “I make a great lasagna. Can I bring some tonight for your family?” With that said, the word OFFER specific help is important. Give us the option of saying no as well. We may be sick of eating our fourth pan of lasagna in as many days or the fear of someone seeing my bathroom that has been sorely neglected while caring for my dying loved one is not worth having it cleaned.
6) There is no timeline. For me, the first few months weren’t too bad. I was busy planning a funeral and cleaning up a life that had been neglected in the month’s leading up to my mother’s death. Plus it just didn’t seem real. There was no possible way she was REALLY dead. It felt like she was just at her house waiting for me to show up. It wasn’t until three months or so after her death that it suddenly felt real and crushing grief set in. By then, I’m sure my friends thought I was handling it well and had moved on to my new reality. So don’t be surprised if three months or even three years later something sets us off and the grief suddenly become fresh again.
And truly…. just the fact that you are reading this post wondering what you can do to help your friend means that you will do just fine. You care. And that is enough.
Welcome back for Part II!
Last post we discussed the various type of contracts (Firm Fixed Price, Time & Materials, and Cost Plus Fixed Fee) and started to get into what we call indirect cost “pools” – Fringe, Overhead and General & Administrative. For this post, we will delve a bit further into what makes up the “pools”, how they are approved by the government and how you use the pools to develop the price per hour you can charge to the government.
So what make up these so called “pools”? On this hot summer day as I write this I wish they were cool places to dip your toe. Alas, they are simply categories of expenses….
Imagine that you have three boxes and a huge pile of receipts. Your accountant would prefer you file the expenses into various “types” of expenses or the three boxes rather than the big pile and the government is no different. Each company can decide exactly how to divide their expenses but this is the most common approach:
Direct Labor Rate. This is easy. You take the salary of the person you are proposing and divide by 2,080 (the number of hours in a year). For example, if you pay someone $50,000 per year, their Direct Labor Rate is $24.04.
Indirect Costs. Indirect Costs are anything that you cannot directly charge to the government such as paying for the employee’s health care premiums or items like rent, accountants or paper for the copier. This is the complicated part and I’ll explain a bit more in depth below.
Fee which is your Profit on the task. This is negotiated within your proposal and can be either a fixed number ($1,000) or a percentage of the billed amount (5%).
So… back to the Indirect Costs. Indirect Costs are further broken into sub pools (or categories). The most common approach to this division is:
Fringe Pool – items such as health care, retirement contributions, vacation, sick, and workman’s compensation.
Overhead Pool – items that cannot be billed directly to a contract but can be attributed to the cost of doing business with one or more customers. For example, computers, rent for billable employees, salary paid to an employee between two projects or utility costs for space allocated to billable employees.
Some companies divide their Overhead Pool into two distinct pools: one for Company Site Employees and one Government Site Employees. This is because it obviously costs us more in overhead costs to employee someone who works on our site than on a government site. It doesn’t seem fair to allocate (and thus charge) costs for Company Site employees to clients who are providing those materials such as desks, space to work and computers for us.
General & Administrative — items that attributable to running your business in general. Examples include the salary of the President of your company (unless the President is a billable employee and then you should divide the salary proportionately into the correct pools), rent for the area where administrative personnel work, accountant and lawyer fees.
Once you have divided your costs into their various pools, you can calculate percentage costs for each pool based on the total Direct Labor costs. See the charts below for a very simplified sample budget and the corresponding “Indirect Rates” that were derived.
Now, once you have your budget for the year you can start to calculate what your indirect rates are…
Let’s start with Fringe. Your total cost for Fringe is $97,000 and your total Labor Base is $340,000. To compute your Fringe Rate you divide Fringe by the Labor Base total for a percentage of 28.5%.
The other indirect rates are calculated using the same methodology as you can see below.
Once you have the indirect rates, you can use them to create your Cost Plus Fixed Fee rates that you bill to the government.
Your proposed budget and indirect rates are submitted to the Defense Contracting Auditing Agency (DCAA) at the beginning of the year and are called Provisional Rates. DCAA will either approve or request a change to what you proposed. Once they are approved you can use those indirect rates to bill the government on your CPFF contracts.
Provisional Rate are just that … provisional. They are based off what you propose in your budget. You do your best to stay within the budget but things happen and your actual numbers are sure to not exactly match the budget. At the close out of the contract you will apply your actual indirect rates (based on your actual expenditures) to the direct labor expended and do a reconciliation between what was billed and the actual costs incurred on the contract. At that point, you will either owe the government back some money (if they were lower than budgeted) or you can attempt to collect additional fees from the government (if they were higher than budgeted).
So… that is your quick overview of how to create a government contracting budget and how it is used to create Cost Plus Fixed Fee rates. This is an immensely simplified view to give you a basic understanding. If you have questions or need further explanation please contact us for our business consulting services.