Independent Government Contract Estimate

INDEPENDENT GOVERNMENT CONTRACT ESTIMATE 10

IndependentGovernment Contract Estimate

Governmentcontracts outline the agreement between business organizations andthe government. Every year, the United States of America governmentprocures goods and services of more than $300 billion. The governmentis still the most significant buyer of goods and services, with theproducts ranging from airplanes to zippers. The contracts betweengovernments and business organizations follow a set of guidelines andrequirements. They are the Independent Government Estimate (IGE). Thesection 3-3 of the Management and Oversight of Service Acquisitionsrecognizes IGE to be synonymous toGovernment estimate (GE). Itoutlines the cost estimates for the Performance of Work Statement(POWS) or the statement of work (SOW). Although the IGEdocumentation may vary, it should outline the standard details. Theyinclude the name of the preparer and their titles, the approvingreviewer and contact information, the signature and the date for thepreparer and the approver. It should also contain a statementcertifying that the IGCE was created independently before seekingformal proposals from contractors. Finally, it should contain anarrative that supports how the costs were developed. The informationshould provide sufficient analytical support such as a word documentexplaining the purpose and scope of the (IGCE) and the preparerconclusions. Therefore, the Independent Government Cost Estimate(IGCE) provides standard requirements to ensure a strong internalcontrol process for the documentation of contract files (InteriorBusiness Center, n. d).

Thecurrent term paper investigates the Independent Government Estimate(IGE) and its application to the Government Contract Purchase of theM107 Long Range Sniper Rifle. The paper pays specific emphasis on the (IGCE). It breaks the IGCEto show Base year one and four option years, a total of five years.

Body

TheIndependent Government Cost Estimate for Government Contract Purchaseof 7,500 pieces of M107 Long Range Sniper Rifles was completed on26th August 2015 by Stanley Jones. He is a market analyst at theDepartment of Defense. The Estimate covered five years from 2015 to2019. The total contract cost was USD $118,717,964.00 and a profit ofUSD 10,650,361.00. The total is a summation of estimated costs for afive years period from 2015 to 2019 (Interior Business Center, n. d).

The(I G C E) for the Purchase of M107 Long Range Sniper Rifles,indicates the various costs for the first year. The total cost ofdirect labor indicates a total of USD 11, 435, 032 in year one. Thefigure increases to 11, 745,930 USD, 12,056,820 USD, 12,368,710 USDand 12,318,710 USD for years 2, 3, 4, and 5, respectively. The figurerelies on the cost estimates of labor. Although the project entailsthe provision of a good, labor costs are the most significant part ofthe IGCE in terms of dollars for service contracts (Interior BusinessCenter, n. d).

IGCEprovides that direct labor is the human effort directly applied tothe performance of the contract requirements. It includes the cost ofpersonnel involved in the support capacity for the delivery of theproduct. The department of labor wage determination as provided bythe Service Contract Act or the Davis-Bacon Act guides the IGCEdetermination of labor. The IGCE identifies the various laborcategories including the hours required for each task comprised inthe Performance Work Statement (IGCE, n.d).

TheIGCE identifies two types of labor costs- burdened and unburdenedlabor costs. The burdened labor cost includes the salary only.However, the burdened or fully loaded labor costs includes the salaryand other allocation costs for overhead, general and administration,profit/ fee, and any other escalations for the option years. Burdenedrates simplify the process of obtaining cost estimates. However, theaccuracy of the process is dependent on the availability of recentand competently negotiated burden rates. The rates must have similarrequirements to the acquisition at hand (Interior Business Center, n.d).

Theannual work hours are divided into productive and nonproductive time.Productive time is used to perform the duties while non-productivetime includes paid to leave time or paid time off (PTO). It alsoincludes other paid non-productive time like breaks, downtime andtraining time. The total productive or non-productive time depends oneither weeks or hours. Productive time is charged directly to thecontract as direct labor and the non-productive time is charged tofringe benefits overhead pools (IGCE, n.d).

TheIGCE can consider the available time to be 2,080 hours it includesthe product of 52 weeks in a year by 40 hours in a week. The timetaken traveling in between the job composes the non-productive time.The total cost of direct materials for the project is USD 28,572,000. The costs increase with time from year one to year 5(Interior Business Center, n. d).

Thematerial costs include the costs of purchasing and transportation ofthe raw materials used in the production of the M107 sniper rifles.The IGCE identifies material costs as costs used in the manufactureof the M107 Sniper Rifles. The quotes are estimated using catalogprices, price quotes, market surveys and historical data. The cost ofmaterials for this project includes historical costs. Data on priceand costs are obtained from similar projects conducted in the pastfive years. The data emanates from the manufacturing firm –BarrettFirearms Manufacturing Inc. The IGCE requires great accuracy in thequantity and the type of each raw material (IGCE, n.d).

Thesupply of the M107 Sniper Rifles involves other direct costs of atotal USD 5,950, 560. The costs increase from USD 879,214, USD908,250, USD 937,286, USD 966,322, and USD 968,050 in the first yearto the fifth year respectively. The costs are an estimate of thevarious costs not included in the labor and material estimates. Theyentail costs such as those incurred in travel, lease of equipment,per Diem telephone and other necessary costs incurred in theproduction and delivery of the rifles to the government. The IGErequire that the costs be charged directly against a givenrequirement (Interior Business Center, n. d).

Thecosts of other direct items are available from catalogs, pricequotes, market surveys and historical data. For the supply of M107sniper rifles, costs are obtained from historical data of similarprojects conducted in the past five years. Barrett FirearmsManufacturing Inc provides the data (IGCE, n.d).

Besides,the IGCE requires the identification of other direct costs that mayinvolve bonds or other securities. For example, a bid bond may lackassociation with direct costs. However, it is contingent on thepayment of a percentage of the bid or the proposal cost upon theaward and issue of performance and payment of the bond. The bondscost to the vendor an amount of 1% to 3% of the bid or the proposalprice. According to the IGCE, the cost should be included in thebidder’s price. Besides, it calls for a review of the past bondingrequirements as a guide to identifying a reasonable range for otherdirect costs (Interior Business Center, n. d).

Anotherclassification in the GE of the supply of M107 sniper rifles is theoverhead costs. The total costs of the project are USD 13,251, 400.The costs increase over time from year one to year five.Specifically, the associated overhead costs associated with thecontract are USD 2,339,382, USD 2, 345,780, USD 2,352, 178, USD2,358,576, and 2,359, 760 USD for year one to five respectively(IGCE, n.d).

Overheadsare costs not directly related to a single final cost objective.However, they are identified with two or more final cost objectivesor an intermediate cost objective. They are not subject to thetreatment as direct costs. In a manufacturing firm, indirect costsare incurred for an identifiable unit or activity of the contractor’sinternal organization (Interior Business Center, n. d).

Dueto the nature of the overheads, they do not qualify to be charged tothe final cost objectives on an individual basis. Consequently, theyare charged after consolidation into a pool of indirect costs. Thepool is typically an overhead base allocated to the various finalcost objectives. The allocation process involves the use of anallocation base that best connects the cost pool to the project`sobjectives. For example, big contractors encounter multiple butseparate overhead pools for the engineering of the rifles,manufacturing, material handling or other specific off-siteactivities. A smaller contractor only deserves one overhead pool. The various types of overhead pools involve various departments.First is the supervision and depreciation of the department’sbuildings and production equipment. Besides there is the training ofemployees and their various fringe benefits. During allocation, thecosts are distributed from their pools to the project. Properallocation requires the application of an appropriate allocationbase. The relationship between the overheads base and the projectsenhance proper allocation. The FAR 31.203 provides the detailedguideline on the allocation of overheads to their respective bases(IGCE, n.d).

Therates used in determining the overhead rates are developed bydividing the overhead pool by the selected base. For example, thedirect labor cost as indicated in dollars by the labor hours. The IGEcalls for the bases and the pool to relate to the same period. Forexample, when the labor overhead costs amount to USD 10 and the base(direct labor hours) is equal to USD 100. The division of the laborcost of 10 by 100 provides a rate of 10 %. The interpretation of therate is that overheads amount to 10% of the direct labor cost.Overheads are portrayed in percentages (Interior Business Center, n.d).

TheGeneral and administrative costs include the management, financial orother expenses incurred in the operation of the business. Thecontract to supply 7,500 M107 sniper rifles has an overall total ofUSD 1,563,993 in general and administrative costs. The cost increasesover time in the five-year period associated with the contract. Itincreases from a minimum of 437,157 USD to a maximum of 775,185 USDin the fifth year. The general and administrative costs aredistributed equally across all projects ran by the business.Specifically, costs include expenditures incurred in utilities,office rent, compensation packages, employee training and businesstaxes. Besides, the costs include liabilities of the business such asinsurance, legal costs, and other non-contract specific leases. Italso includes equipment supplies, human resources, accounting,finance and public relations. The expenditure on contractadministration, legal, and expenses allocated from the head officequalify as general administrative costs. There are various methodsused in the allocation of the general and administrativeexpenditures. First is the total cost input method serves as anallocation base for general and administrative costs. It applies toall the costs incurred by the contractor other than the general andadministrative expenditure. The second method is the value added costinput method. It is an allocation base for general and administrativecosts used as input except the incurred costs in administration. Itequates to the material and subcontractors costs. The third method isthe single element cost input used in the allocation base, and itequals to the direct dollar amount of labor, labor hours or directmaterials (IGCE, n.d).

Dueto the nature of the general and administrative costs, they cannot becharged to the final product on an individual basis. Consequently,they require to be grouped together into an indirect pool. The poolis related to the final cost objectives by using an indirect costallocation base. The base links the general administrative cost poolto the objectives of the project (Interior Business Center, n. d).

Thereis a rate used to relate such costs to the program objectives. Therate is developed by dividing the general and administrative expensesby the selected allocation base such as the total cost of input. Thecosts vary significantly due to the disparity in company size, type,and the geographical location. There is no typical generaladministrative rate that exists (Interior Business Center, n. d).

Thetotal five-year profit / fee for the supply of the M107 Sniper riflesis 10, 650, 361 USD. The profit increases from one year to the other.Specifically, it raises from a minimum of 2,005,723 USD in year oneto 2,164,652 USD in year five. The profit describes the fee in dollaramounts, over and above the allowable costs for the performance ofthe contract. It is the main reason the contractor is in business.The value of the fee varies from year to year. It depends on thecontractor’s perceived risk in executing the project. The feeindicates that the more complex the nature of the project, the morethe likelihood that the contractor might fail in delivery.Consequently, more risky projects raise the contractor’sexpectations for a high return. Although the profit fee is difficultto estimate, a percentage is determined. It is applied to the bottomline cost to obtain the overall total price to the government. Thefee structure of the profit is broken down to indicate the varioustypes of awards such as incentives or fixed fees. Straight linepercentages enable the development of estimates. The GE calls for theapplication of the fee structures provided in FAR 16 The KO helps toovercome the limitations (IGCE, n.d).

Conclusion

Theterm paper`s main topic is to discuss the rules and regulations ofthe conduct of government procurement processes. Specifically,attention is directed towards the Independent Government CostEstimate for the purchase of 7,500 pieces of M107 Long Range SniperRifles. The deal is between the USA and the Barrett FirearmsManufacturing company. The total value of the contract is 118,717,964USD.

The(IGE) is a set of standards that are used to develop the estimatesfor the performance of works statement (POWS) or the statement ofwork (SOW).Although the IGE may vary from time to time, it has anoutline of standard details followed in developing the projectestimates. The IGE provides guidelines for estimates indirect labor,indirect labor, direct material, overheads and general administrativecosts, and profits. The estimates of profits are the main aim for thedevelopment of IGE estimates. They are hence most difficult todevelop. They indicate the riskiness of the project to thecontractor. Consequently, the government uses the profit to providethe return for the contractor as a way to remunerate for the riskinvolved. The pay is in a major way to motivate the contractor toexecute the project.

References

IndependentGovernment Cost Estimate (IGCE), (n.d). AcquisitionCommunity Connection.[Online] Retrieved on 7thOct. 2015 from https://acc.dau.mil/CommunityBrowser.aspx?id=526706#cor10

InteriorBusiness Center (n. d). USDepartment of the Interior. [Online] Retrieved on 7thOct. 2015 fromhttps://www.doi.gov/ibc/services/acquisition/getting-started