Labor Distributions

The functional units supply their input to the program office in the form of man-hours as shown in Figure 14-2. The input may be accompanied by labor justification, if required. The man-hours are submitted for each task, assuming that the task is the lowest pricing element, and are time-phased per month. The man-hours per

Figure 14-2. Functional pricing flow.

month per task are converted to dollars after multiplication by the appropriate labor rates. The labor rates are generally known with certainty over a twelve-month period, but from then on are only estimates. How can a company predict salary structures five years hence? If the company underestimates the salary structure, increased costs and decreased profits will occur. If the salary structure is overestimated, the company may not be competitive; if the project is government funded, then the salary structure becomes an item under contract negotiations.

The development of the labor rates to be used in the projection is based on historical costs in business base hours and dollars for the most recent month or quarter. Average hourly rates are determined for each labor unit by direct effort within the operations at the department level. The rates are only averages, and include both the highest-paid employees and lowest-paid employees, together with the department manager and the clerical support.1 These base rates are then escalated as a percentage factor based on past experience, budget as approved by management, and the local outlook and similar industries. If the company has a predominant aerospace or defense industry business base, then these salaries are negotiated with local government agencies prior to submittal for proposals.

The labor hours submitted by the functional units are quite often overestimated for fear that management will "massage" and reduce the labor hours while attempting to maintain the same scope of effort. Many times management is forced to reduce man-hours either because of insufficient funding or just to remain competitive in the environment. The reduction of man-hours often causes heated discussions between the functional and program managers. Program managers tend to think in terms of the best interests of the program, whereas functional managers lean toward maintaining their present staff.

The most common solution to this conflict rests with the program manager. If the program manager selects members for the program team who are knowledgeable in man-hour standards for each of the departments, then an atmosphere of trust can develop between the program office and the functional department so that man-hours can be reduced in a manner that represents the best interests of the company. This is one of the reasons why program team members are often promoted from within the functional ranks.

The man-hours submitted by the functional units provide the basis for total program cost analysis and program cost control. To illustrate this process, consider Example 14-1 below.

Example 14-1. On May 15, Apex Manufacturing decided to enter into competitive bidding for the modification and updating of an assembly line program. A work breakdown structure was developed as shown below:

1 Problems can occur if the salaries of the people assigned to the program exceed the department averages.

Methods to alleviate this problem are discussed later. Also, in many companies department managers are included in the overhead rate structure, not in direct labor, and therefore their salaries are not included as part of the department average.

PROGRAM (01-00-00): Assembly Line Modification PROJECT 1 (01-01-00): Initial Planning Task 1 (01-01-01): Engineering Control Task 2 (01-01-02): Engineering Development PROJECT 2 (01-02-00): Assembly Task 1 (01-02-01): Modification Task 2 (01-02-02): Testing

On June 1, each pricing unit was given the work breakdown structure together with the schedule shown in Figure 14-3. According to the schedule developed by the proposal manager for this project, all labor data must be submitted to the program office for review no later than June 15. It should be noted here that, in many companies, labor hours are submitted directly to the pricing department for submittal into the base case computer run. In this case, the program office would "massage" the labor hours only after the base case figures are available. This procedure assumes that sufficient time exists for analysis and modification of the base case. If the program office has sufficient personnel capable of critiquing the labor input prior to submittal to the base case, then valuable time can be saved, especially if two or three days are required to obtain computer output for the base case.

During proposal activities, the proposal manager, pricing manager, and program manager must all work together, although the program manager has the final say. The primary responsibility of the proposal manager is to integrate the proposal activities into the operational system so that the proposal will be submitted to the requestor on time. A typical schedule developed by the proposal manager is shown in Figure 14-4. The schedule includes all activities necessary to "get the proposal out of the house," with the first major step being the submittal of man-hours by the pricing organizations. Figure 14-4 also indicates the tracking of proposal costs. The proposal activity schedule is usually accompanied

MONTHS AFTER GO-AHEAD 1 2 3 4 5 S 7 S & 10 11 12 13 14 IS 16 17 IS 19 20

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ENGINEERING DEVELOPMENT

ASSEMBLY

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Figure 14-3. Activity schedule for assembly line updating.

Figure 14-3. Activity schedule for assembly line updating.

Figure 14-4. Proposal activity schedule.

by a time schedule with a detailed estimates checklist if the complexity of the proposal warrants one. The checklist generally provides detailed explanations for the proposal activity schedule.

After the planning and pricing charts are approved by program team members and program managers, they are entered into an electronic data processing (EDP) system as shown in Figure 145. The computer then prices the hours on the planning charts using the applicable department rates for preparation of the direct budget time plan and estimate-at-completion reports. The direct budget time plan reports, once established, remain the same for the life of the contract except for customer-directed or approved changes or when contractor management determines that a reduction in budget is advisable. However, if a budget is reduced by management, it cannot be increased without customer approval.

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