BNUMBER:  B-257823 
DATE:  January 22, 1998
TITLE: Federal Mediation and Conciliation Service--Propriety of, B-
257823, January 22, 1998
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Matter of:Federal Mediation and Conciliation Service--Propriety of 
          Financial Management Service Charges Under the Economy Act

File:     B-257823

Date:January 22, 1998

DIGEST

The Federal Mediation and Conciliation Service (FMCS) claims that 
Financial Management Service (FMS) overestimated the amount of time 
FMS employees spend on administrative and other matters that FMS 
charges to all customers as an indirect cost for work performed 
pursuant to the Economy Act, 31 U.S.C.  sec.  1535.  As a result, according 
to FMCS, FMS charges all of its customers for employee time properly 
chargeable to, and payable by, identifiable customers.  GAO's role is 
not to recompute FMS's standard hourly rate but to assess its general 
accuracy as a means to recover "actual costs" consistent with the 
dictates of the Economy Act. 

FMS estimates the amount of time its employees spend on administrative 
and other matters not directly chargeable to any one of its customers 
using historical data on actual levels of work performed, 
administrative workload, and lead time between customers, as well as 
estimates of anticipated workload growth.  Based on our review of 
FMS's methodology, we have no basis to conclude that FMS's estimate is 
inconsistent with the requirements of the Economy Act.  

DECISION

The Director of Budget and Finance, Federal Mediation and Conciliation 
Service (FMCS), requested our opinion on the propriety of charges made 
by the Financial Management Service (FMS), Department of the Treasury, 
for technical assistance provided in fiscal years 1993 and 1994 under 
reimbursable agreements entered into pursuant to the Economy Act, 31 
U.S.C.  sec.  1535.  The Economy Act requires agencies to recover the 
actual cost of goods and services provided.  31 U.S.C.  sec.  1535(b).  
FMCS questions the methodology used by FMS to calculate its charges.  
FMCS asserts that FMS charges were in excess of actual cost because 
FMS charged FMCS (as indirect costs) costs that were properly 
chargeable to other FMS customers.  For the reasons stated below, we 
do not object to FMS's methodology for calculating costs.

Background

FMS provides accounting services to agencies and organizations on a 
reimbursable basis.  For this purpose, FMS established the Center for 
Applied Financial Management (Center).  The Center is a separate unit 
within FMS with its own staff, equipment and space.  Its sole purpose 
is to perform work and provide services to its customers.

FMS agreed to help FMCS develop an administrative accounting system 
and to provide implementation support under a memorandum of 
understanding (MOU) and three reimbursable agreements entered into in 
July and August, 1993.  The MOU required FMCS to reimburse FMS for the 
actual costs of Center personnel assigned to the project, and other 
costs incurred in providing the services.  FMS charged FMCS a total of 
$194,846 under the agreements.  FMCS has questioned the methodology 
used by FMS to calculate its costs in performing under the MOU.  

While FMS can track direct costs chargeable to any given project, it 
needs to allocate indirect costs, including overhead, attributable to 
a project.  FMS uses standard hourly rates to capture, and bill, 
direct and indirect costs associated with personnel assigned to a 
project.  FMS premised its methodology for establishing its standard 
hourly rates on the presumption that all of the Center's costs of 
operation are chargeable to the Center's customers.  Since FMS 
established the Center as a separate and self-sufficient unit within 
FMS for this very reason, FMS charges all of the Center's costs of 
operation to customers either as direct or indirect costs.

To arrive at a standard hourly rate, FMS identifies all of its 
"billable employees" and categorizes each by grade.  FMS calculates a 
standard hourly rate for each general schedule grade to reflect both 
direct and indirect costs.  It defines direct costs, generally, as the 
salaries and benefits of its billable employees.  Billable employees 
are those of its staff who work directly on projects and whose time is 
charged directly to projects, as opposed to management and support 
staff who do not charge their time to specific projects.  FMS factors 
the cost of management and support staff, as well as overhead, into 
the standard hourly rate as indirect costs. 

FMS recognizes that a portion of time spent by billable employees is 
not directly chargeable to any particular customer, and needs to be 
accounted for as an indirect cost.  To compute these costs, FMS 
estimates that each billable employee will devote, on average, 1400 
hours per year to directly working on projects.  The Office of 
Management and Budget (OMB) has advised agencies that of the 2088 
hours attributable on an annual basis to a federal employee, each 
employee works only 1744 hours per year.  OMB Cir. No. A-76 (Revised), 
"Performance of Commercial Activities," p. IV-8 (Aug. 1983).  The 1744 
hours reflects the average amount of annual, sick, holiday, and 
administrative leave used.  FMS estimates that for its billable 
employees, 344 of the 1744 hours are attributable to administrative 
and other matters that do not directly relate to specific projects.  
FMS considers these activities to be "nonbillable activities," and 
captures their cost to FMS (that is, the percentage of a billable 
employee's annual salary and benefits that correlates to 344 hours) in 
the standard hourly rates as an indirect cost.  

During the course of any particular project, FMS tracks for each 
billable employee the actual number of hours that employee works on 
the project.  FMS determines the amount to charge its customer for 
that particular project by adding together the products derived from 
multiplying the number of hours worked by each FMS employee on a 
particular project by the standard hourly rate for the employee's 
grade.

FMCS questions FMS's use of 1400 hours in computing the indirect costs 
attributable to billable employees.  FMCS states, "It is our belief 
that the formula includes too many indirect costs and that the 1400 
hour figure is too low."  In conversations with us, FMCS elaborated 
that it believes any given billable employee probably devotes more 
than 1400 hours of his annual work schedule to direct work on 
projects.  FMCS argues that as a consequence, FMS, in all likelihood, 
has included in indirect charges, allocated among all of FMS's 
customers, costs that, in actuality, are attributable directly to, and 
should be paid by, specific projects.  FMCS has not supplied any data 
to support its belief.

Discussion

Resolution of the issue raised by FMCS requires an understanding of 
the Economy Act, 31 U.S.C.  sec.  1535.  The Economy Act authorizes 
agencies to enter into agreements, such as this MOU, for the 
interagency provision of goods and services.  Id.  The Act requires 
that the ordering agency, in this case FMCS, pay the performing 
agency, FMS, "the actual cost" incurred in providing the goods or 
services ordered.  31 U.S.C.  sec.  1535(b).  As used in the Economy Act, 
the term "actual cost" includes all direct costs attributable to 
providing the goods or services ordered, as well as indirect costs 
funded out of the performing agency's currently available 
appropriations that bear a significant relationship to providing the 
goods or services.  57 Comp. Gen. 674, 682-83 (1978).

Agencies possess some flexibility in applying the Act's "actual cost" 
standard to specific situations, so long as there is reasonable 
assurance that the performing agency is reimbursed for its costs 
without the ordering or the performing agency augmenting its 
appropriations.  B-250377, Jan. 28, 1993.  Thus, we have not objected 
to the use of a standard cost for items provided out of inventory 
(B-250377, Jan. 28, 1993), or to a standard level user cost for the 
use of storage space (B-211953, 
Dec. 7, 1984).  From a fiscal law perspective, our concern is whether 
reimbursements are based on reasonable standard cost determinations 
that do not augment appropriations or otherwise run afoul of the 
Economy Act.  Id.

The issue FMCS raises goes to the reasonableness of FMS's calculation 
of its standard hourly rate, in particular, the use of the 1400 
billable hours per year estimate.  Based on our review of FMS's 
methodology for establishing its standard hourly rates, including the 
estimate for billable hours per year, we have no basis to object to 
its standard hourly rates for billing a project's "actual cost" to an 
agency under the Economy Act.

Although FMS's accounting system can identify direct labor and other 
direct costs with each customer, a basis is necessary to allocate its 
other costs.  Because of the multiplicity of customers and FMS 
employees serving any one customer and because of the complexity in 
tracking and allocating the myriad indirect costs to individual 
customers, FMS decided, not unreasonably, to use standard hourly rates 
by grade to support its recovery of all costs incurred in providing 
services to  customers.  See B-230377, Jan. 28, 1993 (ability of 
performing agency's accounting system to identify all actual costs 
relevant factor in determining reasonableness of agency's use of 
standard costs).

To establish its standard hourly rate, FMS gathers the historical cost 
of the Center for both personnel and nonpersonnel costs, considers in 
detail each employee's personnel costs including promotion and step 
increase projections, and factors in estimated cost of living 
increases, rent increases, etc.  Before calculating the standard 
hourly rate, FMS deducts costs such as travel costs that are billed 
directly to the customer agency and estimates billable hours per 
employee for the year.  To make this estimate, FMS uses a two-step 
process.  It starts with guidance contained in OMB Circular A-76 
indicating that the average federal worker, after eliminating annual, 
sick, holiday, and administrative leave, works an average of 1744 
hours per year.  OMB Cir. No. A-76, at IV-8.  Next, FMS considers 
historical data on actual levels of hours worked directly on a 
project, administrative workload and lead time between customers, and 
anticipated growth estimates to determine the percentage of average 
hours worked per year that an employee is able to bill for actual 
hours worked.  For the period in question, FMS established this 
percentage at approximately 80%, or 1400 hours.  To calculate the 
standard hourly rates, FMS groups all estimated billable hours by 
employee into their respective grades, indexes the grades to the 
Office of Personnel Management (OPM) pay schedule to keep the final 
rates per grade aligned with the OPM pay schedule, and then produces 
standard hourly rates per grade that recoup the Center's costs.

FMCS expresses particular concern with FMS's estimate that out of 1744 
hours the average employee actually works per year, FMS's billable 
employees spend 344 hours on administrative and other matters that are 
not directly chargeable to any particular project.  FMS considers the 
cost of the 344 hours to be indirect costs that are spread out among 
all of FMS's customers.  FMCS suggests that the average billable 
employee probably spends more that 1400 hours per year working on 
tasks that are directly chargeable to identifiable customers.  If that 
is the case, FMCS argues, all customers are paying for a portion of 
the billable employee's time that should properly be paid by the 
customer on whose project that employee was working.

Although we appreciate the significance of FMCS's argument, our review 
of the record before us does not support the essential premise of 
FMCS's concern, namely, that FMS's estimate of the number of billable 
hours worked per year by a Center employee is unreasonably low.  
Certainly FMCS does not, nor could it, disagree with the proposition 
that Center employees will spend some portion of their productive time 
working on administrative and other matters either because of the need 
to address these matters or because of lead time between customers.  
Similarly, a portion of the Center's employees' time will be spent 
each year on training and other professional activities.  If this much 
is conceded, as we think it must be, the issue is one of degree.  It 
is not our role to recreate FMS' computation of billable hours but to 
assess its general accuracy as a means to recover "actual costs" 
consistent with the dictates of the Economy Act.  The test is whether 
the computation of standard cost produces a reasonable approximation 
of actual costs, not exacting precision.  B-250377, Jan. 28, 1993.  

FMS has obvious incentives to minimize indirect costs.  Because of the 
nature of the service FMS's Center for Applied Financial Management 
provides, i.e., technical assistance in designing and implementing 
accounting systems, FMS, in fact, competes with other, nonfederal, 
providers.  To the extent that FMS can maintain low overhead and other 
indirect costs, FMS enhances the competitiveness of its charges to its 
customers.  Further, as noted in our description of FMS's methodology, 
FMS used historical data on actual levels of work performed, 
administrative workload, and lead time between customers plus 
estimates of anticipated growth in Center workloads to arrive at the 
percentage of an employee's hours billed directly to a customer's 
project.  We have no basis to object, either in concept or 
application, to the methodology used by FMS to estimate the amount of 
hours that its employees will directly bill customers per year.

Comptroller General
of the United States