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