PREPARING THE COST COMPARISON ESTIMATES
Chapter 1--Implementation Instructions
1. Part II provides generic and streamlined cost
comparison guidance to comply with the provisions of
the FAIR Act and Circular A-76. This includes guidance
for developing in-house costs based upon the Government's
Most Efficient Organization (MEO) and other adjustments
to the contract and inter-service support agreement
(ISSA) price. It also sets out the principles for development
of cost-based performance standards or other measures
that are comparable to those used by commercial sources.
Appendices 6 and 7 provide sector-specific cost comparison
2. The guidance provided by this Part
relies on the managerial cost accounting and performance
standards established in support of the CFO Act, GPRA
and Federal Accounting Standards. Cost and performance
information developed for competitions subject to the
Circular and this Supplement should be drawn from the
data base established by these standards and adjusted
as appropriate. This guidance is to be used by Federal
agencies to ensure that cost comparisons are fair and
3. A cost comparison between in-house,
contract or ISSA performance seems straight-forward,
but, in fact, is complicated by the very different ways
Government agencies and commercial sources account for
cost. For example, the Government buys capital equipment
and may recognize the entire expense when payment is
made. The commercial sector may borrow funds and recognize
the expense of capital equipment as it is used. All
costs incurred by commercial sources are ultimately
charged to a "customer," whereas agency costs may be
met by several different appropriations accounts, revolving
funds or mixes thereof. Insurance is a real cost of
doing business in the commercial sector, while the Federal
Government is a "self-insured entity." Taxes are paid
by most commercial sources and received and used by
the public sector. Assets are purchased from owners
equity in the commercial sector, yet they are purchased
by the taxpayer in the public sector. The Government
may incur employee retained pay or save pay as a way
of mitigating the adverse impacts of a management decision,
without assessing these costs to the activity. The commercial
sector passes these types of costs on to the customer.
These and other differences necessitate cost comparison
requirements that equalize the systems to reflect the
total alternative costs to the Government and the taxpayer.
Such costs may or may not be fully reflected by agency
4. The procedures set forth in this
Part recognize the absence of a uniform accounting system
throughout the Federal Government and are intended to
establish a practical level of consistency to assure
that all substantive factors are considered.
1. Part II is divided into five chapters.
2. Chapter 2 provides the generic principles
and procedures for developing the cost of in-house performance
to the Government. The principles and procedures of
Chapter 2 represent a competitive cost comparison.
3. Chapter 3 provides the generic principles
and procedures for developing the cost of contract or
ISSA performance to the Government. The principles and
procedures of Chapter 3 represent a competitive cost
4. Chapter 4 provides procedures for
computing the minimum conversion differential, calculating
the financial advantages to the Government associated
with Government or contract performance and the cost
5. Chapter 5 provides an alternative
cost comparison methodology for activities involving
65 in-house FTE or less at the time of study announcement.
While the principles and procedures of Chapter 5 represent
a competitive cost comparison, this non-mandatory alternative
approach is provided to minimize the administrative
costs associated with cost comparisons, ensure timely
completion and preserve the equity and cost comparability
requirements of this Supplement.
a. This Chapter provides the policies
and procedures that will be used when the Government
determines that a cost comparison between in-house (agency),
contract or interservice support agreement (ISSA) performance
b. The procedures of Part I of this Supplement
regarding cost comparison waivers, the certification
of the Government's MEO, review by an Independent Review
Officer and the Administrative Appeals process apply.
Cost comparisons will be based upon the same scope of
work and performance requirements contained in the Performance
Work Statement (PWS).
c. Cost comparisons are conducted in
accordance with this guidance, modified to the extent
applicable by Chapter 5 of this Part. The procedures
differ for the conversion of work from contract or ISSA
to in-house performance, however, in four basic areas:
(1) the identification of new or increased in-house
costs, (2) one-time conversion costs and (3) the calculation
of the minimum cost differential, and (4) certain other
adjustments that may be necessary if an ISSA is being
2. Standard Cost Factors.--Standard
cost factors are to be used as prescribed in this Part.
Agencies are encouraged to collect agency or sector-specific
data to update and improve upon the standard cost factors
provided herein. The official in paragraph 9.a. of the
Circular, or designee, may develop alternative agency-wide
or sector-specific standard cost factors, including
overhead, for approval by OMB.
3. Common Costs.--Costs that would
be the same for in-house, contract or ISSA performance,
without organizational, workload, or responsibility
changes need not be computed or entered into the cost
comparison. Common costs or "wash" items will be identified
in the Management Plan for review.
4. Retained and Save Pay.--Retained
and save pay are not included in the in-house cost estimates.
Agencies are encouraged to seek their Most Efficient
Organization (MEO), without penalty of historical inefficiencies.
Agencies cost only the "positions" in the MEO.
5. Cost of Conducting a Cost Comparison.--The
cost of conducting a cost comparison is not added to
the in-house cost estimate or contract price. This is
an administrative expense associated with good management
practices and is irrelevant to the cost of performance.
6. Proration of Performance Periods.--Cost
comparisons are conducted using not less than three
years of proposal/cost data, submitted by the Government
and commercial sources. In-house cost estimates and
contract prices will reflect the same multi-year basis.
If permitted by statute and the Federal Acquisition
Regulations (FAR), performance periods for cost comparisons
in excess of five years may be approved by the official
in paragraph 9.a. of the Circular, or designee. Multi-year
procurement or pre-priced renewal options provide advantages
such as continuity of operations, the possibility of
lower prices, and reduced turbulence and disruption.
However, in extending the performance period, the official
in paragraph 9.a. of the Circular, or designee, must
certify that no known cost comparison advantage be conveyed
to the in-house, contract or ISSA bid by the extension.
7. In-House Costs.--
a. The competitive cost of in-house performance
includes all significant performance costs associated
with the activity that are not common to the in-house,
contract or ISSA options. The in-house cost estimate
is based upon the following:
--Materials and Supply Costs
--Other Specifically Attributable Costs
--Cost of Capital
--Maintenance and Repair
b. In addition to costs generally associated
with the in-house performance of an activity, including
personnel, material and overhead costs, a conversion
from contract or ISSA performance to in-house performance
may require increased costs for facilities and equipment.
The cost of all capital assets not currently provided
to the contractor will be computed using the depreciation
and cost of capital methods provided in this Chapter.
Increases for the rent, maintenance and repair, utilities,
travel and their associated overhead is also calculated.
Government costs that would be the same for in-house,
contract or ISSA operation, should be identified, but
need not be computed.
8. Minimum Cost Differentials.--
a. This Supplement establishes a minimum
threshold of undefined costs that must be exceeded prior
to a conversion to or from in-house, contract or ISSA
performance. The minimum differential is also established
to ensure that the Government will not undertake a conversion
for marginal estimated savings.
b. An activity will not be converted
to or from in-house, contract or ISSA performance, on
the basis of a cost comparison, unless the minimum cost
differential is met. The minimum cost differential is
the lesser of 10 percent of in-house personnel-related
costs (Line 1) or, $10 million over the performance
period. Factors such as decreased productivity, and
other costs of disruption that cannot be easily quantified
at the time of the cost comparison are included in this
c. Whenever a cost comparison involves
a mix of existing in-house, contract, new or expanded
requirements, or assumes full or partial conversions
to in-house performance, each portion is addressed individually
and the total minimum differential is calculated accordingly.
9. Rounding Rule.--Round all line entries
on the Cost Comparison Form (CCF) to the nearest dollar.
a. Agencies will use the annual inflation
guidance developed annually for the President's Budget
and provided by OMB for use in cost comparisons conducted
in accordance with this Supplement.
b. In preparing cost estimates, all known
or anticipated increases incurred before the end of
the first performance period; e.g., salary increases
for Government employees, are included in each cost
element--prorated as appropriate. For subsequent periods,
the cost of anticipated changes in the scope of work,
as described in the PWS, is determined. Inflation factors
for pay and non-pay categories will then be applied
to the estimated year-end costs for the first year of
performance. There are some exceptions to the inflation
adjustments as discussed later, such as personnel costs
subject to economic price adjustment clauses of the
Service Contract Act, Davis-Bacon Act, depreciation
costs for facilities and equipment, and the cost of
c. To calculate out-year costs: (1) determine
the cost elements affected by inflation during each
performance period. For each period, ensure that the
number of months in the period and the changes in the
PWS for each period have been considered; (2) multiply
each cost element for each performance period by the
respective salary/wage or material cost inflation factors
to the applicable performance period, and (3) once adjusted
for inflation, calculate the total cost of that CCF
11. Other ISSA Adjustments.--
a. It is not the intent of this Supplement
to require an ISSA offeror to significantly alter its
methods of operation to provide unique or site specific
services. While such services may meet agency missions
and may legitimately be included in the solicitation,
additional adjustments to the ISSA cost estimate may
be necessary to reflect differences in in-house and
b. Agencies should identify the minor
differences between the requirements of the solicitation
(contractor bid) and the ISSA cost estimate. The agency
determines if any item or combination of items will
impact the agency's ability to perform. If the agency's
ability to perform would be adversely impacted, the
ISSA cost estimates may be rejected as non-responsive.
If the differences will have minimal agency performance
implications, and/or can continue to be performed by
agency personnel, the ISSA cost estimates will be adjusted
for purposes of comparison with the contractor and MEO
offers, based upon the comparable costs contained in
the agency's MEO.
c. A complete record of all adjustments
to the contractor and ISSA cost estimates should be
maintained and made available to the public upon request.
B. Personnel--Line 1
1. This Line includes the cost of all direct in-house
labor and supervision necessary to accomplish the requirements
specified in the PWS. Included are salaries, wages,
fringe benefits, and other entitlements, such as uniform
allowances and overtime. To determine Line 1 Personnel
costs, identify the in-house staffing estimate and proper
wage/grade classifications as described in the Management
2. In-house cost estimates that assume
a mix of in-house labor and existing contract support
should include the cost of labor for the Government's
administration and in-house inspection of those support
contracts on Line 1. Table 3-1, of this Part, may be
used to estimate contract administration costs, based
upon the estimated number of contract employees involved.
The cost of the support contracts themselves, including
the cost of related Government furnished equipment and
facilities not provided to the contractor under this
cost comparison, should be entered on Line 3 Other Specifically
3. Line 1 includes all competitive
costs that could change if performance is converted
to or from in-house, contract or ISSA. Thus, Line 1
may also include certain management and oversight activities,
such as personnel support, environmental or OSHA compliance
management, legal or other direct administrative support
4. The conclusion that an activity
may be performed by contract or ISSA also reflects a
decision that the work need not be accomplished by military
or other uniformed Government personnel. The cost of
military labor in a cost comparison, even if the work
will remain military if retained in-house, will be determined
by the composite rate for uniformed personnel established
by the DOD or other applicable Comptroller.
5. Generally, in-house staffing should
be expressed in terms of productive work hours. With
the establishment of the number of productive work hours
required, a conversion to the number of full-time equivalents
(FTE) is needed. For full-time and part-time positions,
estimate the total hours required by skill and divide
by 1,776 annual available hours to determine the number
of FTE positions required. For intermittent positions
to be expressed in FTE, estimate total hours required
by skill and divide by 2,007 annual available hours
to determine the number of FTE positions required. The
military agency comptroller will establish comparable
productive hours for military personnel included in
an MEO as military positions. The productive hours exclude
annual leave, sick leave, administrative leave, training
and other nonproductive hours. The factors result from
differences in nonproductive time between types of positions.
6. The following considerations are
used to compute personnel costs:
a. Position Title or Skill--Identify
the job. Example: carpenter, driver, janitor, supervisor,
foreman, administrative clerk or department head.
b. Grade--Identify the appropriate GS/FWS
grade for each position title or skill.
c. Number of FTE Required--Identify the
FTE required for each grade. Identify the temporary
and intermittent employee work years. This is important
for later fringe benefit calculations, since intermittent
and temporary employees get fewer benefits than full-time
or part-time employees.
d. Annual Salary/Wages--Pay information
can be obtained from the personnel or finance office.
Use current pay rates based on the Government-wide representative
rate of step 5 for GS and step 4 for FWS employees.
Multiply that pay rate by the number of FTE, except
for intermittent positions where actual hours are used.
As a rule, GS salary is expressed as an annual rate
of pay and the FWS salary is expressed as an hourly
rate. For positions to be used on a prearranged regularly
scheduled tour of duty, this hourly rate is multiplied
by 2,087 (the number of hours employees are paid annually).
e. Other Entitlements--Include entitlements
that will also earn fringe benefits. Work closely with
the personnel office to make sure all entitlements are
considered and to obtain current factors. Examples include:
night differential pay for FWS employees, environmental
differential pay and premium pay for Federal civilian
fire fighters and law enforcement officers.
f. Fringe Benefits or FICA--The following
fringe benefit factors are estimated according to the
Federal Accounting Standards for Liabilities-Exposure.
Multiply the following Governmentwide standard factors
by the appropriate basic pay:
(1) Full or part-time permanent Federal
(a) The standard retirement cost factor
represents the Federal Government's complete share of
the weighted CSRS/FERS retirement cost to the Government,
based upon the full dynamic normal cost of the retirement
systems; the normal cost of accruing retiree health
benefits based on average participation rates; Social
Security, and Thrift Savings Plan (TSP) contributions.
The current (1996) rate is 23.7 percent of base payroll
for all agencies. The comparable retirement cost factors
for special class employees are 32.3 percent for air
traffic controllers and 37.7 percent for law enforcement
and fire protection employees.
(b) The cost factor to be used for Federal
employee insurance and health benefits, based on actual
cost, is 5.6 percent, plus an additional 1.45 percent
(c) The cost factor to be used for Federal
employee miscellaneous fringe benefits (workmen's compensation,
bonuses and awards, and unemployment programs) is 1.7
(2) Intermittent or temporary Federal
civilian employees.--The Federal Insurance Contribution
Act (FICA) employer cost factor of 7.65 (or the current
rate established by law) will be applied to civilian
employees not covered by either of the two civilian
civil service retirement systems (normally intermittent
and temporary employees). Apply the FICA rate only to
wages and salaries subject to the tax; there is an annual
salary limitation for FICA tax.
g. Other Pay--Include entitlements that
do not earn fringe benefits. Some examples are night
differential pay for GS employees, overtime, holiday,
awards, bonuses, and uniform allowances.
h. Personnel Cost--Add Basic Pay, Fringe
Benefits or FICA and other pay for all positions and
total for both Federal Wage System (FWS) and General
Schedule (GS) categories. This figure can now be used
as a basis to compute the annual personnel costs for
each performance period.
7. Adjustments to annual personnel
costs for each performance period are made to reflect
anticipated pay increases.
8. All in-house wages, salaries and
other costs are adjusted for inflation consistent with
the economic assumptions used in the President's most
recent Budget, through the end of the first year of
performance. Federal wages and salaries for contracts
that contain an economic adjustment clause or are subject
to the Service Contract Act (SCA) (41 USC 351-357) or
the Davis-Bacon Act (DBA) (40 USC 276a--276a-7) are
inflated to the end of the first performance period.
However, when using the Department of Labor criteria,
certain potential contract positions may not be covered
under the SCA/DBA provisions; accordingly, the in-house
related costs for such positions are escalated through
the end of the cost comparison period.
C. Material and supply--Line
1. Material and supply costs are incurred in each
performance period for goods such as raw materials,
parts, subassemblies, components and office supplies.
Material costs are calculated only if the materials
are used by the activity and will not be provided to
the contractor or ISSA provider by the Government.
2. Review the PWS to determine the
materials required for in-house performance that will
not be furnished to the contractor or ISSA provider.
Normally, the contractor or ISSA provider will be expected
to provide the supplies and materials necessary to perform
the work described in the PWS. The policy regarding
contractor or ISSA use of Government provided supplies
and materials is set forth in FAR 51.101. Adjust historical
material use and cost data to reflect the requirements
of the PWS.
3. Determine if materials can be obtained
on the open market at less cost than from other Government
agencies. Material cost includes material, transport,
handling and availability/delay costs. If so, obtain
any necessary waivers from the other Government agency(s)
to purchase materials on the open market. Include established
allowances for normal scrap, spoilage, overruns and
defective work. List required material by quantity needed,
unit price, escalation for out-years and total cost.
A single entry may be made for miscellaneous items such
as office supplies.
4. If the furnishing agency establishes
and certifies that all costs of acquiring, managing,
storing and transporting its material are included in
its pricing structure, including overhead, no material
mark-up is required. If not, escalation factors based
upon the principles and procedures of this Supplement
should be developed.
5. Material and supply costs are projected
for all performance periods, including adjustments for
inflation, consistent with the economic assumption contained
in the President's most recent Budget and the rate of
transition to the contractor or ISSA provider, as provided
in the PWS. Ensure that unit prices are calculated to
the end of the first performance period. Future performance
period material costs may not be inflated, if the PWS
includes an escalation or economic adjustment clause.
Such a clause enables a contractor or ISSA provider
to be reimbursed for future price increases. The Management
Plan shows the computations used to derive the entries
for all performance periods.
D. Other specifically attributable--Line
1. Overview.--Personnel and material costs are normally
the primary sources of Government costs. The remaining
elements of competitive cost are also attributable to
the activity. When requirements differ by period due
to changes in the PWS or the Transition Plan, additional
adjustments will be necessary. Ensure that such adjustments
are made before applying inflation factors, if appropriate.
Costs that would be the same regardless of the eventual
decision, should be identified for each cost element.