Question

Because the Department of Transportation 1996 Appropriations Act exempted the Federal Aviation Administration (FAA) from various Federal procurement laws, the FAA developed and then implemented its own acquisition management system. The official record of its Acquisition Management System (AMS) is known as FAST, which stands for the FAA Acquisition Systems Toolkit. To guide its analysts as they review cost estimates to ensure they are fair and reasonable, FAST includes a Pricing Handbook. That Pricing Handbook includes guidance on direct labor cost estimates. Access the guidance that covers direct labor (follow the steps listed below) as follows. Steps to access the Direct Labor section of the Pricing Handbook: • In Google, search for FAA or just Start with the FAA’s website at www.faa.gov • In the search box (upper right), type “Direct Labor” • Scroll down and click on the 7. Direct Labor link. Click on the link, which will download the Direct Labor portion of the Pricing Handbook. After reading this section of the Pricing Handbook, answer the following questions:

A. What method should be used in situations where detailed drawings, bills of material, and firm specifications are not readily available? When would it be inappropriate for a contractor to use this method?

B. What is an efficiency factor? How is the efficiency factor determined with regards to direct labor?

C. What is a realization factor? How is it determined with regards to direct labor?

D. Will a contractor normally use both factors (i.e., efficiency and realization) when estimating direct labor costs?

E. When the first few units are produced by the contractor, what are the levels of efficiency and realization that should be expected?

F. One of the most difficult tasks performed by FAA analysts is the assessment of projected direct labor rates. What is a projected labor rate?

G. What are the various internal and external forces that can cause projected labor rates to change?

Answer 1

Ans for A: Round table estimates are used in situations where detailed drawings, bills of material, and firm specifications are not readily available. As a result, round table estimates are most applicable and appropriate for contracts requiring substantial research and development or engineering efforts. Round table estimates should not be used when there is sufficient information and historical data available to use more detailed methods of cost estimation.

Ans for B: Efficiency factor is used when the developing cost estimates in Labour standards method. The estimate will be composed of two components , the labor standard and a realization or efficiency factor. With an efficiency factor, the worker’s actual performance is measured against the standard. An efficiency factor is calculated by dividing the standard hours by the actual hours. This figure is multiplied by 100 to determine the efficiency percentage. An efficiency percentage greater than 100% indicates that workers are performing better than the standard. In contrast, a percentage below 100% means workers are performing below the standard. The formula used to calculate an efficiency percentage is basically the reciprocal of the realization factor. Efficiency is expected to be less than 100% and realization will be greater than one when the first few units of an item are produced. Efficiency, on the other hand, only measures actual work time on the task that is backed by a labor standard.

Answer for C:

As discussed early when Labor Standards Method is used in developing cost estimates, the estimate will be composed of two components, the labor standard and a realization or efficiency factor.

Realization factor: When using labor standards, a realization factor can be applied to standard estimates. This factor represents the relationship between actual hours and standard hours and is derived by dividing the total actual hours expended on a task by the standard hour estimate. A factor of one means the company expects to achieve the standard; a factor less than one means the company expects to perform better than the standard; and a factor greater than one means a company will perform below the standard. The factor used is multiplied by the standard to produce the expected actual. For instance, if the standard time for assembling a part is twenty-five minutes and the contractor expects a realization factor of .95, then the expected actual time to assemble one part is 23.75 minutes (25 minutes x .95). Realization considers idle time and unmeasured work (unmeasured work is work without a labor standard backing it up).

Ans for D : The two factors are not exactly reciprocals of each other. Realization considers idle time and unmeasured work (unmeasured work is work without a labor standard backing it up). Efficiency, on the other hand, only measures actual work time on the task that is backed by a labor standard. Although the two factors are slightly different, a contractor will normally only use one of the factors in its estimating system.

Answer for E: Efficiency is expected to be less than 100% and realization will be greater than one when the first few units of an item are produced. However, both factors normally improve as more units are produced. Various factors must be applied to standard times to reflect how individuals truly work in a manufacturing plant. Generally, these factors include contingency costs such as rework and repair costs.

Ans for F: when evaluating a contractor’s proposal, an analyst is generally evaluating projected labor rates. In other words, the contractor is proposing what it believes will be the labor rates when contract performance actually occurs. Analyzing projected rates is one of the most difficult tasks in pricing.

Ans for G: There are various internal and external forces which can cause labor rates to change. Changes in skill levels due to force reductions or increases can cause labor rates to fluctuate while a changing economic climate or changes in Government policy can also force labor rates to change. All of these factors, together with the passage of time, must be taken into account when projecting labor rates.