As a project Controls Engineer that has just been mobilized on a project, my task is to categorize the labour on the Project and calculate the Charge-out rates or Labour rates of each personnel per hour on the project.
From the list of personnel given to me by the Project manager, I have been able to categorize the personnel into 3 groups namely:
a) Direct labour – Civil, Mechanical, Electrical, Piping, Process, Instrument, Corrosion and Pipeline Engineering
b) Indirect Labour – Project Controls, HSE, QA/QC and Document Control Engineers
c) Overhead labour – Human Resources, Admin Services, Executive Directors, Accounts Unit, Business Development, Public Admin and Audit)
The classification of the personnel on the list into the above categories will help in calculating the labour rates per personnel working on the project.
After categorizing the Labour on the Project, there are 2 alternatives that can be used in determining the labour rates / charge-out rates per personnel:
- To do an order of magnitude Guesstimate by arbitrarily allocating labour rates to personnel
- To review the cost actual and follow a calculative process at determining the charge-out rate
Based on the two options available to me, I will opt for the second option as I believe I will get a realistic value that will be beneficial to the company. The 1st option is prone to errors and may cause a loss to the company.
The main criteria that I have used in choosing option 2 is to properly analyze the rates and make profit for the company for each hour expended by a personnel
CALCULATING THE CHARGE-IN RATES
The charge-in rates or base rates for personnel is the exact amount the company pays each personnel. It is usually calculated by determining the total salary of the staff and dividing the salary by the total productive hours of the staff.
OTHER PAYROLL BURDEN
I also need to consider other costs borne by the company that staff benefit from such as Paid time off( holidays, sick leave, annual leave), Pension, gratuity, Medical services e.t.c
To get the total charge in cost of each staff, the total emoluments will be added together and then divided by the total productive hours.
In other words, (Total Salaries + Fringe Benefits+ Transportation allowance + other payroll Burden)/ Total Productive Time in Hours
To determine the productive time per staff, I did an estimate:
52 weeks make a year = 365 days
Weekends = 2 * 52 = 104 Days
Estimated Sick leave- 5 Days
Annual leave - 32 Days
National Holidays – 10 Days
Total - 151 days
Hence, total productive time – 365-151 = 214 days * 8hrs/day = 1712 Hours
So Let us assume the GRADE 1 staff’s total emolument is =NGN=5,000,000 naira, the base rate or charge in rate will be
5,000,000 / 1712 hr = 2921 naira / hour
CALCULATING THE OVERHEAD AND OTHER FACTORS
In order to calculate the overhead, the total emoluments of all staff, all capital expenses CAPEX such as Building rents &Cars, Operating expenses OPEX such as electricity bills will all be added together and divided by the estimated hours to be expended for the year. Other direct costs will be considered, taxes and definitely the PROFIT that the company will get for each staff working on a project per hour.
In a tabular form, the Charge out rate may be calculated below
| DESCRIPTION | GRADE 1 STAFF Rates in Naira |
| Charge in rates | 2921 |
| Other Direct Cost | 500 |
| Overhead | 1000 |
| Profit (20% of Charge-in rates) | 58.42 |
| With Holding Tax (10% of Charge-in rates) | 29.21 |
| Rate Differential | 0 |
| Charge out rate/Hour in Naira | 4508 |
With the results of the charge out rate achieved, there has to be an annual monitoring and review of the rates. Secondly, the rates has to be dynamic to be suitable for the client and job bided for.
References
- Chapter 4, Skills and Knowledge of Cost Engineering. 5th Edition Revised.
- Chapter 34, Project management using Earned Value, pp 749 - 753. Humprey and Associates.
- GAO Cost Estimating and Assessment Guide. Best Practices for developing and managing capital Program Costs
- Engineering Economy,14th Edition, Page 27,Table 1-1
Week#5_Monigha Idubamo_ poor contracting and over valuation
ReplyDeleteAs the Vice-Chairman staff co-operative society estate development steering committee. I was recently asked to co-ordinate the re-award of the estate’s perimeter fence. A look at previous fence contract awarded in the past indicated that project was poorly done and so much money paid for little or nothing.
Upon assumption of duty, we asked for the scope of the previous contract and found out that there was none, other than quote on which the contract was negotiated and awarded. The intent was to find out what went wrong and we discovered that there was no proper selection process for the past contractor and he was paid without a measure of valued work pay mechanism.
In my capacity as the project adviser, I suggested the following:
A. Bidders’ selection through Technical pre-qualification.
In line with above, invitation was sent out to about twenty three contractors. Seventeen of them returned bid and six others did not. A panel with set criteria evaluated and twelve were successful into the commercial round. Presently, the commercial bid has just been concluded awaiting recommendation for award.
B. Payment to be based on earned value system
This met a lot of reservation from other members of the steering committee and the society’s management committee. When the process was explained, they accepted and asked that it be done similarly to the successful bidders during the commercial pre-bid meeting. – 1it was explained to the bidders that the days of poor quality and advance payment were over. They all agreed to abide with the new way of working.
2Criteria for payment will be based on the following:
i. Physical site inspection of extent or work.
ii Work must be in conformance with technical specification through QC inspection
Reports/Tests.
iii. Contractual obligations met.
The first test of the earned value system is in place already with the design consultant. Their milestone payment was reduced to earned value for not meeting up with design of a retaining wall stipulated in their scope; the true value of the retaining wall scope was deducted.
The general lesson learnt here is that we should use only contractors that are capable using the right selection process and pay for only what is deserved. As the project progresses, we shall be informed of its progress and final outcome.
References:
1. Pearl Garden Estate Minutes of meeting 21/12/2010, page 2 item 2.9
2. AACE Certification Preparation Course Material, Dr. Paul Giammalvo November 2010; Page 47 of 94.
Nicely done, Lanre! Not quite up to an Excellent or OUTSTANDING rating yet, however. Why not?
ReplyDeleteWhile you followed the template from Engineering Economy, page 27 quite nicely, you missed a couple of VERY key points in calculating your hourly rates.
The first thing you missed (which will be a killer) is how productive is a person during any given 8 hour day? Do really get "8 hours worth of work for 8 hours pay"? Or does bathroom time, coffee breaks, a quick visit to Facebook, maybe a game or two of solitaire...... All serve to reduce a persons EFFECTIVE billing rate?
The second thing you missed was an assessment of the nature of the work. Is it repetitive or does it consist of different or continuously changing tasks or processes? The more repetitive, the more learning curve will apply, while the less repetitive, the less learning curve can be used.
Another MAJOR issue you didn't address was the effects of overtime? Is the "normal" work day 8 hour, 5 day long workweek? If this is the case, then your assumption will be fine. But if the "reality" is based on 9 or 10 hours per day instead of 8, and/or a 6 day workweek, then you also have to adjust for the impacts of overtime, both in terms of premium pay and in terms of "burn out".
Bottom line- What I would recommend (STRONGLY!!) that you research what the EFFECTIVE billing rate is, (nominal billing rate X productivity factor) and I think you will shocked to find how overly optimistic your number will be. (You are lucky to get 70% to 80% REAL productivity out of an employee, and that is BEFORE factoring in how many hours are spent in MEETINGS!!!!)
Good topic, but if you want to earn a WOW!!! or OUTSTANDING!!! you need to explore more about real productivity in the work force.
BR,
Dr. PDG, back in Jakarta