Contract Costing Terminology and Concepts
Contract Costing Terminology and Concepts
Across-the-board increases- A negotiated raise in which all members of a bargaining unit, regardless of classification, receive the same wage increase (either in percentage or dollar amount).
Front loading- Front loading occurs when the largest increases occur earlier in a contract cycle (e.g. Year 1 - 6% increase, Year 2 - 4% increase,
Year 3 - 2% increase) in a multi-year agreement.
Back loading- Back loading occurs when the largest increases occur at the end of a contract cycle (e.g. Year 1- 2% increase, Year 2- 4% increase, Year 3- 6% increase) in a multi-year agreement.
Annualizing wage increases- Annualizing is a way of converting changes over different time periods into a standard yearly increase. For instance, a 6% wage increase that is applied at the start of a full 12 month year (January 1) will be worth a 6% wage increase to the employee and will cost the employer 6% for the year for that employee. But a 6% wage increase that is applied half-way through the year (July 1), for a six month period is only worth 3% to the employee and will cost the employer 3%. The annualized figure is arrived at as follows using this example: the 6% is divided by 12 into equal monthly amounts, equaling .5%. That number is then multiplied by the 6 months it is in effect, which equals 3%.
Splits- Some wage increases may be spread over the contract year, or split. A split might look like this: a 3% increase effective on Jan. 1 (the first day of the contract) with another 3% increase effective on July 1 of that same year. The impact in this example is that the worker’s rate of pay (or base rate) will increase by 6% during the course of that year, but the actual in-pocket money received for that year will be 4.5% (figure arrived at by annualizing the split plus the initial increase) of total wages.
Paid time vs. Work time- This is an important concept to keep in mind when considering how a particular benefit is calculated. Paid time includes all paid time off (all days or time that and employee is paid, but not working). Work time only applies to that time in which a worker is actually on the job, excluding vacation time, sick days, personal or professional days, bereavement leave, etc. Example: Vacation accrual rates that are calculated on work time (instead of paid time), would have the effect that all the time that an employee takes for vacation, holiday time, sick time, etc. (non-work time) will lower the vacation accrual rate thereby reducing total vacation amounts.
Simple hourly average- The simple hourly average is an average rate of pay based on totaling all of the rates of pay and dividing that number by the total number of all of the employees.
Weighted hourly average- The weighted hourly average is the figure that is arrived at by multiplying the number of employees in each specific wage rate, adding that number, and then dividing it by the total number of employees. This number is a more accurate measure than a simple average of per hour cost because it takes into account the distribution of employees within each pay category. At the bargaining table, the employer may try to use the “average” rate because it is a higher rate, therefore indicating higher costs per hour that are not valid.
Mean - The mean of a set of numbers is the sum of all the members of the set divided by the total number of items in the set. The mean is what is usually called the “average”.
Median - The median is the number in the middle of a list with the same number of units above it equal to the number of units below it.
Mode - The mode of a sample is the element that occurs most often in the collection. For example, the mode of the sample [1, 3, 6, 6, 6, 6, 7, 7, 12, 12, 17] is 6. Given the list of data [1, 1, 2, 4, 4] the mode is not unique – the dataset may be said to be bimodal, while a set with more than two modes may be described as multimodal.
Range - The range is the difference between the highest and lowest values within a set of numbers such as a wage scale. To calculate range, subtract the smallest number from the largest number in the set.
Cash bonus- A cash bonus is just as it sounds- an amount of money that is negotiated into a contract that usually is given to each employee. It is often seen by management as an attractive way of gaining employee support for a contract while saving the employer money in the long run. The main problem is that such cash bonuses do not increase the base wage rate, so that there are no roll-up effects on overtime, vacation pay, holiday pay, etc. and the base wage rate remains the same going into the next cycle of negotiations.
Base rate – The wage workers earn for all regularly scheduled straight-time hours. Excluded from the base rate are: shift differentials; overtime; longevity pay and any type of incentive pay.
Overtime pay – Overtime pay is pay (usually at a rate of 1.5 times the base rate of pay) for work performed beyond a worker’s normal work shift or in excess of 40 hours of work per week.
Compensatory time - Compensatory time or comp time, is the practice of giving employees paid time off instead of paying them for overtime hours. Federal labor laws offer strict guidelines regarding the use of comp time as a means to avoid paying overtime. In most cases, private sector employers are prohibited from the practice.
Hourly Employees - If an hourly or salaried non-exempt employee is entitled to overtime pay, employers cannot substitute with comp time. Federal law requires employers to pay these employees at least 1.5 times their normal hourly rate for all hours over 40 worked during a workweek. The workweek does not have to be Monday through Friday; a workweek is a period of seven consecutive days and can begin and end on any day; however, the definition of a workweek must be consistent from week to week.
Exempt Employees - Certain employees are exempt from the overtime laws. These are typically managers, executives, professionals and outside sales personnel. Certain computer professionals also qualify as exempt employees. Regardless of how many hours these employees work during a week, employers are not under any obligation to pay them overtime. Employers are free to give them paid time off as a reward for the extra hours. Although this is not comp time under Federal labor laws, employees often refer to it as such.
Roll-up costs- These are the additional costs (other terms used include: add-on; loading; creep; impact; multiplying fringes) caused automatically by a change in wages or salaries. As the hourly wage rate increases there are impacts on other contractual items such as- overtime, holiday pay, vacations, sick pay, call-in pay, bereavement leave, plus other potential items as pensions, Social Security payments. The roll-up factor is obtained by adding up the average hourly cost of all benefits subject to the roll-up effect and dividing by the total cost of straight-time wages. Example: Benefits subject to roll-up and their average hourly costs: Overtime- $.90, Holidays- $1.00, Vacations- $1.30, Differentials- $.05, Call-in pay- $.12, Sick Pay- $.23 for a total of $3.60. Divided by the Straight time wage of $12.00 per hour equals a 30% roll-up factor.
Comps- In preparation for bargaining economic contract items, the parties will research what other comparable employers are paying or giving for various benefit categories. These are often referred to as comps. Comps are not necessarily as objective as might be expected since either side can be selective in what they deem to be “comparable”. Is a company located in the same geographic area, but in a different industry and of a different size a legitimate “comp” or alternately, is a similarly sized company in the same industry but in a different part of the country (and therefore different economic environment) a better “comp”?
CPI (Consumer Price Index)- The CPI is a figure published by the U. S. Department of Labor that is supposed to show changes in the cost of living by measuring changes in prices for housing, food, transportation, clothing and other items. National and regional figure are available from the Bureau of Labor Statistics available on its web site bls.gov.
COLA (cost of living adjustment)- COLA is an escalator clause in contracts that provides automatic wage increases to cover the rising cost of living due to inflation, usually pegged to the Consumer Price index and calibrated to kick in only if the inflation rate rises beyond a certain percentage. COLAs were common in the high inflation years of the 1970s but have eroded over recent years, with various explanations offered (reduced inflationary uncertainty, lower union power, and structural shifts in the economy, etc). But regardless, they are seldom seen in contracts today.
Contractual raise- This is basically the negotiated wage increase that is applied to the wage scale at the beginning of a new contract year or period on a specific date.
Step increase- This is the step progression that an employee receives as a result of moving up the wage scale from one step to another. The step increases are most often set as yearly increases given on each individual employee’s anniversary of date of hire. Therefore, the step increases for any bargaining unit are spread throughout the year.
Differential pay- Additional pay for time or duties beyond those normally required. The most common forms are those for working on a shift other than the day shift, and for weekend work. Differentials also may be paid for other specific circumstances, such as: hazardous duty; certification or accreditation; and, education.
Fringe benefits- Negotiated contract provisions exclusive of wages and hours, such as health insurance, pensions, maternity/parental leave, paid vacations, leaves of absence, mileage allowance, travel pay, etc. are termed fringe benefits.
Call pay- An hourly amount of pay given a worker for being in an on-call status.
Incentive pay- Also referred to as “pay for performance” or “merit pay”. It is a system of pay that is a throw-back to piece work bonuses in which workers are paid more than others for more or better work or for supposedly higher performance on the job. Generally opposed by unions because they are often tied to annual evaluations and are highly susceptible to favoritism and subjective decisions made by supervisors, and also because they destroy the unity and solidarity of the union.
Prevailing wage rate - is a term used in a legislative effort to provide organized labor a fair chance to bid for government contracts. Federal law requires all employers engaged in the performance of federal contracts to pay "prevailing" wages to their workers. This ensures that nonunion employers cannot gain an unfair bidding advantage by paying wages far below the union rate and passing the savings on to the government in lower bids. A prevailing wage is a rate of pay determined by the U.S. Department of Labor based upon the particular geographic area for a given class of labor and type of project. The Davis-Bacon Act, the McNamara-O'Hara Service Contract Act, and the Walsh-Healy Act are the primary laws governing federally funded construction projects in the private sector.
Minimum Wage - The minimum wage is the hourly rate of compensation for labor, as established by Federal statute and required of employers engaged in businesses that affect interstate commerce. Most states also have similar statutes governing minimum wages.
Along with a requirement for overtime pay and restrictions on child labor, the minimum-wage law is one of the most significant, substantive obligations created more than 50 years ago by the Fair Labor Standards Act of 1938 (FLSA) (29 U.S.C.A. §§ 201 et seq.). The FLSA culminated a long struggle for state and federal protective legislation for workers that had begun during the nineteenth century.
Living wage - The living wage is the amount of income needed to provide for a decent standard of living. It should pay for the cost of living in any location. It should also be adjusted to compensate for inflation. The purpose of a living wage is to make sure that all full-time workers have enough money to live above the Federal poverty level. A living wage does not include the basic buffers needed to improve one's quality of life or protect against emergencies. For example, it doesn't provide enough income to eat at restaurants, save for a rainy day, or pay for education loans. It doesn't include medical, auto, or renters/homeowners insurance.
Living wage ordinances - Living wage ordinances are enacted by local governments to raise job and living standards for workers at companies and firms that do business with a city or county, or that benefit from taxpayer assistance. The first living wage ordinance was passed in Baltimore in 1994. Since then, at least 140 communities in the U.S. have passed such laws, and there is now a significant body of research on their effect. The evidence shows that living wage ordinances raise wages for low-income workers, often by a significant amount, with few if any measurable negative effects on either employment or taxes. Many of these ordinances are loosely modeled after existing federal and state “prevailing wage” laws, which date back to the late nineteenth century and gained popularity during the Great Depression. Note that several minimum wage ordinances have been overturned, including Birmingham, AL; Miami Beach, FL; Louisville and Lexington, KY; Johnson, Lee, Linn, Polk, and Wapello Counties in Iowa; St. Louis, MO; and Kansas City, MO.
Pay in lieu of benefits- Some contracts include the option for the employee to take a higher rate of pay (pay in lieu of benefits) in exchange for not taking any benefits at all, including health insurance, paid time off, etc. This can often undermine the unity of the union as competing pressures and divisions emerge on bargaining strategy.
Pyramiding- Often contracts include a stipulation that there is “no pyramiding” of overtime pay. This usually refers to a ban on getting paid twice for the same hours worked. An example would be as follows: an employee works 4 hours over her 8 hour shift and therefore will get paid 8 hours at her straight hourly rate of pay, plus 4 hours at the overtime rate (1 ½ time pay) or 6 hours additional pay for a total of 14 hours pay for that day. Assuming she works a 40 hour work week for that week, she would receive a total of 46 hours pay. “No pyramiding” means that the 4 hours overtime worked on one day cannot also be counted as being 4 hours over the 40 hours per week rate. It cannot be counted twice. Employers sometimes incorrectly or intentionally try to claim that “no pyramiding” also prohibits an employee from getting a shift differential, in addition to a weekend differential, or overtime. That is not the case unless the contract language specifically states that.
Two-tiered wage systems- An employer’s practice of paying higher wages to current employees while creating a lower level of pay (another tier) for all new hires after a date specific. Such systems usually lead to divisions and tensions in the workforce between senior employees and newer employees since the workforce becomes divided by pay for performing the same job, simply based on an arbitrary date. Increasingly these have been exposed as only another union busting measure rather than one designed to sustain a struggling company. Such two-tiered systems also have been dramatically expanded and used for creating different tiered benefit levels (vacation accrual rates, holidays, personal days, health insurance plans and premium share; pensions, etc).
Wage scales- Wage scales are a central element to any labor agreement. The wage scales list all of the job classifications in various pay grades (usually vertically) and the steps (usually horizontally) representing amounts of time spent in a pay grade. Employees normally move up the step scale automatically based on years in that pay grade. Wage scales may have a very limited number of Steps (2-3) or they may have multiple steps (22 plus) depending on what the parties have negotiated.
Percent increases vs. Dollar increases - Percent increases applied to a wage scale have the effect of increasing the gap between the bottom of the wage scale and the top. This occurs because a % increase on a lower wage rate is less actual dollars than the same % increase on a higher wage rate. While a dollar increase (or any portion of a dollar amount) has a different effect. A fixed dollar amount is worth the same in actual dollars to the worker at the bottom of the scale as to the one at the top, but that amount represents a greater % increase to the lower wage earner.
Longevity pay- Contracts often have a provision for longevity pay which is a cash amount given to senior employees who have reached the top of the scale and have no more steps to advance to.
Red circle rate- On rare occasions, when a worker is placed on a wage scale, he/she might be red-circled because their rate of pay does not fit anywhere on the scale. This means that they are held in place (either not advancing up the scale or not receiving a contractual increase) until their rate of pay and the scale come together, or alternatively the employee may be red-circled in recognition of being outside or above the wage scale.
New money – This is a term that management often sites when costing out a contract. It basically refers to the dollar increases in labor costs they will experience due to the newly negotiated wage and other economic benefits in the contract.
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Some important numbers:
2080 hours is the number of hours in a year based on a 40 hour work week
173.3 hours is the number of hours in a month based on a 40 hour work week
1950 hours is the number of hours in a year based on a 37.5 hour work week
1820 hours is the number of hours in a year based on a 35 hour work week
260 days are the number of days in a work year excluding Saturday and Sunday
4.33 weeks is the average number of weeks in a month
"There are three kinds of lies: lies, damned lies and statistics." Mark Twain
Compiled by Joseph A. Twarog 8.18