Independent Government Contract Estimate (Term Paper Sample)

Independent Government Contract Estimate
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Introduction
Government contracts outline the agreement between business organizations and the government. Every year, the United States of America government procures goods and services of more than $300 billion. The government is still the most significant buyer of goods and services, with the products ranging from airplanes to zippers. The contracts between governments and business organizations follow a set of guidelines and requirements. They are the Independent Government Estimate (IGE). The section 3-3 of the Management and Oversight of Service Acquisitions recognizes IGE to be synonymous to Government estimate (GE). It outlines the cost estimates for the Performance of Work Statement (POWS) or the statement of work (SOW). Although the IGE documentation may vary, it should outline the standard details. They include the name of the preparer and their titles, the approving reviewer and contact information, the signature and the date for the preparer and the approver. It should also contain a statement certifying that the IGCE was created independently before seeking formal proposals from contractors. Finally, it should contain a narrative that supports how the costs were developed. The information should provide sufficient analytical support such as a word document explaining the purpose and scope of the (IGCE) and the preparer conclusions. Therefore, the Independent Government Cost Estimate (IGCE) provides standard requirements to ensure a strong internal control process for the documentation of contract files (Interior Business Center, n. d).
The current term paper investigates the Independent Government Estimate (IGE) and its application to the Government Contract Purchase of the M107 Long Range Sniper Rifle. The paper pays specific emphasis on the Independent Government Contract Estimate (IGCE). It breaks the IGCE to show Base year one and four option years, a total of five years.
Body
The Independent Government Cost Estimate for Government Contract Purchase of 7,500 pieces of M107 Long Range Sniper Rifles was completed on 26th August 2015 by Stanley Jones. He is a market analyst at the Department of Defense. The Estimate covered five years from 2015 to 2019. The total contract cost was USD $118,717,964.00 and a profit of USD 10,650,361.00. The total is a summation of estimated costs for a five years period from 2015 to 2019 (Interior Business Center, n. d).
The (I G C E) for the Purchase of M107 Long Range Sniper Rifles, indicates the various costs for the first year. The total cost of direct labor indicates a total of USD 11, 435, 032 in year one. The figure increases to 11, 745,930 USD, 12,056,820 USD, 12,368,710 USD and 12,318,710 USD for years 2, 3, 4, and 5, respectively. The figure relies on the cost estimates of labor. Although the project entails the provision of a good, labor costs are the most significant part of the IGCE in terms of dollars for service contracts (Interior Business Center, n. d).
IGCE provides that direct labor is the human effort directly applied to the performance of the contract requirements. It includes the cost of personnel involved in the support capacity for the delivery of the product. The department of labor wage determination as provided by the Service Contract Act or the Davis-Bacon Act guides the IGCE determination of labor. The IGCE identifies the various labor categories including the hours required for each task comprised in the Performance Work Statement (IGCE, n.d).
The IGCE identifies two types of labor costs- burdened and unburdened labor costs. The burdened labor cost includes the salary only. However, the burdened or fully loaded labor costs includes the salary and other allocation costs for overhead, general and administration, profit/ fee, and any other escalations for the option years. Burdened rates simplify the process of obtaining cost estimates. However, the accuracy of the process is dependent on the availability of recent and competently negotiated burden rates. The rates must have similar requirements to the acquisition at hand (Interior Business Center, n. d).
The annual work hours are divided into productive and nonproductive time. Productive time is used to perform the duties while non-productive time includes paid to leave time or paid time off (PTO). It also includes other paid non-productive time like breaks, downtime and training time. The total productive or non-productive time depends on either weeks or hours. Productive time is charged directly to the contract as direct labor and the non-productive time is charged to fringe benefits overhead pools (IGCE, n.d).
The IGCE can consider the available time to be 2,080 hours; it includes the product of 52 weeks in a year by 40 hours in a week. The time taken traveling in between the job composes the non-productive time. The total cost of direct materials for the project is USD 28, 572,000. The costs increase with time from year one to year 5 (Interior Business Center, n. d).
The material costs include the costs of purchasing and transportation of the raw materials used in the production of the M107 sniper rifles. The IGCE identifies material costs as costs used in the manufacture of the M107 Sniper Rifles. The quotes are estimated using catalog prices, price quotes, market surveys and historical data. The cost of materials for this project includes historical costs. Data on price and costs are obtained from similar projects conducted in the past five years. The data emanates from the manufacturing firm –Barrett Firearms Manufacturing Inc. The IGCE requires great accuracy in the quantity and the type of each raw material (IGCE, n.d).
The supply of the M107 Sniper Rifles involves other direct costs of a total USD 5,950, 560. The costs increase from USD 879,214, USD 908,250, USD 937,286, USD 966,322, and USD 968,050 in the first year to the fifth year respectively. The costs are an estimate of the various costs not included in the labor and material estimates. They entail costs such as those incurred in travel, lease of equipment, per Diem telephone and other necessary costs incurred in the production and delivery of the rifles to the government. The IGE require that the costs be charged directly against a given requirement (Interior Business Center, n. d).
The costs of other direct items are available from catalogs, price quotes, market surveys and historical data. For the supply of M107 sniper rifles, costs are obtained from historical data of similar projects conducted in the past five years. Barrett Firearms Manufacturing Inc provides the data (IGCE, n.d).
Besides, the IGCE requires the identification of other direct costs that may involve bonds or other securities. For example, a bid bond may lack association with direct costs. However, it is contingent on the payment of a percentage of the bid or the proposal cost upon the award and issue of performance and payment of the bond. The bonds cost to the vendor an amount of 1% to 3% of the bid or the proposal price. According to the IGCE, the cost should be included in the bidder’s price. Besides, it calls for a review of the past bonding requirements as a guide to identifying a reasonable range for other direct costs (Interior Business Center, n. d).
Another classification in the GE of the supply of M107 sniper rifles is the overhead costs. The total costs of the project are USD 13,251, 400. The costs increase over time from year one to year five. Specifically, the associated overhead costs associated with the contract are USD 2,339,382, USD 2, 345,780, USD 2,352, 178, USD 2,358,576, and 2,359, 760 USD for year one to five respectively (IGCE, n.d).
Overheads are costs not directly related to a single final cost objective. However, they are identified with two or more final cost objectives or an intermediate cost objective. They are not subject to the treatment as direct costs. In a manufacturing firm, indirect costs are incurred for an identifiable unit or activity of the contractor’s internal organization (Interior Business Center, n. d).
Due to the nature of the overheads, they do not qualify to be charged to the final cost objectives on an individual basis. Consequently, they are charged after consolidation into a pool of indirect costs. The pool is typically an overhead base allocated to the various final cost objectives. The allocation process involves the use of an allocation base that best connects the cost pool to the project's objectives. For example, big contractors encounter multiple but separate overhead pools for the engineering of the rifles, manufacturing, material handling or other specific off-site activities. A smaller contractor only deserves one overhead pool. The various types of overhead pools involve various departments. First is the supervision and depreciation of the department’s buildings and production equipment. Besides there is the training of employees and their various fringe benefits. During allocation, the costs are distributed from their pools to the project. Proper allocation requires the application of an appropriate allocation base. The relationship between the overheads base and the projects enhance proper allocation. The FAR 31.203 provides the detailed guideline on the allocation of overheads to their respective bases (IGCE, n.d).
The rates used in determining the overhead rates are developed by dividing the overhead pool by the selected base. For example, the direct labor cost as indicated in dollars by the labor hours. The IGE calls for the bases and the pool to relate to the same period. For example, when the labor overhead costs amount to USD 10 and the base (direct labor hours) is equal to USD 100. The division of the labor cost of 10 by 100 provides a rate of 10 %. The interpretation of the rate is that overheads amoun...