Posted: October 17th, 2013

Cost Scheduling Basics

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Cost Scheduling Basics

According to Cappels (2004), forward pricing rates are “rates applied to raw resources in pricing” (118). During negotiations, parties are expected to sign a forward pricing rate agreement that is to be adhered to by the contracting officers and the contractor. Incase of changes in conditions applying to the original agreement, which is a possibility, the agreement becomes invalidates especially if the changes make the rates no longer useful. Forward pricing rate agreements are negotiated on an annual basis, and they include a listing of forward pricing rate possibilities such as direct employee salary rates, overhead rates, just but to mention a few. The first step in forward pricing rate agreements is determining “whether an agreement is feasible and necessary” (Murphy, 2009, 160).

In this case, before the customers hanged the original plans of the contract, the total cost of the project would have been $46,800. This figure is arrived at by multiplying $39 by 100 since grade seven workers are paid per hour. This comes to $3,900 per month. Since the project would run for a whole year, which would make for 12 months, therefore multiplying #3,900 by 12 months gives us $46,800. This amount is the direct cost of the project and it is multiplied by the overhead cost percentage, which is 150 percent. The result is $70,200, from which we subtract the direct cost of the project to get $23,400. This final amount would have been the overhead cost of the project.

Nevertheless, because the customer said they want the project to start on July 1 instead of the initial January 1, there would be changes in the prices. From July 1 to December 1 would be six months meaning the pay grade 7 workers would be paid $39 per hour at 100 hours per month, bringing exactly $3,900 per month. For six months, that would be $3,900 multiplied by 6 to give $22,800. From December 1 to July 1, 2007, makes another six months. However, the rates for this New Year are different as the workers are paid $42 per hour. $24 per hour for 100 hours is $4,200 per month, multiplied by six months comes to $25,200. Adding the two amounts brings $48,000 as the direct cost of the project with the new time alterations. The overhead cost percentage in 2007 would be 155 percent meaning it would amount to $26,400. This is calculated by multiplying 155 percent by the direct costs to get $74,400 then subtracting the direct costs from it.

Judging from the results in both scenarios, there is a financial impact on the total cost of the project because if the project reels into 2007, the overhead rates and costs increase. The customer asked for an extension in starting the project, and this means that the company would incur extra costs given by the new rates for the year 2007. As the project commences on July 1 2006, the overhead costs are within budget but with the extension into 2007, the financial impact is grave. The total amount of direct costs, were the project done in 2006, would have been $46,800. Nonetheless, since it was extended to the next year, the total amount of direct costs increased to $48,000. The difference between these two costs is $1,200, which, I believe, should be paid by the customer because the extension was their doing. If the customer fails to pay this amount, the department would have to incur it, and it would be considered an extra costs or overhead cost.

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