At Any Rate? Defensible Costing Rates

Initial Estimating of a project or program costs requires that a set of rates and norms is available to the estimator. Also, later in the project, during the logistical and execution phases, Cost Control analysts use these rates for cost analysis. If your company is providing a contracted service, then Accounting also uses these rates for accurate and quick preparation of billing to your client.

As a number of different crafts and skills and professions are employed, managing rates can quickly become quite a complex exercise. For this reason, spreadsheets are used almost universally, for developing the rates model. However, doing so has the downside that these rates must be then be manually transferred into your Estimating, Cost Control and Accounting systems, a time-consuming and error-fraught process. Also, due to its complexity, such a spreadsheet is often tightly controlled by one or two, often over-worked and stressed, people in the company – thus creating a cumbersome bottleneck that impedes quick responses based on new work scope, and new projects, or new requirements, such as the need for night shift work, or travel time, etc.

This post reviews the basic aspects of an integrated rates development and management process, that works seamlessly with integrated Estimating, Cost Control and Accounting processes, with no need for additional handling of this data. Screen-shots of applicable screens or reports are used to illustrate concepts as needed.

Rate Category, Rate Class, Rate Code Rate Type

Four Rate Categories provide the initial breakdown for defining, and managing, rates: Labor, Equipment, Materials and Service, sometimes represented by the acronym, LEMS. Each company, whether an owner company, a vendor, a contractor, a service provider or consulting company, has its own rates for each code in each Rate Category.

Rate Class helps to classify broad groups of items within each Rate Category. Examples of Rate Class, for the Labor Rate Category, include Discipline, Craft or Union Hall.

A Rate Code is the estimated, cost controlled and billed entity that exists in a Rate Class. Examples of Rate Code, include Foreman, Journeyman, Project Manager, etc.

The Rate Type qualifier that enables you to have multiple Rates for a Rate Code. A typical example is Labor hours are normally at a Straight time Rate Type for the first 8 hours of work The Overtime Rate Type is applicable for hours worked over 8 hours.

This table shows, with examples, the relationship between Rate Category, Rate Class, Rate Code and Rate Type for an owner or service provider company:

Rate Elements build Rates

Each Rate code has a Base Rate – in the case of Labor, this would be the base pay rate. To this base rate, you add a number of applicable Rate Element rates that build up the rate to an Expense Rate, which represents the true rate for the incurred hours or other cost item. Add-ons for overhead, small tools, consumables and profit are added to make this into a Billing Rate, appropriate for billing your client for the incurred costs. The screen shot illustrates how Expense and Billing Rates are derived from Rate Elements.

An approval and an audit trail provides added accountability in keeping track of changes to these rates and when they occurred and who changed them and who signed off on them.

Rate Schedule of Rates for Projects and/or Programs

The Company’s Rate Schedule is a collection of rates. You may have a rate schedule for your company’s standard rates for a year. Or, you may have a rate schedule for all of the rates for a project or a group of projects, such as projects for a certain client.

First, populate your Rate Schedule with rate codes for each of the categories and classes that you need to support the projects and/or programs that your company plans to manage. Within the rate schedule, you then define the Rate Types that apply to each of the Rate Codes. The Base, Expense and Billing rates drop in from your Rate Element-based Rates Buildup tool. Rates are defined in your currency or your client’s currencies.

Each Project or Program has a Rate Scheduled attached to it, from which it draws rates in support of the estimating, cost management and accounts receivable functions.

The complexity of rates management justifies the use of an integrated tool simply by codifying and error-proofing the rate buildup process. When you factor in the ability to seamlessly use this data, your value keeps building. Having a documented audit trail that keeps track of rate changes and sign-offs, is yet more value. Integration of Rate data is truly a cost and time saver.