IACCM Forum

In one sense, a much higher overtime rate acts an incentive for the buyer to work carefully with the seller to manage labor resources efficiently. 

I understand your point from a mathematical perspective, but I suspect that most sellers are going to resist reducing the overtime rate based on this theory because they do not want to do anything to disclose the value of the components of the billable rate. The position I normally take in negotiations (for seller) is that a detailed analysis of the components of a billable rate is not particularly productive. Instead, I try to focus the discussion on the reasonableness of the billable rate based on market conditions. 

 We are seeing more and more of this - that is, agreeing full visibility of the profit, overhead and fixed components of an hourly rate and then being able to use that visibility going forward in agreeing increases to rates, and of course overtime components. I wouldn’t say this was standard in our company (a major international oil and gas corporation), but it is becoming a recommended approach.

While it is true that overtime can be cheaper than normal time that normally happens only in real boom times. The factor which makes such a counter intuitive rate possible is usually the fixed overhead. Normally a business will , at  budget time , make a decision on how the fixed overheads in the business will be recovered and that “recovery” will be based on the number of manhours sold by the business. Again , in the usual course of things , many businesses will apply the fixed overhead to a mixture of normal time and overtime because , in most businesses , experience is that there will be peaks and troughs in demand and there will be periods in which overtime is worked and periods in which normal time is not fully sold so the budget has to be based on the likely pattern of sold manhour burn.

In the good times , and there have been some in my career , one sees Finance Directors leafing through BMW sales manuals , and in the bad times one sees them leafing through books on downsizing. In the good times one will usually find it possible to elicit the information that the business is “overrecoverring” its overheads. What that means is that the business has sold all the budgeted manhours and is now selling manhours at rates which include a portion for fixed overhead ; whereas the fixed overhead has already been recovered so that the portion of the rate allocated for fixed overhead is now running directly to the bottom line.

For those working on true cost reimbursable contracts an appreciation of the cost principles and the variables is key to the ability to assess cost and to differentiate cost from rate. Making sure you understand the contractor’s true cost base will allow you to design rates which tail off at the point at which full recovery has been made

Of course a canny FD will always consider whether it is best to take advantage of such times by making super profit , or by cutting the rates in order to attract more orders (at the risk that those rates will be remembered all too well by equally canny procurement people) or by a combination

Apart from Employee payroll, the rates quoted by a Contractor also includes Mobilisation/Demobilisation costs , transport to and from from the work site to home, administrative overheads, food and accommodation, etc. These costs do not change if the employee works more or less than the normal hours.

Hence, the Overtime pay is balanced by these fixed costs - justification that OT hours should remain the same

Srikanth, 

I do not agree that all necessary overhead is included in the regular time rates.  Imagine that the prime contract calls for labor to be performed Monday to Friday. Vendor does not have full time staff based in the city where services are being performed, so it asks staff on the other side of the state/territory (imagine that you are in a place like the US or Canada, which have numerous provinces) to drive into the work location.  On Wednesay, prime customer requests overtime services on Saturday, perhaps for something like an equipment cutover on Saturday night.  Vendor may be required to pay for not just 1 additional day of travel/accomodations, but 2 days.  I think your assumption is that vendor will not be liable for additonal costs at all. As I have illustrated, this is not necessarily the case. Also, in the United States and other places, the law may require payment of 1.5 times the base rate of pay for each staff member performing services beyond the first 40 hours per week. 

In this example, at least, not only are additional "overhead" costs required, but extraordinary costs may apply, too. 

From an efficiency perspective, it would be inefficient and a serious disadvantage to prime customer for vendor to include a full week of travel/accomodations in the base rates.  

In sum, I think that the argument you make works only under a certain set of facts. Once we change the facts, the argument breaks down. 

- Edward