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  • Question

    How does one calculate or determine escalation rates for labor rates past the contract expiration date?


    Answer

    There are two sources of labor rates when estimating the contract price: Statute rates and R.S. Means.  Statute rates are generated by DOL and downloaded from SAM for inserting into new contracts. Please note that there is a base rate and a fringe rate.  A fringe rate is added on top of a base rate.  Fringe includes employee benefits but does not include other costs such as taxes and insurance.  Labor rates from R.S. Means does NOT include fringe benefits, and just like DOL rates, taxes and insurance are not accounted for either. If overtime hours will be required on the contract, a 1.5 increase in pay for overtime hours is only applied to the base rate (unburdened); fringe benefits don't change because they worked some overtime hours.  DCMA has SMEs and a wealth of informaiton for negotiating labor and overhead rate; they are the rates experts for DoD.  While they may not have historical data for the A-E contractor you are negotiating with, they can provide some perspective on industry practices, what their experience has been in negotiating rates with similar companies and any recommended best practices. 

    Escalation needs to be negotiated with the contractor when you have a base year and one or more option years on a contract.  Typically, the contracting officer (KO) negotiates an escalation factor which is then applied to a base labor rate to calculate the escalated labor rate for the option year(s).  The negotiated first-year rate(s) and negotiated escalation factor(s) become the two components which are the inputs for calculating the  outyear rate(s).  If the contractor proposes escalation rate(s), they should provide to the Government the supporting data and basis they used for calculating their proposed escalation rates upon request.  DCMA may have labor rates and historical escalation rates for the contractor you are negotiating with.  I would check to see what they have first in order to determine if you'll need to request information from the contractor to help you prepare for negotiating escalation factor(s) for your contract.  It's even possible that DCMA has already negotiated escalation factors which are available through an FPRA for you to use on your contract saving you a lot of work. 

    Bottom line: it's important to calculate the escalation factor yourself as part of your preparation and planning of your pre-negotiation objective.  Going through this process will give you visibility (and insight) into what would be considered a reasonable escalation rate, as well as by how much and why the base year should be escalated.  Finally, this process will lead you to ask, "where does this come from."  In other words, you'll gain a better understanding of how the escalation factor was calculated, what information it was based on and what data and/or estimates were used to calculate escalation. 

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