It’s that time of the year when we begin to negotiate labor agreements set to end on June 30th. Have you started your preparations for the negotiating process? One critical step in labor negotiations is costing your existing MOU. What do we mean when we say “costing?” It means you should be able to identify what each item in the MOU costs on a fiscal year basis and thereby determine the total cost of the contract to your agency.
Direct & Indirect Costs – What are They?
Collective bargaining agreements contain both direct costs and indirect costs. It is important to understand each of these concepts and determine their value. Direct costs are items that send cash out the door – compensation components and employer paid benefits are the two largest types of direct costs. Direct costs break down even further into categories such as pensionable, taxable, or those paid to a third party on behalf of an employee. Some direct costs can be determined by position; others are “bucket items” for which multi-year averages are the best method to determine costs. Indirect costs are typically the value of contract provisions where cash isn’t necessarily leaving the organization but the provision has a value, for example, sick leave. For most employers, the value is a productivity cost. However, in other cases where you have minimum staffing, sick leave may result in direct costs via the payment of overtime (to cover the work of the sick employee).
The process of costing is time-consuming and can be tedious. Also, often agencies rely on what they previously budgeted to spend vs. what they are actually spending. It is recommended that you understand the difference and focus on what you are actually spending. In addition, it is important to establish your costing methodology and then communicate it to key stakeholders (i.e. City Manager, Finance Director, HR Director, Elected Officials, etc.). It is easier to start with the costing of the current MOU and reach consensus on the methodology long before you engage in developing proposals and seeking authority for the next MOU. A good example is a frequently asked question – what would a 1% salary increase cost?
Well, we need to be clear about the question – 1% of base pay or 1% of total comp? Are we including the value that 1% has on overtime costs? Have we factored in escalating provisions that we have previously agreed to pay the employer rate for retirement benefits or the impacts of health insurance premiums that were already negotiated and exist in the MOU? If the base pay for a bargaining group totals $6,287,290 and the total cost for the group is $9,664,591 – then thinking through the 1% question in this way makes a big difference!
Who handles the costing? Is it the finance department, the budget office, Human Resources? Hopefully, it is a collaborative effort. If you are fortunate to have a finance system that can prepare costing information and create costing scenarios – you are LUCKY! For most agencies, downloading data from payroll and finance systems into Excel spreadsheets to run costing calculations is more common. Have a conversation with your bargaining team leadership and chief negotiator early so you can determine the plan for costing.
Is Costing Really Helpful?
Absolutely! Understanding what each item costs sets the framework for identifying what each proposal in the negotiation process costs. Both agency and union proposals need to have a value identified in order to determine the feasibility of the proposal. Additionally, when you have analyzed the cost, you will clearly see what the real impact of a proposal might be. Clear costing data adds credibility to the meet and confer process. You should be able to share costing information across the table and it can serve as an effective tool in explaining why items may not be able to be realized during negotiations. If you find yourself at an impasse and engaged in the fact-finding process, then your costing data will be essential during the fact-finding hearing.
As public agencies begin to see improvements in the financial condition of their organization, costing will continue to be a critical component in labor negotiations. The long-term sustainability of the compensation structure and the ability to work within the structure require a solid and complete understanding of labor costs. Effectively using costing to determine one-time costs, the best use of a dollar, structural costs that increase in future years, etc., are issues elected officials want to understand and that you should understand as well.
Want to learn more about the process of costing? Join us for the LCW Pre-Conference workshop:
Costing Labor Contracts
March 8, 2017 | 9AM - 4 PM | Disneyland ® Hotel
The keys to successful negotiations include planning and costing. Just like planning a vacation, the amount of time and effort you put into planning and costing can determine the success of the trip. Costing contract proposals is similar to costing excursions on a vacation - they all sound like a good idea but can we afford them? Join us at this workshop to learn the importance of costing and methods you can use to make costing easy. Register Today (select Pre-Conference ONLY)
Also, this presentation is the first workshop that is a part of the new LCW Labor Relations Certification Program ©. This program is designed to provide labor relations practitioners education combined with practical hands-on experience in a variety of core areas.
Participate in individual seminars and receive a certificate of completion for each completed course or participate in all seven to earn the Labor Relations Certificate. Learn more >