Introduction
In negotiations, the union proposals and the company proposals
won't be the same. This requires a method to estimate and compare
the costs of union proposals and company offers. The way to do
this is by costing out the contract.
There are good reasons to go through the costing out process:
*You can make decisions about which benefit demands best meet
the needs of your members.
*You can evaluate the total economic welfare of your
membership and make comparisons with other groups of workers.
*You can evaluate the cost impact on the employer of any set
of wage and fringe benefit demands.
*You help keep bargaining table nonsense to a minimum.
*You can tell your membership what the new contract is worth
in dollar terms.
*The company will take the union proposal and "cost it out" so
advance calculations can keep the company from using its cost
figures as a negotiating weapon.
Data Collection
Long before negotiations begin and throughout the bargaining
process, data for costing should be collected. Information on your
company can often be found in the business reference section of
your public library, college libraries, and in corporate annual
reports.
When the union notifies the company of its desire to begin
negotiations, it should soon after request the following data
"...in order to intelligently negotiate a contract."
1. Total hours worked, and total hours compensated for all
represented workers.
2. Projections for the next three years, annually, of total hours
worked and total hours compensated for represented workers.
3. Active employment (number of workers who receive pay for work).
4. Average active employment in the last year of the contract and
to date for current year.
5. Detailed average labor costs breakdown. Also, a current job
classification/wage breakdown showing the number of workers in each
classification.
6. Life, medical and dental insurance data (i.e., enrollment by
plan and total enrollment; total premiums paid by plan and total
for all plans).
7. For non-represented workforce, average active employment, total
hours worked and total hours compensated, detailed breakdown of
total payroll costs.
8. Income statements for the last three full years.
9. Current outstanding contracts, including agreement terms and
projected delivery dates, and expected contracts over the next
three years.
10. Identify any extraordinary, unusual or non-recurring
costs/write-offs/income occurring in any of the last three years.
11. Balance sheets for the latest available month and the prior
year end.
12. Operating plans, budgets, forecasts or any other documents
dealing with projected sales, costs and operating results, together
with a list of the major assumptions used in preparing such
information.
NOTE: If you ask for numbers 1, 3, 4, 5, and 6 above, you should
receive this data. The remaining requests are excellent to have
but harder to get.
Useful Definitions
Base Period: The reference point against which changes in costs
are measured (usually the final year of the terminating contract).
Base Rate: The wage employees earn for all regularly scheduled
straight-time hours. Shift, overtime, incentive, and longevity
payments are excluded from the base rate.
End Loading: Postponing major portion of a wage increase until the
later years of a multiple year contract; provides less take-home
pay.
Fringe Benefit: Any provision of the collective bargaining
agreement which improves the welfare of the bargaining unit member
and is provided at a cost to the employer. (For example:
vacations, holidays, sick leave, funeral leave, pensions, health
insurance, disability insurance, life insurance, overtime, shift
premiums, etc.)
Differences in Fringe Values:
(a) some fringes have dollar benefits that are directly
related to changes in wages (paid vacations and holidays, personal
leave, for example).
(b) other fringes are not tied to the employer's pay
structure; they have negotiated formulas (pensions, health care,
tuition reimbursements, employer provided personal safety
equipment, tools, etc., for example).
(c) other fringes can be figured either way; a shift bonus
can be a percentage of a worker's wage rate or a flat
cents-per-hour amount.
Front Loading: Larger portion of the wage increase is paid during
the early years of a multi-year agreement; provides more take-home
pay for employees.
Notice Requirements: The party seeking to reopen (renegotiate) or
terminate a labor agreement is required by federal labor law to
give the other party 60-days' notice and FMCS and the state or
territorial mediation service 30-days' notice. (The notices are 90
and 60 days respectively in the health care industry.)
Total Compensation: For costing purposes, consists of direct wages
and fringes.
Weighted Average: Determined by multiplying the number of
employees in each pay bracket by the applicable wage rate, adding
the results for each bracket together, and then dividing the final
dollar figure by the total number of employees in the bargaining
unit. Weighted average is used since most companies have many base
wage rate brackets or classifications. Note: the employer may use
another measure (arithmetic average, median, or mode) because it
shows a higher average wage rate and makes the company look better;
however, the weighted average is more representative because the
distribution of employees within the pay categories is taken into
account.
Work Year: Wages of employees are typically paid on the basis of
a work year averaging 2080 hours (40 hour week x 52 weeks).
Another concept to be aware of:
Paid Versus Productive Hours
Sometimes you will hear an employer talk about "productive hours."
Wages/salaries of employees are typically paid on the basis of a
work year averaging 2080 hours. Actual hours worked are fewer
because of holidays, vacations, coffee and lunch breaks, jury duty,
etc. Sometimes, employers will view the time employees spend off
the job as nonproductive hours and will not include them when
calculating the hourly cost of a fringe benefit. This will inflate
the employer's cost. The union should resist any unreasonable
number for the sake of good costing. For all our examples, we use
the 2080 figure.
First Steps
There can be a certain amount of anxiety when confronted with the
economics of bargaining but, as you will see, it is really a matter
of taking some easy steps after relevant data is supplied by the
employer. The arithmetic involved is quick and simple usually
requiring only a pencil, paper, and calculator.
In contract bargaining, cost can be reflected in at least three
different ways:
1. Total Annual Cost (TAC): the total cost to the employer
in a given contract year
2. Annual Average Cost Per Employee (AACPE): the Total
Annual Cost divided by the number of employees in the bargaining
unit
3. Average Cost Per Hour Worked Per Employee (ACPHWPE) or
Average Hourly Cost (AHC): derived by dividing the Annual Average
Cost Per Employee by the average number of hours worked per year
per bargaining unit member
The most systematic and probably speediest way to cost any given
benefit is to determine the Total Annual Cost of the benefit and
carry out two divisions -- first by number of employees and then by
average number of hours worked.
TASK 1: Estimate the cost/value of a wage proposal
The proposal is for a 5% wage increase in each year of a 2-year
contract; there are 300 employees in the bargaining unit. You will
want to know what this offer amounts to in dollars. Take the
following steps.
Step 1: Calculate the Weighted Average:
Number of people in each wage classification:
55 people @ $5.75/hour = $316.25
80 people @ $6.25/hour = 500.00
25 people @ $6.75/hour = 168.75
40 people @ $7.00/hour = 280.00
60 people @ $7.50/hour = 450.00
40 people @ $8.00/hour = 320.00
300 $2,035.00 (Total wages
pd./hour)
Total Wages Paid Per Hour v Total Employees = Weighted Average Base
Rate
$2,035.00 v 300 = $6.78 (Weighted Average Base Rate)
Step 2: Calculate Proposed Increase and New Weighted Average, Year
1:
Formula: Weighted Average Base Rate x Percentage of Proposed
Increase
$6.78 x .05 = $0.34 (first year increase)
New Weighted Average = $6.78 + $0.34 = $7.12 an hour
Total Annual Cost (TAC) to the employer is then calculated by
multiplying $0.34 times the number of bargaining unit employees
times 2080 hours (the accepted number of hours in a work year).
TAC= $0.34 x 300 x 2080 = $212,160
Step 3: Calculate Proposed Increase and New Weighted Average, Year
2:
The second year wage increase is calculated using the first year
hourly base rate of $7.12 ($6.78 + $0.34 = $7.12) and is $0.36 per
hour ($7.12 x .05 = $0.36).
It looks like the total wage increase for two years is $0.70 ($0.34
+ $0.36 = $0.70); however, since the first year increase is paid
again in the second year, it is included in the two-year total.
Thus, the combined hourly cost is $1.04 ($0.34 x 2 years + $0.36 =
$1.04).
Try it yourself:
The proposal is for 8% in the first year; 3% in the second year of
a two-year contract; 200 workers; weighted average base rate is
$11.50 an hour; average number of hours worked is 2080.
TASK 2: Estimate the cost/value of a pension
Use the following:
1. TAC = Total employer contribution to pension plan over the
past year.
2. AACPE = TAC v Number of employees
3. Average Hourly Cost = AACPE v Average number of hours
Relevant data: the employer contribution is $1,750,000; the number
of employees 1000; and the average number of hours worked equals
2080. So:
1. TAC = $1,750,000
2. AACPE = TAC v Number of employees = $1,750,000 v 1000 =
$1,750.
3. Average Hourly Cost = AACPE/average number of hours =
$1,750 v 2080 = $0.84
Try it yourself:
There are 1000 employees; average number of hours worked is 2080.
The cost of the current pension program is $1,750,000 per year and
from your discussions with the union's pension consultant, your
proposals for improving the current plan will increase the cost of
the plan by 10%. You want to know the cost of the improvement in
cents per hour. Start by figuring 10% of $1,750,000 to get the new
annual cost: $1,750,000 + $175,000 = $1,925,000. Continue as
above:
1. TAC =
2. AACPE = TAC v Number of employees =
3. Average Hourly Cost = AACPE v Number of hours worked =
TASK 3: Estimate the cost/value of a hospital/medical insurance
proposal
The formulas are:
1. TAC = Average monthly premium x 12 months x number of
employees
2. AACPE = TAC v Number of employees
3. AHC = AACPE v Average number of hours worked
Relevant data: The average monthly premium equals $135; there are
1000 employees; and the average number of hours worked is 2080.
1. TAC = $135 x 12 months x 1000 = $1,620,000
2. AACPE = $1,620,000 v 1000 = $1,620
3. AHC = $1,620 v 2080 = $0.78
Try it yourself:
Within the past few months a Health Maintenance Organization (HMO)
opened in your community. The monthly average premium for medical
and hospital coverage is $125 per month. The monthly premium on
your current health insurance program is $130 per month. Assuming
all the cost savings would go into increased wages, how much could
wages be increased if your local switched to the cheaper plan?
Additional information needed: 950 employees and average hours
worked per year is 2080.
Start by doing the calculations for the $125 per month cost; then
for the $130 per month cost.
TASK 4: Estimate the cost/value of a holiday (or paid leave time)
proposal
The basic equations are:
1. TAC = total paid holiday hours x average hourly wage x
number of employees
2. AACPE = TAC v Number of employees
3. AHC = AACPE v Average number of hours worked
In this example, there are 10 eight-hour paid holidays; the average
hourly wage is $9.50; there are 1000 employees; and average number
of hours worked is 2080.
1. TAC = 10 x 8 hours x 1,000 employees x $9.50 = $760,000
2. AACPE = $760,000 v 1,000 = $760.00
3. AHC = $760 v 2080 = $0.36
Try it yourself:
You currently have 10 holidays and your local would like to
negotiate one additional holiday per year. What is the cost of
this proposal in cents per hour? The average hourly wage is
$10.00; there are 750 members; and average hours worked per year
are 2080.
TASK 5: Estimate the Cost/Value of a Vacation Proposal
What is the cost of a fifth week of vacation for all employees who
have completed 20 years of service? You will need to know the
number of prospective beneficiaries of this contract improvement.
That can be found by examining a list of employees and their hiring
dates.
In this case, 22 employees are eligible for the extra 40 vacation
hours during the first year of the new agreement; the weighted
average hourly rate is $10.53. The total number of employees is
95; average hours worked are 2080.
The calculations would be:
TAC = $10.53 x 22 beneficiaries x 40 hours of benefit =
$9,266.40.
Next, divide total cost by total annual hours for the
bargaining unit:
95 x 2080 = 197,600 (total annual hours)
$9,266.40 v 197,600 = .047 or 4.7 cents
Note: The weighted average wage for the 22 affected employees
would have been more representative to use.
Try it yourself:
Listed below is the basic data regarding the vacation program
contained in your current contract. Figure out the cost of this
contract provision in cents per hour. Assume each employee works
an average of 2080 hours per year.
Vacation Time Number of Employees Average Hourly Wage
1 week (40 hours)23 7.00
2 weeks (80 hours)85 8.10
3 weeks (120 hours)35 8.65
4 weeks (160 hours)10 9.50
TASK 6: Estimate the cost/value of benefits applicable to a
portion of the membership
General Formula:
1. Figure the cents per hour cost of the benefit as though
all of the membership receive it.
2. Multiply the above cents per hour cost figure by the
percent of employees who do receive this benefit.
For example, to calculate the cost of 10% night shift premium with
an average hourly wage of $9.50; and 15% of employees receiving
shift premium, you would proceed to calculate:
1. Cost Per Hour if 100% Received Premium = $9.50 x 10% =
$0.95
2. Actual Cost = $0.95 x 0.15 = $0.143
Try it yourself:
Your local would like to negotiate a 20-day paid leave for members
who must be absent from work for childbirth. What is the cost of
this proposal in cents per hour? Additional information needed:
Cost of One Paid Leave Day Per Employee = $0.02 per Hour Worked
Number of Members in Bargaining Unit = 100
Expected Number of Members Absent for Reason of Childbirth = 4
Notice: Employers tend to be overly generous when making
assumptions about the utilization of benefits.
Try it yourself: Costing out a wage and benefit package proposal
The cost/value of the money package is obtained by combining all of
the individual pay and fringe items.
Facts:
XYZ Company has 300 people in the OCAW bargaining unit;
negotiations are in progress.
The OCAW local union is prepared to make its proposal as
follows:
1) a one-year contract
2) 10% wage increase
3) two additional holidays
4) $10 per month increase in the company contribution
for medical/hospital insurance
5) increased life insurance coverage of $5,000 per
employee
Current benefits are:
1) vacations: average of 2 weeks per employee
2) holidays: 8 days
3) sick leave: 5 days
4) medical/hospital insurance: company pays $50/month
per employee
5) life insurance:
Number of Amount of Co. Cost per
$1,000
Employees Covered Coverage Each of coverage/month
165 $25,000 75 cents
135 30,000 85 cents
300
6) pensions: non-contributory (company pays $35/month
per employee)
1. Costing out the wage increase proposal.
The proposal is for a 10% increase. The weighted average rate for
the 300 people in the unit is $6.78 an hour.
Calculate Proposed Increase and New Weighted Average:
$6.78 x 10% increase = $.68
New Weighted Average = $6.78 + $.68 = $7.46/hour
2. Costing out the additional holidays proposal (2 additional
days, from 8 to 10)
The method for costing out additional days uses this formula:
STEP 1:
Weighted Average Wage x Hours Worked x No. of Holidays =
Annual Cost Per Employee
STEP 2:
Annual Cost Per Employee v Annual Hours Paid = Cents-Per-Hour
Cost
For our example:
STEP 1: Calculation of Current Cost:
$6.78 x 8 x 8 = $433.92
$433.92 v 2080 = $0.209 per hour
STEP 2: Calculation of New Cost:
$7.46 x 8 x 10 = $596.80 per employee
$596.80 v 2080 = $0.287 per hour
STEP 3: Calculation of Increase:
Increase per employee = $596.80 - $433.92 = $162.88 per
year
Increase per hour = $162.88 v 2080 = $0.078
or
$0.287 - $0.209 = $0.078
3. Costing out vacation increase proposals
The method for costing out vacations is:
Average Hourly Wage x Hours Worked/Week x Number of Weeks = Annual
Cost Per Employee
Annual Cost Per Employee v Annual Hours Paid = Cents-Per-Hour Cost
For our example there is no increase proposed, employees receive 2
weeks of vacation:
STEP 1: Calculation of Current Cost:
$6.78 x 40 x 2 = $542.40 per employee
$542.40 v 2080 = $0.261 per hour
STEP 2: Calculation of New Cost:
$7.46 x 40 x 2 = $596.80 per employee
$596.80 v 2080 = $0.287 per hour
STEP 3: Calculation of Increase:
Increase per employee = $596.80 - $542.40 = $54.40/year
Increase per hour = $ 54.40 v 2080 = $0.026
or
$0.287 - $0.261 = $0.026
4. Costing out sick leave proposals
The method for costing out sick leave is:
Average Hourly Wage x Hours Per Day x Number of Days = Annual Cost
Per Employee
Annual Cost Per Employee v Average Number of Hours = Cents-Per-Hour
Cost
For our example, employees receive 5 sick days per year and no
increase is proposed:
STEP 1: Calculation of Current Cost:
$6.78 x 8 x 5 = $271.20 per employee
$271.20 v 2080 = $0.130 per hour
STEP 2: Calculation of New Cost:
$7.46 x 8 x 5 = $298.40 per employee
$298.40 v 2080 = $0.143 per hour
STEP 3: Calculation of Increase:
Increase per employee = $298.40 - $271.20 = $27.20/year
Increase per hour = $27.20 v 2080 = $0.013
or $0.143 - $0.130 = $0.013
5. Costing out increases to life insurance coverage
For our example, the proposal is to increase coverage by $5,000 for
each employee.
STEP 1: Look at current coverage and proposed coverage:
Number of Amount of Co. Cost per $1,000*
Employees Covered Coverage Each of Coverage per Month
165 $25,000 75 cents
135 $30,000 85 cents
Proposed coverage:
165 $30,000 80 cents
135 $35,000 90 cents
*The union must usually rely on these figures as furnished by the
company in order to calculate this and the cost. In situations
like this, the negotiating committee should attempt to verify,
through independent sources, that the rate levels are reasonable.
The OCAW Research & Education Department can be contacted for this
purpose.
STEP 2: It is necessary to calculate a weighted average to arrive
at the cost for each employee, using the following formula:
Number of Employees in Group x Coverage per Employee/1000 x 12
Months x Cost per Thousand per Month = Total Annual Cost
Total Annual Cost v Total Employees = Annual Cost Per Employee
Annual Cost per Employee v Annual Hours Paid = Cents-Per-Hour Cost
For our example:
Calculation of Current Cost:
165 x $25,000/1000 x 12 x .75 = $37,125
+
135 x $30,000/1000 x 12 x .85 = $41,310
____ ________
300 $78,435 Total Annual Cost
$78,435 v 300 = $261.45 Annual Cost Per Employee
$261.45 v 2080 = $0.125 per hour
Calculation of New Cost:
165 x $30,000/1000 x 12 x .80 = $47.520
+
135 x $35,000/1000 x 12 x .90 = $51,030
_____ _________
300 $98,550 Total Annual Cost
$98,550 v 300 = $328.50 Annual Cost Per Employee
$328.50 v 2080 = $0.158 per hour
Calculation of Increase:
Increase per employee = $328.50 - $261.45 = $67.05/year
Increase per hour = $67.05 v 2,080 = $0.032
or $0.158 - $0.126 = $0.032
6. Costing out increases in medical/hospital insurance
The method for costing out changes in contributions to
medical/hospital insurance is:
STEP 1:
Monthly Cost per Employee x 12 months x Number of Employees = Total
Annual Cost
STEP 2:
Monthly Cost Per Employee v Monthly Hours Paid (2080 v 12 months)
= Cents-Per-Hour Cost
For our example, the union has proposed an increase of $10 per
month per employee in company contribution (from $50 to $60):
STEP 1: Calculation of Current Cost:
$50 x 12 x 300 = $180,000 per year
$50 v 173.3 = $0.288 per hour
STEP 2: Calculation of New Cost:
$60 x 12 x 300 = $216,000 per year
$60 v 173.3 = $0.346 per hour
STEP 3: Calculation of Increase:
Increase per year = $216,000 - $180,000 = $36,000 in
total
Increase per hour = $10 v 173.3 = $0.058
or $0.346 - $0.288 = $0.058
7. Costing out a pension proposal
Method:
STEP 1: Calculate Annual Cost Per Employee
Monthly Cost x 12 months = Annual Cost Per Employee
STEP 2: Calculate Total Annual Cost
Annual Cost Per Employee x Total Number of Employees = Total Annual
Cost
STEP 3: Calculate Cents-Per-Hour Cost
Monthly Cost Per Employee v Monthly Hours Paid = Cents-Per-Hour
Cost
For this example:
The union has not proposed any increase in the pension benefit;
however, the company claims that the proposed wage increase would
cause their payment into the pension fund to increase from
$35/month to $40/month for each employee due to effect of wage
increase on pension formula. (Note: the union has to rely on cost
figures furnished by the company. See comment in life insurance
section.)
STEP 4: Calculation of Current Cost:
$35 v 173.3 = $.202/hour
STEP 5: Calculation of New Cost:
$40 v 173.3 = $.231/hour
STEP 6: Calculate Increase per Hour
$5 v 173.3 = $.029
SUMMARY
WAGE AND BENEFIT PACKAGE
(Stated in $ per hour)
Current New Amount of Percent
Cost Cost Increase Increase
Wages $6.780 $7.460 $0.680 10%
Vacations 0.261 0.287 0.026 10%
Holidays 0.209 0.287 0.078 37%
Sick Leave 0.130 0.143 0.013 10%
Medical/Hospital 0.288 0.346 0.058 20%
Insurance
Life Insurance 0.126 0.158 0.032 25%
Pension 0.202 0.231 0.029 14%
Total Package $7.996 $8.912 $0.916 11%