Question that pertains to the scenario below: If a composite labor rate, developed on the basis of the overall mix of work on the entire contract, was used in the original estimate, should the same composite rate be used in pricing the work associated with the change?

In January 20X1, the ABC Company received a contract from the Air Force for 175 electronic devices. The contract was a firm fixed price contract at a unit price of $115,000, and a total price of $20,125,000. The price included a 12% profit. The delivery schedule called for 25 a month commencing in May 20X1, with delivery to be completed by December 20X1.

In July, a change was made by the Air Force in several of the components. At the time of the change the contractor had completed 75 but had not shipped any of the items. Another 50 units were partially completed. The components affected by the change were completed on 40 of the 50 items. Ten of the work-in-process items were not affected by the change. The contractor submitted the following cost proposal.

I. COMPLETED UNITS AFFECTED BY THE CHANGE

Labor Removing changed work New work **Overhead @ 180% Material Manufacturing Cost ***G&A @ 15% Profit @ 12% Total cost of change per unit	90 hours 140 hours 230 hours @ $30.00*	$ 6,900.00 12,420.00 3,250.00 $ 22,570.00 3,385.50 $ 25,955.50 3,114.60 $ 29,070.10
Number of units affected by the change (75 + 40)	115 $3,343,061.50

*Labor estimated in the original contract @ $27.50 per hr.

**Overhead estimated in the original contract @ 110%

***G&A estimated in the original contract @ 6%

II. UNITS ON WHICH CHANGED WORK HAD NOT BEEN PERFORMED

Labor New work Less estimated cost of old work Overhead @ 180% Material Less old material Manufacturing Cost G&A @ 15% Total Cost Profit @ 12% Unit Cost of Change	140 hours *40 hours 100 hours @ $30.00 $3,250.00 2,650.00	$ 3,000.00 5,400.00 600.00 $ 9,000.00 1,350.00 $ 10,350.00 1,242.00 $ 11,592.00
60 units on which none of the work affected by the change had been performed	60 $695,520.00

Total cost of change ($3,343,061.50 + $695,520.00) $4,038,581.50

*This portion of the work had originally been estimated to take 70 hours

Mr. Roger Stinson, who was assigned the responsibility of negotiating the change, requested that an analysis be made of the contractor's proposal. Mr. Richard Foster was assigned to the case by the Cost Analysis Section. His report to Mr. Stinson disclosed the following points of difference.

1. REMOVING CHANGED WORK

Contractor's Proposal 90 hrs @ $30.00

Air Force 60 hrs @ $27.50

Mr. Stinson was of the opinion that the company had overestimated the amount of time required to remove the work affected by the change which had already been performed. His opinion was strengthened by the fact that the contractor estimated the time required to install the work at only 40 hours elsewhere in his proposal. The contractor informed him that there was no relation between the time required to install new work and the cost of removing the old work; that in this case a considerable amount of the changed work involved terminal block locations and wiring which was inaccessible without removing other work already installed.