Costing Out Contract Proposals

Spreadsheet programs such as excel are very helpful in costing out contract proposals. However, they pose their own challenges if the wrong information or formula is entered into the spreadsheet. Many union negotiators are perfectly comfortable using a pencil, notepad and calculator. The important thing is to find a method that works for you. Understand the reasoning behind your calculations and always double-check your work.

The costing out exercises that follow are based on bargaining between one union and one employer in bargaining an enterprise-level collective agreement. You will need to adjust your calculations if you are working with more than one employer or an industry group. 

Some of the exercises may not be relevant to informal workers who, rather than negotiating for a specific wage increase or paid time off, are negotiating for improved access to materials or selling locations. You will need to decide which of the exercises apply to your situation or whether you need to create your own costing out exercises.

You will practice the exercises using your own contract negotiations as an example. You will have an opportunity to accomplish the following:

• Research the cost of living and a living wage
• Calculate the weighted average wage rate (WABR)
• Costing wages over the years
• Cost out benefits such as healthcare, pension contributions, holidays, vacation, paid time off and overtime
• Cost out the total baseline compensation
• Cost out a tentative agreement
• Calculate a roll-up factor for a benefit that increases as wages increase
• Cost out a benefit, such as shift differential, that only applies to a fraction of the workers
• Research the cost of employer payroll taxes
   

Acknowledgements

Adapted from “A Guide to Costing Labor Contracts”, International Brotherhood of Teamsters, Training and Development Department.

The cost of living is an important factor to consider when costing out a contract. The union will usually strive to beat the cost of living and provide a living wage to workers. 

Most workplaces will have a number of different job classifications earning different rates, and within these different job classifications there may be different wage rates.

Instead of calculating out proposals based on each classification and wage rate, it is often helpful to calculate the Weighted Average Base Rate (WABR). Consider the table below showing the different classifications and wage rates for the employees of XYZ, Inc.:
 

In this example, XYZ, Inc. employs 120 employees in four separate wage classifications with each classification earning a different rate. Figuring out the weighted average base rate will make calculating your proposals and the employer’s proposals much easier.

To calculate the WABR, multiply the number of each member in each classification by their wage rate. In the A-I classification, multiply the 25 members by their hourly rate of $15.25 to reach a total hourly rate for the A-I classification of $381.25. Do this same calculation for the remaining classifications and add the total hourly rates together for all of the classifications.

This total equals $2,010, which when divided by the total number of members (120) will equal your WABR of $16.75. In this example, we assume that the employees work 40 hours a week during the 52 weeks of the year for a total of 2,080 hours worked. To figure the total baseline wages for this bargaining unit, we multiply our WABR ($16.75) by the total number of employees (120), by the total hours worked (2,080) and arrive at $4,180,800.

Now that we have our WABR, let’s look at some wage offers you will typically see at the bargaining table.

This section provides the formula to go through the math of creating a wage proposal over a period of years.  

A good negotiator will instinctively try to get as much as possible in wage increases as soon as possible.

Assume that the employer is offering a 9% wage increase over the course of a three-year contract.

• Would it be better to front-load the 9% by moving the first year’s increase to 5% and putting 2% in each of the next two years? 
• What if we spread the 9% evenly by increasing wages 3% in each year of the contract?
• Lastly, would it be better to back-load the contract by putting 2% in the first two years of the contract and 5% in the last?

Let’s calculate each of these proposals to see which is best:

First, let’s look at the formula for our front-loaded proposal:
 

Using the WABR from our prior example, we multiply the WABR of $16.75 by 5% to obtain our new WABR of $17.59 per hour. Multiplying the new WABR by the amount of employees and the total number of hours worked brings the total cost of the wages in the first year to $4,390,464. This is an increase of $209,664 for the 5% wage increase. Using the same formula, we can calculate the remaining two years of the front-loaded proposal. After this is done, we can add all of the contract years of wage increase and arrive at a total of $13,435,968 for our front-loaded proposal.

Next, let’s look at the formula for our even distribution proposal:
 

Finally, let’s look at the formula for our back-loaded proposal:
 

In all of these examples, the WABR ended up at $18.30 in the final year of the contract because all of the wage increases totaled 9%. However, as you can clearly see, front-loading a contract will bring more value to your members because it puts a larger wage increase into the first year and allows the subsequent year’s increases to compound out at a higher rate.

To get a true cost of healthcare benefits, you must request the true cost of healthcare premiums and the number of members in each classification covered (single, married, family, etc.). Consider this table showing the current costs of healthcare at XYZ, Inc.:

In this example, to get a weighted average for the cost of health care you can divide the total annual cost ($2,944,380) by the total number of employees (120) by the amount of total hours in a year (2,080).

The hourly weighted average for health care is $11.80

Pension contributions

XYZ, Inc. currently contributes $400 per month into the union’s pension fund. On an annual basis the employer contributes $576,000. You can figure out the hourly amount for pension contributions by dividing the annual contribution ($576,000) by the amount of employees (120) by the total hours worked (2,080).

The 2,080 hours worked a year is based on 40 hours worked multiplied by 52 weeks.

The hourly cost of pension contributions is $2.31.
 

Holidays

Currently, the members at XYZ, Inc. are entitled to 10 paid holidays. The total annual cost of paid holidays can be determined by multiplying the number of holidays (10) by the number of hours paid for each day (8) by the number of members (120) by the WABR (16.75). The total cost for paid holidays is $160,800.
 

Vacation

Vacations should be calculated using the same process as the weighted average base rate for wages.

The number of members earning vacation at different levels should be multiplied together to show the total number of weeks for each level of vacation. After adding all of the weeks of vacation earned at each level, you can divide this number by the total number of members. This will yield the average number of weeks earned for each employee. This makes it easier to calculate the costs of vacation leave as you figure out the total compensation in each year of the proposed contract.

In our current example, the 120 members of XYZ, Inc. earn a total of 330 weeks of vacation. When we divide the 330 weeks of vacation by the 120 total members, we arrive at an average of 2.75 weeks of vacation per member.
 

Paid time off

Paid time off could be calculated separately if your contract separates sick time and personal time. However, all of the time could be added together into one category.

The members at XYZ, Inc., are entitled to 9 paid days off. The total cost for all paid time off can be determined by multiplying the number of paid days off (9) by the number of paid hours for each day (8), by the number of members (120), by the WABR (16.75).

The total cost for paid days off is $144,720.
 

Overtime

Depending on your situation, you may want to calculate the cost of overtime compensation. If workers earn overtime, you should send the employer an

information request asking for the amount of overtime hours worked by the members.

You could determine the amount of overtime earned by your members by multiplying the total number of overtime hours worked by the overtime rate ($16.75 x 1.5).
 

Some employers will not factor in overtime and will base cost estimates on a 40-hour basis, especially if the overtime is not guaranteed. You will need to decide if you want to add overtime into your cost estimates.

Our examples below do not include overtime costs and are based on a 40-hour workweek.
 

Now that we have calculated each cost for wages and fringe benefits, we need to add together the annual costs of wages, healthcare, and pension so our baseline compensation costs can then later be compared to the union’s and the employer’s proposals.
 

Please note that the costs associated with vacation, holidays and paid time off are not added to the annual baseline costs since we used the standard calculation of 2,080 hours per year for the wage calculation.  The 2,080 hours worked a year is based on 40 hours worked multiplied by 52 weeks.

Alternatively, you could calculate the cost of actual hours worked, by subtracting the amount of vacation, holiday and paid time off from the amount of wages.

After extensive negotiations, the Union and XZY, Inc. have reached a tentative agreement that provides for the following modifications to the current contract:

Wages

The tentative agreement calls for a 9% wage increase over the three years in the following incremental steps: 5% in the first year, 2% in the second year, and 2% in the third year.
 

Vacation

The Union was seeking an increase in vacation leave to five weeks for members with 25 years or more of service. Although the members wanted this increase, it was not something the employer was willing to accept. In the end, the negotiating committee felt it was better to put the money elsewhere. Even though the union did not achieve an increase in the amount of vacation earned, the cost of vacation will still increase based on the wage increase listed above.
 

Healthcare

In this example, during negotiations the union was able to make

small adjustments to the healthcare plan design to provide significant savings

to the employer. The new rates are roughly five per cent lower than the employer’s current costs. Healthcare costs were contained for the next two years at five per cent increases in each year, which further stabilised the employer’s rise in health care rates.

If the healthcare benefit provider cannot provide rates in the next few years, you should ask for a premium rate history to show the average rate increases for the plan. With this information, you can make reasonable assumptions about the cost of healthcare increases.

The new rates for healthcare coverage are listed below, with the increases in the second and third years of the contract listed as well. Note also the initial savings in the first year of $147,219, which is equal to $0.59 per hour, per employee.
 

Holidays

The union negotiated for an additional paid holiday, and was successful in obtaining the extra paid holiday. The cost of the holiday is listed below. Since the members are paid eight hours for each paid day, you would multiply eight hours by the new hourly rate of $17.59 by the number of members in the bargaining unit (120). The total cost to the employer for one extra paid day is $16,886.40 in the first year. The total hourly cost per member can be found by multiplying eight hours of pay by the WABR of $17.59 per hour divided by the total hours worked in a year (2,080). This amounts to a cost of $0.067 cents per hour, rounded up to $0.07.
 

The total annual cost for all paid holidays is represented in the following chart.  In year 1 you multiply the WABR ($17.59) by the number of members in the bargaining unit (120), by the total hours paid for a holiday (8), by the number of total paid Holidays (11). Total cost for all paid holidays in the first year of the new contract is $185,750.40.
 

Paid time off

The union was again successful in negotiating an additional day of paid time off and increased the total allotment of paid days off from nine to ten. The new costs for the extra paid day can be found by multiplying the WABR ($17.59) by the number of members in the bargaining unit (120), by the total hours paid for a paid day off (8), by the number of total paid days off (10). Total cost

for all paid days off in the first year of the new contract is $168,864.00. The additional costs for the next two years of the contract can be found in the chart below.
 

Pension

The union came to a tentative agreement with the employer on an increase of fifty dollars per month per member in the first year of the contract and maintains that amount throughout the contract. This raises the total monthly contribution to $450 per member per month. To figure out the hourly rate of the monthly contribution you would multiply the monthly contribution ($450) by number of months in a year (12), and divide this number ($5400) by the total number of hours worked in a year (2,080). The total cost per hour per employee of the pension contribution is $2.60. The total annual cost of the pension contribution can be determined by multiplying the monthly contribution ($450) by the total number of members, by the number of months in a year (12). The total annual cost of the pension contribution is $648,000 for each year of the contract.
 

Total cost of the tentative agreement

Just as we did for the baseline costs, we can now add up the proposals in each of the three years to see what the cost of the entire tentative agreement is.

When adding the proposals together, something should stand out. While the union negotiated a five per cent wage increase in the first year, with additional holidays and paid days off, and an increase in the employer’s pension contribution, the total percentage increase is only 1.75%. How can this be?

If you look back through the union’s proposal, when the union provided significant savings to the employer, while leaving those savings on the table. This illustrates the importance of costing out a contract. If a negotiator and/or the bargaining committee do not understand the costs and implications of each proposal, there will be negative consequences at the negotiating table.
 

Roll-ups are benefits that increase as wages increase

In the spreadsheet above, some of the benefits increased as the hourly wage increased throughout the contract. These benefits not only increase when you add additional days off, but also when wages that are tied to the benefits increase. In our example, these fringe benefits are vacation leave, holiday pay and paid time off payments. These benefits that increase as the hourly wage increases are considered “roll-up” or “creep” costs.

Note that the pension increase in this example is not included, as it is a flat amount that is not tied to wages. A pension contribution that is represented by a percentage of the hourly rate would be counted in the “roll-up” factor. The

same would be true for a shift differential. If the shift differential is a flat rate, it will not be counted in the roll-up calculation, but if the shift differential is paid out as a percentage of the hourly rate, it will be included in the roll-up calculation.

To figure out the roll-up factor, you would calculate the hourly rate of the benefits that “roll up”. Once you have the total hourly rate for all of the roll-up benefits, you divide that number by the weighted average base rate (WABR). The roll-up factor is then a percentage. In our example, the hourly rates for these benefits are shown on the following chart:
 

In our example, the total hourly rate for vacation leave, PTO and holiday pay is $2.11. Dividing this number by the WABR of $16.75, one sees that the roll-up costs are 13% of the WABR.

In other words, for every dollar increase you receive in hourly wages, the costs of roll-up benefits increase 13%, so a $1 increase in wages will actually cost the employer $1.13.

In addition to the examples above there are a few other calculations you may want to figure into your proposal, as these do increase an employer’s costs.

General Formula: Figure the cents per hour cost of benefits as though all of the membership were to receive it. Multiply the above figure by the per cent of employees that do receive this benefit.
 

Sometimes it is useful to know the cost that the employer will pay in taxes, even though this is not money that workers will receive. For example, if you might be negotiating the cost savings to the employer for a partial shutdown of a section of the operations and want to know their total cost of payroll savings, as you want to argue that those savings should be used elsewhere.

The percentage of payroll due in taxes, for example .02 or 2% of total payroll, means that a $1.00 wage increase actually costs an additional $.02 cents if the contribution rate is 2%.