How to figure out what a contract proposal cost

By Michael Freeman | July 14, 2021

In negotiations, the PBA and the governing body proposals won’t be the same. This requires a method to estimate and compare the costs of the 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 the membership.
  • 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 employer’s representative will take the union proposal and cost it out so advance calculations can keep the employer from using its cost figures as a negotiating weapon.

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.

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.

End Loading: Postponing a 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 that improves the welfare of the negotiating 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.)

Total Compensation: For costing purposes, consists of direct wages and fringes.

 

Differences in fringe values

(a) Some fringes have dollar benefits that are directly related to changes in wages (paid vacations and holidays and personal leave, for example).

(b) Other fringes are not tied to the employer’s pay structure; they have negotiated formulas (pensions, healthcare, tuition reimbursements, employer-provided personal safety equipment, uniforms, etc., for example).

(c) Other fringes can be figured either way; a shift differential can be a percentage of a worker’s wage rate or a flat cents-per-hour amount.

There can be a certain amount of anxiety when confronted with the economics of negotiating, but it is really a matter of taking some easy steps after relevant data is obtained. For now, we will focus just on the wage proposal. The arithmetic involved is quick and easy, usually requiring only a spreadsheet and a roster. A simple scattergram can be created and adjusted as long as you know the number of officers that are at each step of the guide on the expiration date of the contract. A more complex scattergram can be used, if necessary, that accounts for anniversary dates and anticipated retirements.

Step EMP 1/1/2020 Total EMP 1/1/21 Total EMP 1/1/22 Total
Acad 6 41000 $246,000   42025 $0   42971 $0
1 1 46000 $46,000 6 47150 $282,900   48211 $0
2 3 51000 $153,000 1 52275 $52,275 6 53451 $320,707
3 4 56000 $224,000 3 57400 $172,200 1 58692 $58,692
4 2 61000 $122,000 4 62525 $250,100 3 63932 $191,795
5 4 66000 $264,000 2 67650 $135,300 4 69172 $276,689
6 3 71000 $213,000 4 72775 $291,100 2 74412 $148,825
7 5 76000 $380,000 3 77900 $233,700 4 79653 $318,611
8 4 81000 $324,000 5 83025 $415,125 3 84893 $254,679
9 4 86000 $344,000 4 88150 $352,600 5 90133 $450,667
10 20 91000 $1,820,000 24 93275 $2,238,600 28 95374 $2,670,463
56   $4,136,000   $4,423,900   $4,691,128
      Raise 2.50% 6.96% Raise 2.25% 6.04%

This scattergram shows a 56-member negotiating unit and the number at each step as of 12/31/2020. This salary proposal requests a 2.5% across-the-board raise effective 1/1/21, and a 2.25% ATB raise on 1/1/22. Step movement occurs for all in the guide, which shows a cost increase of 6.96% for the first year. To calculate the cost of this proposal, divide the 2022 cost by the 2020 base period cost to find the increase in percentage: (4,691,128/4,136,000 = 1.1342) or 13.42%.

The PBA position on the cost of this proposal is that it will actually be considerably less, because every year of the previous contracts some member leaves the unit through retirement or promotion, so the number of members at top pay will not go from 20 to 28 in two years. Several of those senior members will be replaced by Academy and Step 1 salaries, even during this short term. That is called breakage. The employer representatives are aware of the consistent movement of members, so discussion can start with an average year. As negotiations go beyond the expiration of the base period, retirements will occur and the guide distribution can be applied to the scattergram as talks proceed.

It is important to understand what a contract proposal costs so that there can be intelligent discussion among PBA members and across the negotiating table. We will expand on these concepts in great detail at the NJSPBA Collective Bargaining Seminar, August 24–26, at Harrah’s Resort Atlantic City. All members are invited, so contact your State Delegate for details.

Step EMP 1/1/2020 Total EMP 1/1/21 Total EMP 1/1/22 Total
Acad 6 41000 $246,000   42025 $0   42971 $0
1 1 46000 $46,000 6 47150 $282,900   48211 $0
2 3 51000 $153,000 1 52275 $52,275 6 53451 $320,707
3 4 56000 $24,000 3 57400 $172,200 1 58692 $58,692
4 2 61000 $122,000 4 62525 $250,100 3 63932 $191,795
5 4 66000 $264,000 2 67650 $135,300 4 69172 $276,689
6 3 71000 $213,000 4 72775 $291,100 2 74412 $148,825
7 5 76000 $380,000 3 77900 $233,700 4 79653 $318,611
8 4 81000 $324,000 5 83025 $415,125 3 84893 $254,679
9 4 86000 $344,000 4 88150 $352,600 5 90133 $450,667
10 20 91000 $1,820,000 24 93275 $2,238,600 28 95374 $2,670,463
  56   $4,136,000   $4,423,900   $4,691,128
      Raise 2.50% 6.96% Raise 2.25% 6.04%