A number of state and local governments have developed cost
comparison formats to assist officials in presenting a summary of cost
comparison data between in-house and contract service delivery. The City of
Cincinnati, Ohio has developed one of the more comprehensive formats.[31] A
modified version of the City of Cincinnati's cost comparison format appears on
the following page.
While the cost-comparison format is basically self
explanatory, three aspects do warrant special mention: 1) avoidable costs; 2)
performance periods; and 3) the cost-comparison ratio.
A. Avoidable Costs
Only avoidable costs are entered in the various categories
under in-house service delivery costs. The cost-comparison format assumes that
the fully allocated costs of in-house service delivery have already been
determined.
B. Performance Periods
The format provides space to include cost-comparison data
for up to three performance periods. A performance period is one fiscal year,
or a portion thereof if a target service is being considered for contracting out
in the middle of a fiscal year. Several reasons exist for carrying out the cost
comparison over multiple performance periods. For example, the total cost
savings associated with contracting out may not be realized in the initial
performance period due to such factors as large contractor start-up costs for
facilities or equipment and/or significant government one-time conversion
costs. In both instances, these costs should be amortized over multiple
performance periods. Another reason is that short-ten-n cost comparisons (i.e.,
one performance period) may fail to account for possible relevant future changes
in the costs of labor, materials, transportation, etc.[32]
C. The Cost-Comparison Ratio
The cost-comparison ratio (see line 11 of the
cost-comparison format) is the
ratio between the total cost of in-house service delivery
and the total cost of contract service delivery. The purpose of the
cost-comparison ratio is to establish a cost-savings threshold that justifies a
decision to change the mode of service delivery. While theoretically
justifiable on the basis of any cost savings, many government agencies have
adopted the policy that the cost savings should be sufficient to warrant the
organizational upheaval associated with the changeover. The federal government,
the state of Texas, and the City of Cincinnati, Ohio have all established a
threshold level of 10 percent when considering a change from in-house to
contract service delivery.[33]
