Direct Salary + Benefit

Doug Terry, one of the two account supervisors in your group, walks into your office one fine morning and proceeds to tell you that the Chief Marketing Officer for High West Financial Services, one of the five clients in your account group, is questioning the agency’s billing practices. Specifically, the client is questioning the hourly charge out rates for employees working on the account under the agreed contract/services agreement.

 

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As the Group Account Director on the High West business, you – along with the agency’s CFO – handled the contract negotiations with the High West CMO that resulted in the approved contract/services agreement, which contains an Agency Fee Addendum.

 

Per the contract, the client has agreed that the agency will charge on an hourly basis for the time-of-staff on the High West account using a “multiplier” of 2.50 on employee direct salaries to cover direct salaries, benefits, overhead, and includes a provision for a mark-up of 25% (on direct employee costs). The formula for the contractually agreed fully allocated employee cost hourly charge out rate on High West is below:

 

 

Direct Salary + Benefits (20%) + Overhead (Direct Salary x 1.0)  +25% (direct costs)  =  Employee Hourly

1800 Annual Hours                                                             Charge Out Rate

          

 

Doug proceeds to tell you that the agency Account Supervisor (AS) on the High West account regularly plays golf with High West’s Advertising Services Manager, and at some point, inadvertently told her that she makes $72,000 working at the agency.   And while this all seems very innocent at the time, the client files this information away and quietly goes to work. What could possibly go wrong?

 

Using the salary information provided, the Advertising Services Manager computes that if the AS works 40 hours per week, that the AS’s time on the High West Financial account would total 2,080 hours per year. Doing the math using the $72,000 salary information she obtained purely through happenstance from the AS, the High West Advertising Services Manager computes that the ASs charge out rate is $34.61/hour. The Advertising Services Manager goes back and checks the “math” against the charge out rate for the AS position of $100.00/hour as outlined in the Agency Fee Addendum to the contract, and determines the agency is overcharging High West $65.39/hour for the AS’s time on the account.

 

The Advertising Services Manager goes to the High West Chief Marketing Officer with this information, and the CMO immediately calls Doug to set up a meeting the following morning at 9:00 a.m. and wants a “full and transparent review” of the agency’s billing practices and charge out rates for employees on the High West account.

 

 

 

Continue to The Big Question ….

 

HERE’S THE BIG QUESTION

Is the Advertising Service Manager’s assertion regarding the agency’s “over charge” on agency time-of-staff on the High West Financial Services correct?

 

 

YES _____

 

 

NO _____

 

 

The rationale behind your answer:

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