5 Cost Analysis
COST ANALYSIS: WHAT DOES THIS COST?
Cost analysis is useful for addressing several key questions that managers ask:
- Will the revenue from a new grant opportunity cover the costs of expanding a program?
- Will a program or service benefit from economies of scale? If not, why not?
- How much should we budget for a new staff member? To add a new shift or another group of new staff?
- How much “overhead” or “indirect costs” should we negotiate into a contract with a government?
- What price should we set for a new fee-based service?
- When will we need to add more staff, and how will adding staff affect our cost structure?
- What’s the best way to share costs between departments within an organization? Between organizations? Between units of government?
In February 2016, a federal judge in Albuquerque, NM, approved a $1 billion settlement between the Obama administration and nearly 700 Native American tribes. This settlement ended a decades-long class action lawsuit over how the Bureau of Indian Affairs (BIA) had distributed aid to tribes since the mid-1970s.
This case came about because of some disagreements over how to measure costs. For over 150 years, the BIA was directly responsible for most of the health care, education, economic development, and other core services delivered on Native American reservations. But then, starting in the mid-1970s, it shifted its focus from direct service provision to helping tribes become self-sufficient. Instead of managing services, it redirected its resources toward training, technical assistance, and other efforts to help tribes launch and maintain their own services.
To make that transition, BIA re-classified many of its activities as “contract support costs.” This change was not just semantic. Funding for direct BIA-administered services is part of a regular federal budget appropriation. That appropriation was stable and predictable. By contrast, funding for support costs on federal government contracts is variable and is often subject to renegotiation. Perhaps not surprisingly, BIA spending declined steadily under this new capacity-building model.
Tribes across the US argued that by re-classifying many of BIA’s costs, the federal government gave itself permission to slash BIA’s budget without Congressional approval. The tribes alleged that this simple cost measurement maneuver allowed BIA to operate well outside its authority and inflict substantial harm on Native Americans around the country. BIA argued that the cost reclassification was a standard accounting change that had been happening across the federal government for decades. The case was ultimately settled for far less than the tribes requested. Still, the federal government did agree to re-classify contract support costs as direct service costs, for which federal funding is far more transparent and predictable.
This case illustrates the central point of this chapter. How we define and measure costs matters tremendously. In this in