HomeMy WebLinkAboutAgenda Report - November 20, 1996 (76)AGENDA TITLE: Contract for Development of Cost Allocation Plan
MEETING DATE: November 20, 1996
SUBMITTED BY: City Manager
RECOMMENDED ACTION: That the City Council approve the preparation and execution of a contract with
David M. Griffith and Associates for the preparation of a cost allocation plan for
the City of Lodi.
BACKGROUND INFORMATION: In the course of work relating to the conversion of our transit operation, it
became clear that cost data relating to the equipment maintenance function
was less precise than it should be. Alan Smith, the CPA assigned by David M.
Griffith and Associates to provide cost analysis for the project, made appropriate adjustments in costs to the extent
that time was available, but it was evident that additional work would be necessary before we would have totally
reliable cost data. We discussed the conduct of such a project with DMG, as well as six other firms that are prominent
in the field of cost analysis, cost accounting and cost allocation (Ralph Andersen and Associates, David Wellhouse
and Associates, Ernst and Young, Price Waterhouse, Management Services Institute, and KPMG Peat Marwick) with
both a narrow scope (equipment maintenance function only) and broad scope (city-wide). DMG, which is the
recognized leader in cost allocation studies, offered two approaches to the narrow scope, with cost factors of $3,975
and $3,140 and an unusually attractive cost of $10,000 for the comprehensive study. Such studies as the latter
typically cost $35,000 to $40,000 (and, indeed, the study which DMG prepared for Lodi in 1991 cost $36,793). No
doubt the proposed cost is as low as it is because the contemplated study would have some aspects of an update,
plus the fact that DMG knows the City of Lodi well. The other firms offering proposals place their costs variously at
$14,480, $20,000, $40,500 and $65,000 to $75,000 for the comprehensive study and $5,000, $6,750, $8,880 and
$15,000 to $20,000 for the equipment maintenance study only. One firm felt that it would be difficult if not impossible
for them (using their methodology) to study the shop function only, as it would still be necessary to allocate all
overhead costs. Another firm's proposal assumes that Lodi would do much of the cost data collection.
Why is it important to conduct such a study? First of all, it is simply good business for us to know, with reasonable
precision, what it costs to fund the broad range of services provided by the City. In the transit context, it was important
to have reliable cost measures in order to compare City costs with those of the private sector. Second, it is
advantageous to the City to be able to transfer appropriate levels of revenue to the General Fund, so long as the
accuracy of the figures is demonstrable. And third, the federal government requires that we be able to demonstrate
the validity of costs in compliance with OMB A-87, and as our share of federal funding has risen over recent years, so
has the need for sound cost data.
Updating of the 1991 study is therefore timely and appropriate, and the attractiveness of the proposal from DMG for
the comprehensive study is basis enough for us to recommend such a study. DMG estimates that the project could be
completed by early February, 1997, or possibly a bit earlier, in time for use in the next budget cycle. Although DMG's
proposal originally contemplated that the work would be done by their specialist in city studies, Richard Pearl later
offered to do it personally, in concert with Alan Smith. This represents an additional advantage to the City.
APPROVED:
H. Dixon Flynn -- City Manager
Contract for Development of Cost Allocation Plan
November 20, 1996
FISCAL CONSIDERATIONS: Because there is no specific budgetary provision for this
project, we respectfully recommend that necessary funds
be appropriated from the Contingency Reserve.
Respectfully s itted,
/H. 4Uio Flynn
City Manager
Prepared by Robert Christofferson
Interim Deputy City Manager
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