Review of FMC’s 

User Fee Calculations 

 

OR10-03 

 

Office of Inspector Inspector General General

FEDERAL MARITIME COMMISSION 

May 2010 
FEDERAL MARITIME COMMISSION

800 North Capitol Street, N.W.

Washington, DC 20573 

May 27, 2010

Office of Inspector General 

TO: Ronald D. Murphy 

 Managing Director 

FROM: /Adam R. Trzeciak/ 

 Inspector General 

SUBJECT: User Fee Calculations 

The Office of Inspector General (OIG) initiated a review of various aspects of the Federal 

Maritime Commission’s (FMC) process to establish user fees for agency activities that convey 

special benefits to recipients beyond those accruing to the general public. Guidance for 

establishing such fees is contained in Office of Management and Budget (OMB) Circular A-25, 

User Charges.

The Circular requires user charges to be sufficient to recover the government’s full cost. Full 

cost includes all direct and indirect costs to any part of the federal government of providing a 

good or service. These costs include, but are not limited to, an appropriate share of: (i) direct and 

indirect personnel costs, including salaries and fringe benefits, such as medical insurance and 

retirement; and (ii) physical overhead, consulting and other indirect costs including material and 

supply costs, utilities, insurance, travel and rents or imputed rents on land, buildings or 

equipment. 

The OIG began this review in January 2008. During the initial weeks of the audit, the OIG 

determined that the agency followed a process that incorrectly set its user fees for various 

mission-related services, resulting in user fees that understated the agency’s costs to provide 

these services. The OIG reported the finding to management who then took steps to reexamine 

its calculations in light of our findings. We suspended further audit steps until the agency 

amended its fee-setting calculations. 

The OIG recognizes that capturing all costs associated with providing services would 

substantially increase fees charged to the public. For example, using OIG calculations, the 

agency would assess $222 of overhead for every $100 of labor. By comparison, the 
agency is currently allocating $92 in overhead for every $100 of labor charged. If the agency 

determines that collecting full costs are inconsistent with policy goals or mission objectives (e.g., 

dramatically increasing licensing fees may reduce compliance rates), then the agency should 

consider alternatives to setting its fees to capture costs and seek concurrence from the Office of 

Management and Budget. 

The OIG is recommending that the agency either (i) establish user charges that reflect the full 

cost of the activity provided, as directed in Generally Accepted Accounting Principles and Cost 

Accounting Standards, or (ii) with the approval of the Office of Management and Budget, set 

fees below the full cost if the agency determines that recouping full costs would be a financial 

burden on the industry or the public. 

Discussion of Findings 

The OIG analyzed the methodology behind the fees charged to the public for services. The OIG 

concluded that the fees are set too low to recover full costs of providing the service to the public. 

To impose a user fee on a private party receiving a benefit, the agency must show that: (i) it has 

identified the specific agency activity or activities for which the fee is being assessed; (ii) the 

value of that service is reasonably related to the fee; and (iii) the benefit accrues, at least in part, 

to an identifiable private beneficiary and not merely to the industry as a whole. 

In 2007, Office of Administration (OA) staff chaired the user fee working group, consisting of 

representatives from several agency offices and bureaus with fee-generating responsibilities. 

The working group began meeting in March 2007 to update cost factors that supported the 

agency’s user fees.1

 The cost factors were then provided to the Office of Financial Management 

(OFM) to establish an overhead worksheet from which the new user fees would be calculated. In 

January 2008, the working group presented its findings to the Commission before preparing a 

draft notice of proposed rulemaking to enable the public to comment on the proposed fees. 

The OIG reviewed OMB Circular A-25, User Charges, dated July 8, 2003, as it relates to the 

establishment of user fees and OMB Memorandum M-07-02, Update to Civilian Position Full 

Fringe Benefit Cost Factor, Federal Pay Raise Assumptions, Inflation Factors, and Tax Rates 

used in OMB Circular A-76, “Performance of Commercial Activities,” dated October 31, 2006, 

which requires agencies to use standard cost factors to estimate certain costs of government 

performance. We also reviewed user fee work sheets prepared by staff from fee-generating 

bureaus and offices and staff’s calculation of indirect (i.e., overhead) costs. 

The user fees established are based on direct labor costs plus fringe benefits, multiplied by a 

calculated overhead rate. The OIG did not review staff’s labor-hour estimates for each feegenerating activity to determine whether the estimates were reasonable. We did, however, 

examine the assumptions behind the agency’s overhead rate calculations. We found that the 

 

1 OMB Circular A-25 also calls for a periodic reassessment of costs, with related adjustment of fees, if necessary, 

and the establishment of new fees where none exist.

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agency did not calculate and apply overhead rates in keeping with cost accounting principles.2

 

For example, OFM failed to include all costs in its overhead rate calculations, (e.g., rent and 

utilities) and other support offices (Administrative Law Judges, Office of Equal Employment 

Opportunity and the OIG). 

The cost data provided in this analysis is from FY 2006, which was the most recent available 

cost information when we performed our analysis. The agency has undergone a recent 

reorganization, resulting in some offices being merged and/or renamed with new responsibilities. 

However, the methodology employed would be identical under any organization, and the 

ultimate distribution between charges for direct labor and overhead would not vary by much. 

The OIG is able to advise management on a proper cost accounting system and is willing to 

assist management to update the cost calculations upon management’s request. 

The results of our analysis of the most recent cost calculations prepared by staff in the agency’s 

Office of Budget and Finance (formally OFM) is presented below by cost category. 

Miscalculation of the Fringe Benefit Overhead Rate

Our review of the overhead worksheet prepared by OFM identified a “fringe rate” of 55.12 

percent. This rate incorrectly included leave and holiday costs in the “fringe” calculation. By 

including them, the agency was double counting because leave and holiday costs are already 

included in the base hourly pay rate for federal employees. OFM used guidance from the 

Defense Logistics Agency in developing its “fringe rate.” While the guidance refers to OMB 

Circular A-76, Commercial Activities, the FMC should have used the “fringe rate” provided in 

the circular itself. According to OMB Circular A-76, the full fringe benefit cost factor is 

comprised of four separate elements: (i) insurance and health benefits, (ii) standard civilian 

retirement benefits, (iii) Medicare benefits, and (iv) miscellaneous fringe benefits. OMB 

determined, based on information provided by the Office of Personnel Management, that the 

civilian position full benefit cost factor is 36.45 percent, as of October 31, 2006. This rate is 

almost 19 percent less than the rate used by the FMC. 

Internal Overhead Rate Overstated

When identifying the overhead costs for five bureaus and offices with fee-generating 

responsibilities, OFM calculated an "internal" overhead rate, which represented non-labor related 

costs, such as travel, training and supplies, within the respective cost centers, of 8.08 percent. 

We noted that the OFM calculation did not include rent and select other expenses in its 

calculation. The OIG calculated these costs separately, as discussed below. Excluding rent for 

comparison, our calculated internal overhead rate was 6.54 percent. 

 

2 Office of Financial Management’s direct and indirect cost calculation worksheet is attached at Appendix A. The 

OIG used this worksheet as the basis of our analysis. OIG analysis is presented in Appendix B. 

- 3 - 
Commission General and Administrative Rate Understated

The OFM calculated the Commission’s General and Administrative (G&A) rate by including 

salary and benefit costs for the Offices of the Chairman, Commissioners, General Counsel, 

Administration and Operations. Several other Commission offices, to include the Office of 

Equal Employment Opportunity, the Library, Office of Inspector General and the Office of 

Administrative Law Judges, were erroneously excluded in the FMC’s indirect or “support costs.” 

Notwithstanding the omission of many support functions, OFM incorrectly applied the formula 

for calculating overhead. For example, it divided the salary and benefit costs accumulated for 

the five offices into the total costs of the FMC to arrive at overhead. This calculation is incorrect 

for two reasons. 

First, OFM should have removed these “support costs” from the total agency costs before 

calculating this overhead rate. For example, the agency determined that the salary and benefit 

costs of the Chairman’s office, Commissioner offices, etc., was $5.8 million. It then divided this 

sum by total agency expenses for the year ($20.3 million). This resulted in an OA calculated 

overhead rate of 28.78 percent.3

 Using the agency’s cost data and assumptions, the correct 

calculation would be to first subtract the “support” costs from the total costs ($20.3m - $5.8m = 

$14.5m), then divide $14.5 into the $5.8m. This one modification would increase the overhead 

rate attributed to support offices to 40 percent. 

But this overhead rate (40 percent) is still understated because it does not include rent and similar 

costs for these five “support” offices. In its financial reports, FMC has a cost center titled 

“Overhead.” In the OFM calculations, these costs were part of the agency’s total costs 

($20,294,010), but the costs were not allocated out to agency bureaus and offices as overhead. 

Consequently, we could not determine what portion of the agency’s rent was allocated to any 

direct programs or support offices. To include these costs in the overhead rate, the OIG allocated 

them to all Commission offices based on square footage. This increased Commission G&A costs 

(i.e., those “support offices”) by $1,389,917. Adding this to the Commission G&A costs, and 

dividing it into all other costs of the FMC,4

 provided an overhead rate for Commission G&A of 

70.72 percent, versus an OFM-calculated rate of 28.78 percent. 

It should be noted that OFM considered all the costs in offices of the Chairman, Commissioners, 

General Counsel, Administration and Operations to be overhead. A study of these costs may 

reveal that some of them are program or direct costs, and not overhead. Removing those costs 

would lower the overhead rate. 

Allocating Rent and Other Overhead

As noted above, OFM did not consider rent and similar costs when it identified administrative 

costs for fee-generating (direct program) offices. It therefore understated total costs for these 

offices; in effect, calculating rent overhead to be $0. The OIG allocated rent and similar costs to 

 

3 $5.8m /$20.3m = 28.78 percent

4 Total Cost of Support Offices / Total Agency costs less support costs = $8.4m/$11.9m = 70.72 percent 

- 4 - 
the cost centers of the fee-generating offices. These costs equated to 30.05 percent of the costs 

built up for “fee-generating” offices’ labor and internal overhead. This 30.05 percent would, in 

effect, apply to all programs and costs other than “Commission G&A.” 

Computing the Overhead Rate

Another observation we made that results in understating overhead is that OFM added its 

calculated rates together, rather than applying them, as illustrated below: 

OIG OFM

• Fringe rate 36.45% 55.12% 

• Internal Overhead for five feegenerating offices 6.54% 8.08% 

• Overhead to direct programs for 

rent and misc., costs 30.05% 0% 

• Commission G&A, including rent 

and misc., costs added to five 

overhead cost centers 

70.72% 28.78% 

TOTAL *** 91.98% 

*** Because the rates are multiplied, and not added, the rate is 222.75 percent. See the 

mathematical proof below: 

Proof:

Direct Program Costs, including fringe 

and internal costs 

$9,140,406 

Direct Program overhead costs for rent 

and similar administrative expenses x 30.05% 2,746,740 

Subtotal 11,887,146 

Non-Direct Program Costs, including 

rent and similar administrative expenses x 70.72% 8,406,864 

FMC TOTAL COSTS $20,294,010 

For every $100 of labor for each fee-generating activity, the agency should add $222.75 of 

overhead to arrive at $322.75 totaled burdened costs. This equates to an overhead rate of 222.75 

percent. This can be seen mathematically as follows: 

- 5 - 
- 6 - 

Direct labor services $100.00 

Fringe costs 36.45% 36.45 

Subtotal 136.45 

Internal Overhead/Programs 6.54% 8.92 

Sub-total 145.37 

Overhead for Direct Labor 30.05% 43.68 

Sub-total 189.05 

FMC overhead cost of Commission G&A 70.72% 133.70 

Subtotal 322.75 

TOTAL DIRECT LABOR PLUS OVERHEAD $322.75 

Recommendation 

The OIG recommends that the Office of the Managing Director either (i) establish user charges 

that reflect the full cost of the activity provided, or (ii) with the approval of the Office of 

Management and Budget, set fees below the full cost if the agency determines that recouping full 

costs would be a financial burden on the industry or the public. 

Agency Response 

Management’s comments are attached to the report in their entirety. 

Attachments 
APPENDIX A 

MANAGEMENT DIRECT AND INDIRECT 

COST CALCULATION WORKSHEET
INDIRECT COST CALCULATIONS

(Applied to Direct Cost)

A. Government Overhead Costs -

 Fringe benefits and other wage-related government 

 contributions from OMB Circular A-76:

Leave and Holiday 22.67%

Retirement 23.70%

Workmen's Comp. Awards 1.70%

Health, Life Insurance 5.60%

Medicare 1.45%

---------------------

Total 55.12%

B. Commission General and Administrative -

 Expenses allocated to the office of the Commissioners,

 General Counsel, and Bureau of Administration

 (FY 2006 amounts from 2006 Final Report)

FMC9110000 Chairman 191,517

FMC9111000 Commissioner 1,140,561

FMC9130000 General Counsel 1,505,504

FMC9910000 Office of Administration 2,489,439

FMC9810000 Office of the Operations (Director) 513,953

------------------

Total 5,840,974

Calculation of overhead percentage:

- Commission G & A / Agency Funding = % Overhead

- Total Agency Funding for FY 2006 20,294,010

- Commission G & A 5,840,974

- Overhead Percentage: 28.78%

C Commissions General and Administrative C. Commissions General and Administrative

 Overhead expenses allocated to Office & Bureaus involved in

 fee-generating activities.

 FMC9120000 Secretary 51,391

 FMC9500000 Bureau of Trade Analysis 72,750

 FMC9600000 Bureau of Certification & Licensing 52,464

 FMC9710000 Bureau of Enforcement 40,797

 FMC9800000 Office of Operations (ARs) 25,821

------------------

Total 243,223

Calculation of overhead percentage:

- Overhead Expense / Bureau/Office Funding = % Overhead

- Funding for Bureaus/Office:

 (FY 2006 amounts from FY 2006 Final Report)

 FMC9120000 Secretary 602,374

 FMC9510000 Bureau of Trade Analysis 1,012,038

 FMC9600000 Bureau of Certification & Licensing 614,949

 FMC9710000 Bureau of Enforcement 478,204

 FMC9800000 Office of Operations (ARs) 302,470

------------------

 Total 3,010,035

- Office G & A 243,223

- Overhead Percentage: 8.08%

D. Total Indirect cost Factor (Sum of A through C)

 A. Government Overhead Cost 55.12%

 B. Commission General & Administrative 28.78%

 C. Office General & Administrative 8.08%

------------------

 Total 91.98%
APPENDIX B 

OIG COMPUTATION OF OVERHEAD USING 

FY 2006 EXPENSES 
Office of Inspector General

Direct Program and Overhead Cost Calculations

Direct Program Labor 

Program Total Expenses Sq. Ft. (%) O/H Cost Centers Direct Program Costs Labor/Fringe O

Chairman 391,568 3.84 391,568

Commissioners 1,147,926 8.43 1,147,926Secretary 708,486 708,486 656,967 CADRS 776,720 776,720

Library 253,049 253,049

General Counsel 1,574,369 5.01 1,574,369

ALJ 181,916 181,916

EEO 158,658 1.15 158,658

OIG 461,868 1.49 461,868

BTA 2,463,748 2,463,748 2,294,472 BCL 1,776,766 1,776,766 1,739,774 BOE 1,381,899 1,381,899 1,317,188 Operations 709,302 709,302 599,804 Area Reps 874,820 874,820

Admin 608,057 1.91 608,057

OIT 1,330,982 3.72 1,330,982

OHR 389,924 2.53 389,924

OFM 420,556 2.33 420,556OMS 533,049 3.19 533,049Plug 13,700 13,700Overhead 4,136,657 1,389,917 2,746,740

TOTALS 20,294,020 33.6 8,406,874 11,887,146 6,608,205 G/A O/H Rate 70.72%

O/H alloc. to Programs 2,746,740

Programs less O/H alloc. 9,140,406

O/H for Programs (rent, etc.) 30.05%O/H within Programs (travel, training, supplies) 
Office of Inspector General

Direct Program and Overhead Cost Calculations

Direct Labor $                   100.00

Fringe Rate 36.45%

Fringe Cost $                     36.45

Direct Labor & Fringe $                   136.45

Programs Internal O/H Rate 6.54%

Program Internal O/H Cost $                       8.92

Program labor, fringe and internal O/H $                   145.37

Rent etc., alloc to programs ‐ rate 30.05%

Rent etc., alloc to programs ‐ cost $                     43.68

Programs labor, fringe, internal O/H, and Rent etc., O/H $                   189.05

Support O/H rate on labor, fringe, rent, internal 70.72%

O/H cost on support program labor, fringe, etc. $                   133.70

Total Cost of $100 direct program labor $                   322.76

Rate on $1 of Direct Program Labor 222.76%
 UNITED STATES GOVERNMENT FEDERAL MARITIME COMMISSION 

 Memorandum 

TO : Inspector General DATE: May 25, 2010 

FROM : Managing Director 

SUBJECT : User Fee Report 

This responds to the report of user fee calculations dated March 25, 2010. I believe that a 

re-evaluation of existing user fees should be made. I also recognize there may have been some 

uncertainty and concerns about previous methodology. Accordingly, I have initiated a project to 

determine the full cost of services for which the Commission assesses user fees. Total costs will 

be calculated in accordance with the requirements of OMB Circular A-25 and applicable Federal 

Financial Accounting Standards. Once those costs are determined, a proposed rule will be 

recommended to the Commission, with the goal of issuing a final rule by December 31, 2010. 

 /Ronald D. Murphy/ 

Cc: Director, Office of Budget and Finance