How much should your cut-off fee be?
Based on the data, I don’t believe some utilities are charging enough for their cut-off fee.
How do you go about setting your cut-off fee? One option is to compare your utility to neighboring utilities and simply follow what they are doing. But is that really the best way to go about it? A better option is to calculate your costs and establish a fair and equitable fee.
This issue unveils a new cut-off fee calculator to help you determine if your cut-off fee is sufficient. But first, let’s look at what goes into calculating a fee…
GFOA best practice regarding fees
Calculate the full cost of providing a service in order to provide a basis for setting the charge or fee.
- Full cost incorporates direct and indirect costs (including operations and maintenance), overhead, and charges for the use of capital facilities. Examples of overhead costs include: payroll processing, accounting services, computer usage, and other central administrative services.
- One useful tool for calculating service costs is Activity Based Costing (ABC). ABC assigns costs to the activities required to deliver a service and can be more accurate than traditional costing methods.
- The associated costs of collection need to be addressed.
Even if your utility isn’t a government entity, this is good advice to follow in setting fees, including your cut-off or reconnect fee.
Activity-based costing for cut-off fees
When determining how much your cut-off fee should be, it’s helpful to analyze the activities required to complete the process. These activities include:
- Preparing the cut-off list
- Delivering final notices (if you use one)
- Disconnecting delinquent accounts
- Collecting payments from cut-off accounts
- Reconnecting accounts
- Dealing with escalated calls from unhappy customers
Included in these activities are the following costs – labor (including fringe benefits), fuel, wear-and-tear and depreciation for vehicles, and consumables (paper, toner, ink, pens, and pencils, etc.)
What is your fringe benefit rate?
An often-overlooked component of the labor cost of any fee is fringe benefits. There are the obvious payroll-related expenses of FICA, Medicare, retirement, and employer-paid health insurance. But that’s not all – don’t forget paid time off.
If you have a full-time employee who earns three weeks of vacation a year, one sick day per month, and eight paid holidays per year, that’s 35 days each year this employee is paid, but doesn’t work. That’s an effective fringe benefit rate of 13.46% (280 non-working hours divided by 2080 annual paid hours).
The U.S. Department of Labor Bureau of Labor Statistics research indicates the fringe benefit rate is 60.51% for state and local government and 42.65% for private industry. If you’re interested in how the BLS arrived at these numbers, please see Table 1 in this press release from September of last year.
Cut-off fee calculator
I’ve developed an online tool, much like the Days of Exposure calculator, to calculate your optimum cut-off fee.
To use the tool, you will need to know the average hourly rates and miles driven (if applicable) for each of the activities enumerated above. You will also need to know the average miles per gallon and price of fuel for your vehicles, your fringe benefit rate, and the cost to mail or place automated calls for final notices.
In addition to the activity-based costs listed above, the tool adds five percent for consumables, much like an auto repair shop adds a percentage to your bill for shop supplies.
To calculate your cut-off fee, please click here.