Transfer Price

Before you perform labor cross charging, you must establish an internal transfer price. For revenue-producing projects, the transfer price determines how profit is allocated among organizations. For overhead projects, the transfer price determines how costs are allocated among organizations.

Transfer price strategy varies greatly among enterprises. Some enterprises transfer the cost of labor only, while others transfer the cost of labor plus benefits. Enterprises typically develop a transfer price that splits profit between the employee’s organization and the project's organization. Usually the transfer price falls somewhere between the break-even amount (labor plus overhead) and the average revenue multiplier.

For transferring revenue, the transfer price might be:

• Break-even; that is, labor plus overhead.
• The average revenue multiplier for all contracts.
• A negotiated figure, between break-even and the average revenue multiplier.
• Exactly at billing rates.

For transferring overhead, the transfer price might be:

• The enterprise-wide overhead rate.
• Each organization’s established overhead rate.
• Direct personnel expenses only.

For subletting consultant services (where the transfer price represents subletted services cost), the transfer price might be:

• Break-even; that is, labor plus overhead.
• A negotiated figure, between break-even and the average revenue multiplier.