Caldwell Cable Company is responsible for providing and maintaining cable services to Lexington County in South Carolina. To reduce expenses and remove the burden of providing insurance and company vehicles, Caldwell Cable hires outside contractors to perform installations and initial connection of cable service. Every three years the cable contract expires and anyone can submit a closed-bid in an attempt to get the contract.

Until recently, P&R Cable, owned by Bob Martin, held the contract. Five years ago, Bob promoted an installer from within the company, named Steve Seiler, to run the business. Since then, Steve has taken on full responsibilities at P&R. On March 15, the contract came up for bid again. Over-burdened by the additional responsibilities and displeased with Bob's unwillingness to share in the profits of P&R, Steve decided to submit a closed bid under the company name "Connect Cable Contractors." Connect Cable underbid P&R by 2% (This figure was discovered later when all the bids became public record after the contract was awarded). This, coupled with Caldwell Cable's preference for working with Steve, caused Caldwell to award the contract to Connect Cable.

Steve now faced several new obstacles. In the course of complying with industry regulations, Steve found that Bob's treatment of worker's compensation was not in compliance with IRS regulations. Under the previous contract, Bob had passed on worker's compensation premiums to his three sub-contractors by deducting 12% from their gross weekly paycheck. By law, Bob should have paid a fixed amount of approximately $6,000 a year. This amount is the responsibility of P&R, not of each sub-contractor.

Steve now has to pay the $6,000 at the beginning of the year and cannot pass on the charges to his sub-contractors. Each sub-contractor is paid on a per job basis and Steve is given an override on each job. Exhibit 1 lists the various jobs that can be performed and the amount both Steve and his sub-contractors earned under the previous contract.

With the removal of the 12% charge, the current amounts that are paid to sub-contractors per job are too high. Therefore, Steve must decide on a new level of prices to pay each person per job. His goal is to pay the sub-contractors more, in real terms, but less in nominal terms. For example, if Steve reduces the pay on a job by exactly 12%, this would be a decrease of 12% in nominal terms, but no change in pay in real terms because the 12% decrease is offset by the sub-contractors not having to pay 12% for worker's compensation. Steve would prefer to give them a raise of between 7%-8%, in real terms.

Furthermore, Bob's old prices are not commensurate with the level of difficulty each job entails. For example, "replacing a drop" is much easier than completely installing cable in a house for the first time, yet both jobs pay the same amount. This disparity in prices relative to the amount of time required to complete a job causes low morale and overall dissatisfaction. Steve, therefore, must revamp the pricing structure to reflect the level of time each job requires and include an increase in real pay of approximately 7%-8%.

The previous prices are consistent relative to each other with the following exceptions. First, overhead and underground installations are priced the same as replacing a drop. Because understanding the differences between the three requires a great familiarity with the cable industry, the analysis will be simplified by informing the reader that overhead installations require the most time, followed by underground installations, then finally replacing the drop. For this reason, Steve would like to pay a higher price for overhead installations, a lower price for underground installations, and an even lower price for replacing a drop. These prices should be altered only slightly as all three are still more time consuming than a basic reconnect.

Second, the previous price structure paid the same amount for installing an additional cable outlet whether or not the outlet was already wired (Exhibit 1, lines 3 and 4. Also lines 8a and 8b.). From a sub-contractor's standpoint, installing cable wire for an additional outlet is not worth the small amount of revenue received, whereas activating an existing line is very quick and easy. Since both jobs paid the same amount, many sub-contractors avoided installing unwired outlets. This caused Bob to lose revenue. Steve knew that something had to be done to entice sub-contractors to promote the installation of additional outlets. After deciding on the new prices, Steve wishes to demonstrate to his employees that in real terms, they will be better off.

To show the resulting increases in real income, Steve asked each sub-contractor for a copy of their invoices since the "time window" system was initiated in January of this year. Steve felt that using records prior to January would be misleading since the time windows have caused a permanent decrease in everyone's income. Due to constraints, such as incompletely kept records and Bob's unwillingness to provide official records, Steve was able to gather only five weeks of records for one sub-contractor named Burt. A second sub-contractor, Chris, provided Steve with nineteen weeks of financial records; Steve kept all twenty weeks worth of records on himself. From this data, Steve calculated a weekly average of the number of each job performed by each sub-contractor, including himself. These weekly averages are shown in Exhibit 2.

Put yourself in Steve's position. What are the new prices you will pay to make the amount of time that each job requires commensurate with the amount of money the sub-contractors receive, and at the same time provide the sub-contractors with an increase in real income of approximately 7%-8%? As you perform the analysis and answer the following questions, remember that Steve's employees will surely ask you to explain the assumptions you have made and where the calculations came from. Keep in mind that the purpose of the new pricing structure is to benefit the employees as well as Steve and to allow for a smooth transition in the transfer of the contract from Bob to Steve.

1. Complete the following table. Be sure to reflect both adjustments for the time required to do different jobs and a 7%-8% increase in REAL pay for each sub-contractor.

2. How much did Chris and Burt earn under Bob's old pricing per week?

3. How much more will they earn per week under Steve's new system?

4. How much MORE will EACH sub-contractor earn under the new pricing structure per year?

5. In question 3, you assumed that they will work the same number of each job in each of the 52 weeks throughout the year. How valid of an assumption is this? Is the assumption just as valid for each sub-contractor? Explain.

6. Based on your results from Question 2, can Steve hire another sub-contractor to help cope with the new time windows without cutting into the existing contractor's income too much? Explain.

7. The entire analysis is based on using data that dates back only to January of this year. What are the advantages and disadvantages of using such a period in the case?

8. In addition to the steps suggested in the case, what else can Steve do to increase his chances of renewing the contract three years from now? This may be the most important question in the case!

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