INDUSTRY SYNOPSIS: NAICS 561612 SECURITY GUARDS AND PATROL SERVICES

INDUSTRY SYNOPSIS: NAICS 561612 SECURITY GUARDS AND PATROL SERVICES 1. SCOPE OF SYNOPSIS A. INDUSTRY DEFINITION The 2002 NAICS manual defines NAICS 561612 Security Guards and Patrol Services as establishments primarily engaged in providing guard and patrol services, such as bodyguard, guard dog, and parking security services. This matches the definition found in the NAICS 1997 manual. Included in NAICS 561612 are establishments that primarily engage in: Body guard services Property protection services (except Guard dog services armored car, security systems) Guard services Protection services (except armored car, Parking security services security systems, personal or property) Patrol services, security Protective guard services Personal protection services (except Security guard services security systems services) Security patrol services Excluded from NAICS 561612 are establishments that primarily engage in: Investigation services (detective agencies, investigators, etc.) Armored car services Security systems services (alarm system monitoring, fire alarm monitoring, etc.) Also excluded are security guard and patrol services that are performed in-house (referred to as proprietary) by establishments classified in other industries. For example, colleges and universities that provide their own security and patrol services are not included in NAICS 561612. Primary Output The primary services for this industry include: Prevention and/or detection of unauthorized entry or activity Prevention and/or detection of fire, theft, and losses Control and regulation of traffic, either vehicular or pedestrian Protection of individuals from bodily harm Enforcement of rules, regulations, and policies related to asset protection Source: Private Security Trends 1970-2000, Hallcrest Report II Other receipts could be considerable for this industry for the larger companies that do investigative, consulting, or other services that are not primary to this industry. 04/14/08 11:10 AM 1 NAICS 561612

Unit of Measure In most cases establishments in this industry provide services as stipulated in a written contract. Therefore, in most cases we will be pricing a contract. The contract stipulates all the legally required elements such as payment, indemnification, etc. But, it also includes the service related details (e.g. security officer benefits, security officer training requirements, and post orders). When either large security companies or large clients are involved, a contract will almost always be used. All of my contacts at large security companies said that virtually all of their business involves contracts. However, the smaller security company s services will most likely involve a contract as well. A contact at a small security company described contracts as being used very loosely and that some would fit on a napkin. What he described was a situation that allows for a great deal of flexibility (to change the service without amending the contract), but offers some protection to his company. Depending on the details of the contract (e.g. level of training required for security officers, security officer benefits, supervision, uniforms, equipment, etc.) the establishment calculates a bill rate. This bill rate can be a single rate that includes all services detailed in the contract or there may be multiple bill rates that apply for different types of service within the contract. In either case, the bill rate(s) represent the entire contract. Thus, the unit of measure will be the contract in most cases. It could also be per hour, per day, per week, or per project. For body guard services, the unit of measure will usually be per contract or per project. B. CONTEXTUAL OVERVIEW The relative importance of NAICS 561612 Security guards and patrol services as compared to the 2-, 3-, and 4-digit levels is illustrated in the tables below. Receipts as a % of 56 Receipts as a % of 561 Receipts as a % of 5616 Establishments Employment Receipts ($000) 56 276,393 7,347,366 295,936,350 X X X 561 260,025 7,066,658 256,590,745 86.7% X X 5616 21,494 682,891 20,444,077 6.9% 8.0% X 561612 6,644 476,995 9,132,633 3.1% 3.6% 44.7% Source: U.S. Census Bureau, 1997 Economic Census, excluding non-employer statistics There are very few standardized regulations for this industry. Potential firms do not face any extraordinary barriers for entry and exit within this industry, as there is very little industry regulation. There has been considerable merger activity in this industry. With the increased importance being placed on security, this industry is expected to continue to grow into the foreseeable future. This industry does not face any direct competition from other industries, however, proprietary security, if included as part of this industry, would account for anywhere from 10 to 30 percent of the industry. Proprietary security includes the methods instituted, equipment owned, and personnel employed by an organization for the exclusive protection of its assets and personnel. Whereas contract security (NAICS 561612) is provided by a private organization for the protection of assets and personnel belonging to either a business, governmental, community, or individual client. 2

2. INDUSTRY OVERVIEW A. NUMBER OF ESTABLISHMENTS AND COMPANIES The 1997 Economic Census reports 4,938 firms operating 6,644 establishments in NAICS 561612 (Security guards and patrol services). There are 4,655 single unit firms and 283 multiunit firms (operating 1,989 establishments). B. SIZE AND TYPE OF PRODUCTION BY SIZE Services provided are similar for both large and small companies. Both are going to provide protection for assets and personnel. However, the larger companies will tend to handle large clients such as class A office buildings. In general, there are no differences in the services provided based on the size of a company. Prices are also not expected to change based on the size of the company. The industry is very competitive. Thus any one company does not have the ability to change prices at will. The number of establishments is fairly evenly distributed across employment size. However, revenue is highly concentrated toward the larger establishments. See table and graph below. EMPLOYMENT SIZE ESTABLISHMENTS PERCENT OF TOTAL RECEIPTS ($000) PERCENT OF TOTAL 0-4 852 15.63% 96,116 1.09% 5-6 324 5.94% 63,250 0.71% 7-9 367 6.73% 82,115 0.93% 10-14 474 8.70% 140,642 1.59% 15-19 312 5.72% 106,480 1.20% 20-49 1,068 19.60% 674,951 7.63% 50-99 800 14.68% 1,116,437 12.61% 100+ 1,253 22.99% 6,570,761 74.24% Source: U.S. Census Bureau 1997 Economic Census,* excludes establishments not operated during the entire year 3 NACIS 561612

Distribution of Establishments and Receipts Percentage 80% 70% 60% 50% 40% 30% 20% 10% 0% 0-4 5-6 7-9 10-14 15-19 20-49 50-99 100+ Employment Size ESTABLISHMENTS RECEIPTS C. CONCENTRATION AND MAJOR SERVICE PROVIDERS The following table shows concentration ratios for NAICS 561612. The industry is not highly concentrated. The top 4 companies account for 28.3 percent of the total revenue. According to industry contacts, this industry is highly competitive. Concentration Ratios PERCENT OF TOTAL RECEIPTS Top 4 companies 28.3% Top 8 companies 35.7% Top 20 companies 45.9% Top 50 companies 54.6% Source: U.S. Census Bureau, 1997 Economic Census D. STABILITY OF INDUSTRY This is a growing industry. According to a recent article in the USA Today, there are at least 11,000 security firms nationwide. The article also referred to the private security industry as fast-growing. This is not surprising given the climate that we have been in since the terrorist attacks on the World Trade Center and the Pentagon. The larger firms generate most of the revenue in this industry and they are usually more stable. The smaller firms are the ones that tend to go in and out of business over time. According to the 1997 Economic Census there were 1,194 establishments out of 6,644 that were not operated during the entire year. This represents roughly 18 percent of the total number of establishments. The total receipts for all 6,644 establishments amounted to $9.1 billion; however, the 1,194 establishments that were not operated during the entire year accounted for only $0.3 billion or about 3 percent of revenue. Thus, even though up to one-fifth of the establishments may have gone out of business during the year, they made up only one-thirtieth of the revenue. 4

There are not many regulations that pertain to the security guard industry. About 40 states have some sort of state regulation. Most of this pertains to training requirements. For example, a state may have a minimum number of hours of training or require a background check for security officers. There are no major barriers to entry. 3. SERVICE INFORMATION A. SERVICE DELIVERY PROCESS This industry is dependent on a job/site survey. The security company will need to detail the scope of work, equipment needed, benefits of officers, and any other items that the client may desire. Once the details of the service are known, the security company will determine a billing rate. This rate includes all aspects of the contract. Things such as the security officers training and benefits, uniform type, electronic/communication equipment, transportation needs, and whether or not the officers are armed or unarmed. Each client has different requirements for their given situation. For security guard/patrol, the service is some combination of security officers, transportation, access controls (e.g. proximity cards, swipe cards), monitoring (e.g. closed circuit TV, internet based real-time), etc. Security guard/patrol services are provided on either an ongoing or short-term (e.g. special events, emergencies) basis. Personal protection, executive protection, and bodyguard services all mean the same thing. This service involves security for an individual or group and requires security officers (bodyguards) to be in close proximity to the client. Personal protection is usually performed on a project basis, but can be ongoing as well. According to an industry contact, personal protection services performed on an ongoing basis are usually handled internally (this is referred to as proprietary security) a significant amount of the time. For example, a contact from the upper northwest stated that personal protection as well as security services for Microsoft is all handled internally. Labor costs make up a major part of the input costs. Some industry contacts said that labor made up as much as 70 percent of total costs. B. CUSTOM SERVICES The security guard industry is custom in nature. In general, each job can be considered custom. There is no preset list of services to be performed. Each client has different requirements that the security company will tailor their services to. 5 NACIS 561612

C. SERVICE DESCRIPTORS There are many factors that go into determining billing rates for security services. These include security officer benefits, officer training, uniforms, supervision, type of labor (union vs. nonunion), transportation needs, communication equipment, and other electronic equipment. The security company determines all the needs of the client during the initial job site survey/assessment. Using the information acquired from the assessment, the security company then determines the bill rate(s). D. SEASONALITY Most of the services within this industry are not seasonal. Security is an ongoing need and is usually performed year round. In certain instances there may be some contracts where the client s needs are seasonal. This is not expected to be very prevalent. E. SERVICE SUBSTITUTION Technological advances do not have a major impact for the majority of services in this industry. In cases where electronic equipment is heavily used, technology changes have a bigger impact. However, since this industry relies heavily on labor, technological change has a relatively small impact. 4. MARKET AND TRANSACTION INFORMATION A. INTRA-INDUSTRY SHIPMENTS AND NET OUTPUT It is not common for security companies to subcontract out their work. Net output ratios were unavailable at time of publication. B. PRICE BEHAVIOR This industry is highly competitive. According to industry sources, contracts are won or lost for pennies on the dollar. Market conditions in the area of service will dictate price as opposed to a firm that may have market share in any particular area. Individual firms do not have pricing power. C. TYPES OF PRICES The types of prices expected to be encountered are billing rate, project rate and daily rate. For security guards and patrol services the type of price will be a single bill rate (composite) or multiple bill rates (sometimes referred to as position billing). These will usually be an hourly rate. The bill rate(s) represent the entire contract. According to all of my industry contacts, the bill rate should be obtainable in almost every case. 6

For bodyguard services a project or daily rate will usually apply. D. TYPES OF BUYERS The following table illustrates the breakout of value of shipments by class of client. CLASS PERCENTAGE Individuals 3% Trade, farming, industrial, transportation financial, and other business firms 64% Federal Government 11% State and Local Government 10% Other 12% Source: U.S. Census Bureau, 1997 Economic Census E. DISCOUNTS, SURCHARGES, OR ADJUSTMENTS TO PRICE Discounts and surcharges are not common in this industry. Any considerations would normally be written into the bill rate. F. ADDITIONAL CHARGES Additional charges are not common in this industry. G. SIZE OF PURCHASE Size of purchase is not relevant in this industry. H. CONTRACTS As stated in an earlier section, we will be pricing a contract. In general there will be 3 cases that are encountered for security guard and patrol services. 1. single bill rate applies and is all-inclusive 2. multiple bill rates apply and are all-inclusive 3. single or multiple bill rate(s) apply, but are not all-inclusive some items are carved out In the first two cases (single and multiple bill rates), the bill rate(s) represent the entire contract. In the third case, additional services (often referred to as extras) are handled as separate line items that are billed outside the bill rates that apply. These additional services are usually things such as vehicles, radios or access controls. The following describes each case individually. 7 NACIS 561612

In the first case, a single bill rate applies and it represents the entire contract. This single bill rate is computed using all services within the contract. It includes all details of the contract, like level of officer benefits, insurance, overhead, and extras (e.g. vehicles, radio). In this case we will collect the bill rate as the price. In the second case, multiple bill rates apply and also represent the entire contract. These multiple rates are also computed using all services within the contract, just as in the first case. However, for whatever reason, the client wanted separate bill rates. For example, there may be two bill rates that apply; one for security officers and one for supervisors. In this case we will have to calculate a composite rate using the multiple bill rates and number of hours for each. The Hours Per Week will be used to determine each bill rates weight in order to determine the Calculated Composite Rate. For each Officer Type divide the applicable Hours Per Week by the Total Hours. Then multiply each Rate Per Hour by the applicable Percent of Total Hours that was just calculated. This amount makes up the Portion of Composite Rate for each Rate Per Hour. These numbers are then tallied to come up with the Calculated Composite Rate. There are three examples below. Example 1 Officer type/level Rate per hour # of hours per week % of total hours Rate times % armed $14.33 584 0.4078 $5.84 unarmed $11.04 808 0.5642 $6.23 supervisor $14.33 40 0.0279 $0.40 Total Hours 1,432 Calculated Composite Rate $12.47 Example 2 Officer type/level Rate per hour # of hours per week % of total hours Rate times % armed-uniformed $12.00 100 0.5714 $6.86 unarmed-plain clothes $11.00 75 0.4286 $4.71 Total Hours 175 Calculated Composite Rate $11.57 Example 3 Officer type/level Rate per hour # of hours per week % of total hours Rate times % officer $15.65 304 0.5938 $9.29 shift supervisor $17.88 168 0.3281 $5.87 account manager $42.00 40 0.0781 $3.28 Total Hours 512 Calculated Composite Rate $18.44 In the third case, single or multiple bill rate(s) may apply. However, in this case, certain item(s) are billed separately outside the bill rate(s). The procedure for case 1 or 2 can be followed for calculating the composite rate as necessary. However, the items that are carved out must be added to the adjustments to price section. For example, if an amount for a patrol car is carved out and amounts to say $250 per week this should be recorded in the adjustments to price section. This 8

value then needs to be adjusted so that it has the same unit of measure as the single or multiple bill rate (usually per hour). These carve outs are not expected to be prevalent. In most cases, allinclusive single or multiple bill rate(s) will apply. The contracts are in theory long-term in nature, but most will have a short-term kick out clause. For example, one of the major companies said that their contracts each have a 30-day kick out clause. The contract may stipulate specific reasons for which this clause may be used. This clause provides some protection to both the client and the security company in case either party wants out of the contract. Other companies had varying kick out clause lengths, usually ranging from 30 to 90 days. Even though the contracts may last years, there is room for annual adjustments to the bill rate. In addition, most of my contacts suggested that the bill rate could possible change at other times throughout the year. Both of these instances will provide opportunities for our index to show price change. 5. INDUSTRY INFORMATION AND PROBLEMS A. INDUSTRY INFORMATION AND RELATIONS National Association of Security Companies (NASCO) 1625 Prince Street Alexandria, VA 22314 NASCO is a trade association for security guard companies. ASIS International (ASIS) 1625 Prince Street Alexandria, VA 22314 ASIS is an international organization for professionals responsible for security, including managers and directors of security. B. CURRENTLY AVAILABLE PRICE INFORMATION There are currently no price data available. C. LITIGATION AND OTHER COOPERATION PROBLEMS Some of the industry contacts voiced concern over whether companies in this industry would be willing to provide data to the PPI. One corporate office I contacted respectfully declined to even answer any questions. However, most contacts were very cooperative as far as answering questions. Even so, some of the cooperative contacts also voiced some concern over whether they would be allowed to provide the data to us. 9 NACIS 561612

There is also a great deal of foreign investment in this industry. According to one source, foreign investment was approximately one-fifth to one-third of the industry. This may present participation problems. It is possible that a U.S. subsidiary that is foreign owned will not get permission from their parent company. It is expected that a fair amount of companies listed in the UI file perform other activities (some of which are not primary to this industry) so misclassifieds may be a problem as well. Examples of these services include investigation services, armored car services, security system services, and consulting. My experience has been very positive at branch locations. However, corporate locations were difficult at best. Because prices are set and records are kept at the local/branch offices sampling was done at the frame record level. This should also help alleviate some of the confidentiality and participation issues. However, for units that are part of a national security guard company clearance to reprice may have to be obtained at the corporate headquarters. In order to help gain cooperation I spoke with Bob McCrie, professor and editor of a twice-monthly newsletter, and he added a blurb in his recent newsletter. I have received inquiries as a result. The reaction was very positive. D. SERVICE IDENTIFICATION PROBLEMS In general service identification should be straightforward. The services that are primary to this industry include only security guard and patrol services. As the NAICS definition states, this includes guard services, bodyguard services, and guard dogs. Consulting services, investigations, armored car services, and alarm systems and monitoring are not primary to this industry. Of the companies that were contacted during the industry study process, very few had significant revenue from these secondary services. Only some locations of the larger firms may have significant revenue for other services. Each security company may have a different mix of types of client. However, the underlying service will remain the same (i.e. providing protection of assets and personnel). One company may specialize in class A office buildings where another firm may specialize in providing security for industrial sites. In any case, each service will be represented by a contract and each contract should have bill rate(s). E. CHECKLIST CLARIFICATIONS GROUP 06 MULTIPLE/POSITION BILL RATE CALCULATION This group is to be used when multiple/position billing is being used for a collected contract. However, this table is also to be used whenever a single or composite rate applies, but the number of hours is a mix of officer level/type. For example, a composite (single) bill rate for a particular service is $12.09 per hour for 178 hours per week (138 hours for security officers and 40 hours for supervisor). The $12.09 and 178 hours would be entered in Group 05 COMPOSITE BILL RATE. However, since the 178 hours is not for one type/level of officer, this mix needs to be entered in Group 06 (see table below). 10

Officer type/level Rate per hour # of hours per week Security officers 138 Supervisor 40 When collecting composite (single) bill rates that are calculated by the security guard company, be sure to ask the reporter for this mix and record it under Group 06. F. INDUSTRY SPECIFIC QUESTIONS AND PROCEDURES **Portions of this section are also contained in 4H: Contracts** In general there will be 3 cases that are encountered for security guard and patrol services. 1. single bill rate applies and is all-inclusive 2. multiple bill rates apply and are all-inclusive 3. single or multiple bill rate(s) apply, but are not all-inclusive some items are carved out In the first two cases (single and multiple bill rates), the bill rate(s) represent the entire contract. In the third case, additional services (often referred to as extras) are handled as separate line items that are billed outside the bill rates that apply. These additional services are usually things such as vehicles, radios or access controls. The following describes each case individually. In the first case, a single bill rate applies and it represents the entire contract. This single bill rate is computed using all services within the contract. It includes all details of the contract, like level of officer benefits, insurance, overhead, and extras (e.g. vehicles, radio). In this case we will collect the bill rate as the price. In the second case, multiple bill rates apply and also represent the entire contract. These multiple rates are also computed using all services within the contract, just as in the first case. However, for whatever reason, the client wanted separate bill rates. For example, there may be two bill rates that apply; one for security officers and one for supervisors. In this case we will have to calculate a composite rate using the multiple bill rates and number of hours for each. The Hours Per Week will be used to determine each bill rates weight in order to determine the Calculated Composite Rate. For each Officer Type divide the applicable Hours Per Week by the Total Hours. Then multiply each Rate Per Hour by the applicable Percent of Total Hours that was just calculated. This amount makes up the Portion of Composite Rate for each Rate Per Hour. These numbers are then tallied to come up with the Calculated Composite Rate. There are three examples below. Example 1 Officer type/level Rate per hour # of hours per week % of total hours Rate times % armed $14.33 584 0.4078 $5.84 unarmed $11.04 808 0.5642 $6.23 supervisor $14.33 40 0.0279 $0.40 Total Hours 1,432 Calculated Composite Rate $12.47 11 NACIS 561612

Example 2 Officer type/level Rate per hour # of hours per week % of total hours Rate times % armed-uniformed $12.00 100 0.5714 $6.86 unarmed-plain clothes $11.00 75 0.4286 $4.71 Total Hours 175 Calculated Composite Rate $11.57 Example 3 Officer type/level Rate per hour # of hours per week % of total hours Rate times % officer $15.65 304 0.5938 $9.29 shift supervisor $17.88 168 0.3281 $5.87 account manager $42.00 40 0.0781 $3.28 Total Hours 512 Calculated Composite Rate $18.44 In the third case, single or multiple bill rate(s) may apply. However, in this case, certain item(s) are billed separately outside the bill rate(s). The procedure for case 1 or 2 can be followed for calculating the composite rate as necessary. However, the items that are carved out must be added to the adjustments to price section. For example, if an amount for a patrol car is carved out and amounts to say $250 per week this should be recorded in the adjustments to price section. This value needs to be adjusted so that it has the same unit of measure as the single or multiple bill rate (usually per hour). Continuing with example #3, the correct adjustment would be to take the $250 security car fee and divide it by the total number of hours in the contract (in this case, 512 hours). This leaves an adjustment of.4883 which would be entered in the "factor" column. On the checklist, detail the unbundled service in Other Features. The adjustments screen in the collection system would then contain the following information (for a single service): Adjustment Type Carve out surcharge Amount/Terms $250 per week patrol car (56 hours) Category Reporter Applied Order Operator Factor S N 01 + 0.4883 For those contracts that have more than one bundled service, list the unbundled services in Other Features of the checklist and combine these services into a single adjustment factor. These would take the following form: Unbundled service #1: $250 per week patrol car (56 hours) Unbundled service #2: $20 per week cell phone charge for shift manager (168 hours) The factor for the patrol car would still be $0.4883 and the factor for the cell phone would be $0.0391 ($20/ 512 hours per week). This totals to $0.5274. The adjustments screen in the collection system would then contain the following information (for multiple services): Adjustment Type Carve out surcharge Amount/Terms Category Reporter Applied Order Operator Factor See details in spec above S N 01 + 0.5274 12

These carve outs are not expected to be prevalent - not a single one was found during the presurvey visits. In most cases, all-inclusive single or multiple bill rate(s) will apply. Repricing Instruct the security guard office to adjust the billed wage rates in the specification but not to adjust the hours. In this way, the transaction becomes a hypothetical. Section 5C mentions a newsletter that had a blurb about this industry being introduced into the PPI. Presently, the WO has not been able to obtain a hard copy but we recognize that this could be used as a tool to solicit cooperation. If and when this newsletter is obtained, the WO will make it available to the field. This industry is not eligible for fax repricing since repricing forms will most likely be two pages. 13 NACIS 561612

PUBLICATION GOALS Producer Price Index Revision Publication Title Listing SIC/Cycle/Version 561612A1 PPIR Code PPIR Title Continuation Code 561612 Security guards and patrol services 561612P Primary services 5616121 Security guards and patrol services 561612SM Other receipts 561612M Miscellaneous receipts 561612MM Miscellaneous receipts 561612S Secondary services 561612SS Secondary services 14