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We Know GovernmentContracts
Who we areLeft Brain Professionals is a boutique accounting firm that
serves government contractors. We specialize in accounting
system design, implementation and audit support.
Our Team
Robert E. Jones Government Contracts & Accounting ExpertCPA, CPCM, NCMA Fellow
• Robert has over 16 years of Department of Defense contract and accounting experience.
• He has successfully managed over $400 million in federal contracts.
Melissa Metzger
• Melissa has successfully developed and instituted compliant and efficient processes that have saved businesses over $1.5 million during the last 5 years.
• She has successfully managed over $100 million in annual federal funds.
Government Accounting & Finance AdvisorMAFM, CPA Candidate
Our Expertise
Accounting
Systems
Audit Support
Cybersecurity
ComplianceTraining
Our Services
Fundamentals of Indirect Rates
Learning Objectives
• List the five basic cost pools
• Describe the composition of
each cost pool
• Identify acceptable allocation
bases and methods
• Execute proper calculation of
indirect rates
• List tips for full cost recovery
Cost Pools
Five Basic Cost Pools
• Direct
• Fringe
• Overhead
• General & Administrative (G&A)
• Unallowable
Cost Pool Composition
Direct (aka Costs of Goods Sold - COGS)
Costs directly attributable to final cost objective (contract, job, project, product, or service)
• Labor• Materials• Travels• ODCs• Subcontractors
Cont…
Cost Pool Composition, Continued…
Fringe
Cost of maintaining W-2 employees
• Employer taxes• Health insurance• Retirement• Paid absences
Cont…
Cost Pool Composition, Continued…
Overhead
Cost of supporting customers, products or services
• General support• Idle time• Training• Manufacturing/service supplies• Facilities
Cont…
Cost Pool Composition, Continued…
General & Administrative (G&A)
Costs of operating the business and costs incurred regardless of number of customers.
• Accounting• Business Development• HR• IT
Cont…
Cost Pool Composition, Continued…
Unallowable
Cost not allowed per terms of the contract or regulations (FAR 31).
Cont…
Cost Pool Composition, Continued…
Other Cost Pools
Join us next month as we explore Advanced Indirect Rates!
Room Poll
Which of the following is not one of the basic cost pools?
A. Overhead
B. Assets
C. Fringe
D. Unallowable
Acceptable Allocation Methods
Acceptable Allocation Methods
Cont…
Direct
Note that direct costs are not allocated, but are assigned to their proper final cost objective (contract, job, project, product, and service).
Acceptable Allocation Methods, Continued…
Cont…
Fringe
Total Labor Dollars – Recommended; most common; most fair with least variances.
Total Labor Hours – Least common; higher risk of over- or under- absorption of costs.
Acceptable Allocation Methods, Continued…
Cont…
Fringe, Continued…
Direct Labor Dollars - Common in some industries such as
Architect/Engineer (A/E).
Direct Labor Hours - Common in some industries.
Acceptable Allocation Methods, Continued…
Cont…
Overhead
Direct Labor Costs - Most common, especially in service or high labor industry.
Direct Labor Hours - Used when total hours for the year can be easily estimated
Direct Material Costs - Useful when material costs significantly outweigh labor costs.
Acceptable Allocation Methods, Continued…
Cont…
Overhead, Continued…
Total Prime Costs (Direct Labor + Direct Materials) -Reflects value added to the materials such as some manufacturing environments.
Units of Production - Useful in high volume production environment.
Machine Hours - Useful in highly automated or heavily machined environments.
Acceptable Allocation Methods, Continued…
Cont…
G&A
Total Cost Input (TCI) - Most common; allocation over most other costs.
Value Added - Less common; used in conjunction with the Material and Subcontract Handling (M&SH) pool we’ll discuss in Advanced Indirect Rates.
Acceptable Allocation Methods
Cont…
Unallowable
Unallowable costs are not allocated, but some (Direct and Overhead) are included in the base of the G&A calculation.
Room Poll
Which of the following is NOT an acceptable allocation method for Overhead?
A. Units of production
B. Direct labor hours
C. Prime costs
D. W-2 employee labor
The Math of Indirect Rates
The Math of Indirect Rates
Pool / Base = Rate
Rates are not inherently high or low. The rate is the rate. Get the correct dollars in the correct pools and bases, then divide. The rate is the rate.
Fringe
Overhead
G&A
Fringe Based on HoursDirect Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Mater ials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fr inge 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Ret irement 5,555$ Applied Fr inge 7,729$ Accounting 11,111$ Char itable Contr ibut ions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fr inge Costs 44,443$ Facilit ies 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fr inge on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fr inge 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fringe Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fr inge on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR
Overhead Based on HoursDirect Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Mater ials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fr inge 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Ret irement 5,555$ Applied Fr inge 7,729$ Accounting 11,111$ Char itable Contr ibut ions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fr inge Costs 44,443$ Facilit ies 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fr inge on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fr inge 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fr inge Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fr inge on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR
G&A With Effect of HoursDirect Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Mater ials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fr inge 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Ret irement 5,555$ Applied Fr inge 7,729$ Accounting 11,111$ Char itable Contr ibut ions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fr inge Costs 44,443$ Facilit ies 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fr inge on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fr inge 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fr inge Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fr inge on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fr inge on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR
LBP Indirect Rate Calculator Tool
https://www.leftbrainpro.com/indirect-rate-calculator/
Room Poll
Fringe is typically allocated over:
A. All labor (including temporary & contractors)
B. Direct labor
C. W-2 employee labor
D. Direct and indirect labor
Full Cost Recovery
Full Cost Recovery
1. Review Rates Regularly (Monthly)
• Actual to budget• Review Variances
Cont…
2. Adjust Budget Quarterly
• Adjust spending to match billing rates.
Full Cost Recovery, Continued…
3. Monitor Over- and Under- Billing
4. Update Billing Rates
• Annually for new budget.
• As needed for significant change in the budget:
• New or lost contracts (direct costs)
• Increased or decreased expenses
In conclusion, higher margins and improved profitability are a direct result of the proper calculation of indirect rates and the maximum recovery of all costs incurred.
Fundamentals of Indirect Rates
Room Poll
How accurate are your indirect rates?
A. Perfect – you won’t find one mistake
B. Good – we check them regularly
C. Horrible – we’re losing money!
D. We’ve never calculated our indirect rates
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Left Brain Professionals Inc.
@LeftBrainPro
@LeftBrainPro
www.LeftBrainPro.com/presentations
Melissa R. MetzgerMAFMmelissa@leftbrainpro.com
Robert E. JonesCPA, CPCM, NCMA Fellow robert@leftbrainpro.com
Let’s connect
Left Brain Professionals Inc.
@LeftBrainPro
@LeftBrainPro
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Developing Your First Cost & Price ProposalTuesday, April 28
9:00 to 10:30 AM EST
Advanced Indirect RatesTuesday, March 241:30 to 3:00 PM EST
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