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1
UNDERSTANDING INDIRECT COSTS
RONALD S. MARTA, CPABUSINESS COUNSELOR
UNIVERSITY OF HOUSTONPROCUREMENT TECHNICAL ASSISTANCE
CENTER
April 11, 2013
2
SOURCES
FEDERAL ACQUISITION REGULATION (FAR)
• Policies and Procedures for acquisition by executive agencies.
CODE OF FEDERAL REGULATIONS (CFR)
• Administrative Law• Based on U.S. Code : Statutes enacted by
Congress. U.S, odeApril 11, 2013
3
FAR
Part 31 - Contract Cost Principles and Procedures
April 11, 2013
4
Costs
Government breaks costs into two basic categories:
Direct
Indirect
April 11, 2013
5
Direct Costs(FAR 31.202)
• Directly connected with producing a product or providing a service.
• Benefit one contract.
April 11, 2013
6
Indirect Costs(FAR 31.203)
• Costs not connected with a particular product or service,
but are needed for business to function.
• Costs that benefit more than one contract.
April 11, 2013
7
Indirect Cost Pools
Payroll Overhead Pool:• Social Security, Medicare, health insurance, etc.
• Costs associated with labor.
General and Administrative Pool:• Expenses that are necessary for the general management and administration of the business.
• Management/support labor, home office supplies, professional fees, rent, utilities, etc.
April 11, 2013
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Cost Bases
Payroll OverheadBase: Productive Labor (direct
and indirect)
General and Administrative (G & A)
Base: Total Cost Input
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Payroll Overhead
G & A
Off Site Overhead
On SiteOverhead
Direct LaborDirect MaterialOther Direct Cost
% of Direct Labor
% of Direct Labor;may be on other costs
% of all other costs (direct costs, payroll o/h, on/off site o/h)
DirectCosts
Indirect Costs
Job 1
Job 2
Job 3
Government Cost Model
April 11, 2013
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OVERHEAD G & AACCOUNT POOL BASE POOL BASE
COST OF SALES (DIRECT ONLY):DIRECT MATERIAL $ 100DIRECT LABOR $1,000 1,000OTHER DIRECT COSTS 300TOTAL COST OF SALES $1,400
PAYROLL OVERHEADSOCIAL SECURITY $ 70MEDICARE 20HEALTH INSURANCE 30VACATION, HOLIDAY &SICK 80TOTAL PAYROLL OVERHEAD $200 $ 200
GENERAL AND ADMINISTRATIVEACCOUNTING $ 20DEPRECIATION 30OFFICE SUPPLIES 20RENT 70TELEPHONE 20TOTAL G & A $160
TOTAL POOL / BASE $200 $1,000 $160 $1,600RATE (%) 20 % 10 %
ABC CompanyIndirect Costs
April 11, 2013
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Contact Information
University of Houston Procurement Technical Assistance Center
2302 Fannin Street, Ste. 200
Houston, TX 77002713-752-8477
http://www.ptac.uh.edu
April 11, 2013