Structuring Indirect Rates

© 2011 | All Rights Reserved | 805 King Farm Boulevard | Suite 300 | Rockville , Maryland 20850 | 301.231.6200 P | 301.231.7630 F | www.aronsonllc.com

Structuring Indirect RatesStructuring Indirect Rates

Presented by: Donna Dominguez & Nicole MitchellJanuary 18, 2011

© 2011 | All Rights Reserved | Aronson LLC | www.aronsonllc.com 2

Donna M. Dominguez – Managing ConsultantDonna M. Dominguez – Managing Consultant

Donna Dominguez joined Aronson LLC in 1999 and is a Managing Consultant in the Government Contracts Services Group. With more than ten years experience working with government contractors, she specializes in the preparation of incurred cost submissions, budgets, business consulting, cost proposals, contract/subcontract administration, contract/subcontract negotiation and assisting clients in the use of Deltek GCS, CostPoint, and QuickBooks software.

Through her work in public accounting as well as positions held directly with private government contractors, she has comprehensive knowledge and understanding of the complexities of accounting for this unique market. Donna earned her Bachelor’s of Science in Accounting from the University Maryland and has completed additional coursework in Contracts Administration.


Nicole M. Mitchell – Director of Financial Nicole M. Mitchell – Director of Financial Compliance Compliance

Nicole M. Mitchell joined Aronson LLC in January 1998 and serves as a Director in the Government Contract Services Group. She specializes in accounting and financial issues impacting government contractors. She has a broad based background in generally accepted accounting principles and cost principles related to government contractors including the Federal Acquisition Regulations and Cost Accounting Standards.

Nicole has been a guest speaker on various financial and government contracting topics for such organizations as the AICPA, MACPA, Deltek Insight Conference, Howard County Chamber of Commerce, Montgomery County Chamber of Commerce, as well as Aronson & Company. She co-authored a Thompson RIA reference manual for controllers “Doing Business with the Federal Government.” She received a Bachelor of Science majoring in accounting from Frostburg State University and a Masters in Business Administration from Mount Saint Mary’s College with a concentration in leadership. She received an award from the state of Maryland for one of the highest scores on the CPA exam and currently holds an active CPA license in the State of Maryland.


WHICH BOX WOULD YOU CHOOSE?WHICH BOX WOULD YOU CHOOSE?

UPS Cardboard Box? or Tiffany’s Blue Box?

© 2011 | All Rights Reserved | Aronson LLC | www.aronsonllc.com

COURSE OBJECTIVECOURSE OBJECTIVE

To provide knowledge in understanding your company’s indirect rate structure:

– Yielding Auditable Rates that Comply with Federal Regulations

– Structuring Indirect Rates

– Competitive Range

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© 2011 | All Rights Reserved | Aronson LLC | www.aronsonllc.com

AGENDAAGENDA

Definitions

Composition of Indirect Pools and Bases

Various Indirect Rate Structures

Wrap Rates

Q & A

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DEFINITIONSDEFINITIONS


Direct Cost - A cost that can be identified with a final cost objective (FAR Part 31.202)

Indirect Cost - A cost that is not directly identified with a single, final cost objective but identified with two or more final cost objectives or as an intermediate cost objective (FAR Part 31.203)

• Costs are arranged into logical and homogeneous pools • Amounts are allocated based on the relationship of the expense to the

segment

Allocate - To assign or charge one or more cost objectives with an item of cost, or a group of items of cost on a causal/beneficial relationship

Service Center - Intermediate pools set up to collect costs that are attributable to multiple cost objectives.



Indirect Cost Pool - A group of homogeneous costs that support multiple cost objectives (numerator)

Indirect Cost Base - The factor used to allocate the indirect costs (denominator)

Indirect Cost Rate - the ratio between the total allowable indirect costs and benefiting direct base

Indirect Cost Pool = Indirect Cost Rate** Indirect Cost Base

**An indirect cost rate percentage is calculated by dividing he pool by the base



COMPOSITION OF INDIRECT POOLS AND BASESCOMPOSITION OF INDIRECT POOLS AND BASES


FRINGE FRINGE

Fringe pool is composed of statutory payroll taxes and discretionary benefits typically found in the employee handbook. Fringe base is commonly computed as a percentage of all labor both direct and indirect.


OVERHEADOVERHEAD

Overhead pool is composed of costs that can be identified in support one or more final cost objectives. The most common base of the overhead pool is direct labor, B&P labor, and related fringe.


SUBCONTRACT & MATERIAL HANDLINGSUBCONTRACT & MATERIAL HANDLING

Subcontract & Material Handling pool is composed of costs that support the award and administration of subcontracts and purchase orders. The most common base of the subcontract & material handling pool is subcontract labor, subcontractor travel & ODCs, and materials.

Typical costs– Subcontracts labor– Accounts Payable for Subcontractors– Facilities/IT Service Center Allocation– Travel


GENERAL AND ADMINISTRATIVE GENERAL AND ADMINISTRATIVE

G&A pool is composed of indirect expenses that cannot be easily attributed to any specific contract objective but are for the general benefit of the company as a whole. There are two types of G&A base total costs input or value added (the most common value added G&A base is over total costs before B&P/IR&D and SM&H base) .


SERVICE CENTERSSERVICE CENTERS

Service Centers or intermediate pools are set up to collect costs that are attributable to multiple cost objectives in order that they may be fairly and equitably allocated in a causal/benefit relationship.

Most common: Facilities and IT/Communication Reasonable basis allocation methods: Square Footage, Labor Hours, Headcount, or Labor DollarsTypical costs in a facility service center

– Rent– Supplies– Property taxes– Depreciation


VARIOUS INDIRECT RATE STRUCTURESVARIOUS INDIRECT RATE STRUCTURES


WHAT IS YOUR INDIRECT RATE WHAT IS YOUR INDIRECT RATE STRUCTURE ?STRUCTURE ? Single Rate Structure

– G&A rate only

Two Tier Rate Structure – Overhead (one or more) and G&A

Three Tier Rate Structure– Fringe– Overhead (one or more)– G&A


WRAP RATESWRAP RATES


WRAP RATEWRAP RATE Understand your wrap rate, especially for

small companies, can be the difference of recovering all your costs and making a profit or losing your shirt.

Realize your customers and industry helps to give a competitive edge

Be aware of your size status– 8(a), small business, sole source,– Large business, out grown NAICS codes, full & open

Prepare a good budget and monitor your actuals Know your Competitive Range (before fee)

1.5 ---------------- 1.8 ----------------- 2.1(Average for Small to Mid Size Service Related Government Contractor)


HOW TO APPLY WRAP RATEHOW TO APPLY WRAP RATESample WRAP rate calculation:

3 Tier Structure – Fringe 28%, OH 41%, G&A 12%

1.00 Fringe 28.00% 0.28

Overhead 41.00% 0.52 G&A 12.00% 0.22

2.02 2.18

WRAP RATEFee 8%

Annual Salary

Hourly Pay

Loaded Bill Rate

75,000.00$ 36.06$ 78.61$


Q & AQ & A


Contact InformationContact Information

Donna Dominguez (301) 222-8232 [email protected]

Nicole Mitchell (301) 222-8231 [email protected]

Documents

Structuring Indirect Rates