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Understanding Basics of Indirect Rates
NCMA
March 20, 2014
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OVERVIEW
1. Understanding description of indirect costs.
2. Understand bases, pools, rates.3. Understand basics of indirect rate
development from accounting records for final costs.
4. Understand a basic submission format
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Why Need Indirect Rates?
Proposals Final Indirect Rate Submissions Provisional Billing Rates (not same as proposals)
Main Reason: Survival. Recover indirect costs on direct work effort.
One significant reason small business fails? No proper recovery of indirect costs!!!!
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Indirect Rates are Difficult for New Contractors
What are Indirect Rates and Indirect Costs? An indirect cost is any cost not directly identified with a single, final cost objective
(contract), but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost.
In simple terms, indirect costs are those costs not readily identified with a specific contract but incurred for the joint benefit of all contracts.
An indirect cost rate is simply a method for determining fairly and expeditiously the proportion of general (non-direct) expenses that each project will bear. It is the ratio between the total indirect costs and some equitable cost base.
Indirect Costs Ratio
Indirect Cost Pool Cost Base =Indirect Cost Rate %
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What are Indirect Rates and Indirect Costs?
How To Develop To develop a logical and consistent method for allocating indirect
costs:
Start
Develop indirect costs grouped into common pools.
Then Pick a common cost or costs that appear to have a causal relationship to the pool costs. The method for allocating a pool of indirect costs is determined by what caused the costs and/or what benefits from the costs. That is, what is the most likely reason the indirect costs are incurred? What effort do the indirect costs support? The selected driver of the indirect cost pools will be the base. That is also called the benefiting objective.
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Examples of Common Indirect Pools and Allocation Bases
Fringe pool costs / total labor cost base
Overhead costs/ direct labor base
G&A Costs/ total cost input base
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FAR Part 31 Impacts Pools and Bases!!!
“Unallowable cost” means any cost which, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost-reimbursements, or settlements under a Government contract to which it is allocable.
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Unallowable Cost Requirements
All items properly includable in an indirect cost base shall bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs.
For example, when a cost input base is used for the allocation of G&A costs, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.
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What???
Example:Have $100 of unallowable direct labor
(unusual)For discussion, have 10% overhead and 10%
G&A rates (assume direct labor base for everything).
How much do you exclude from bill???
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Unallowable Question
Must exclude $100 of direct labor Exclude $10 of overhead Exclude $10 of G&A
Each indirect base still keeps the $100 of direct labor cost
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G&A Unallowables?
Just remove from the pool. They are not in an allocation base. No adjustment to the base.
Luckily, most small contractors only have G&A unallowables.
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How Does this Work?Starting Point for Cost Pools – Trial Balance(Source NCMA presentation PowerPoint 2010)
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Direct G&A OH Fringe IT SC U/A
Direct Labor w/B&P Labor($10,000) $ 300,000 X
Subcontractor Expense 300,000 X
Direct Materials 250,000 X
Payroll Taxes 30,000 X
Insurance Expense 50,000 X
Sick, Holiday & Vacation Expense 65,000 X
Pension Contribution 25,000 X
IT Support Labor 35,000 X
Overhead Labor 72,500 X
Overhead Travel- Unallowable 5,000 X
Rent Expense (75% G&A) 16,000 X X
G&A Labor 170,000 X
Legal & Professional Fees 10,000 X
G&A Travel Expense 8,000 X
G&A Travel Expense – Unallowable 3,000 X
Total Cost $ 1,339,500
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Fringe Rate Example
13
Pool:
Payroll Taxes $ 30,000
Insurance Expense 50,000
Sick, Holiday & Vacation Expense 65,000
Pension Contribution 25,000
Total Fringe Pool $ 170,000
Base:
Direct Labor/w B&P $ 300,000
IT Support Labor 35,000
Overhead Labor 72,500
G&A Labor 170,000
Total Labor Base $ 577,500
Fringe Rate: 29.44%
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IT Service Center
14
Pool:
IT Support Labor $ 35,000
Fringe on IT Support Labor @ 29.44% 10,303
Total Service Center Pool $ 45,303
Base:
Overhead Personnel 5 Personnel
G&A Personnel 3 Personnel
Total Headcount Base 8
Service Center Rate: $ 5,663
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Overhead Rate
15
Pool: Books Allowable
Overhead Labor $ 72,500 $ 72,500
Overhead Travel- Unallowable (excluded from pool) 5,000 0
Fringe on Overhead Labor @ 29.44% 21,342 21,342
IT Service Center Allocation 28,314 28,314
Rent Expense 4,000 4,000
Total OH Pool $ 131,128 $126,156
Base:
Direct Labor $ 300,000
Fringe on Direct Labor @ 29.44% 88,312
Total OH Base $388,312 $ 388,312
Overhead Rate: 33.77% 32.49%
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G&A Rate
Pool:
G&A Labor
BP Labor
Allowable OH on B&P
Fringe on B&P
$ 170,000
10,000
4,205
2,944
Fringe on G&A Labor @ 29.44% 50,048IT Service Center Allocation 16,989Legal & Professional Fees 10,000 Travel Expense 8,000 G&A Travel Expense – Unallowable (excluded from pool) 0Rent Expense 12,000 Total G&A Pool $ 284,186
Base:
Direct LaborLess BP laborLess BP OH at total rate 33.77%Less Fringe on B&P
$ 300,000
(10,000)(4,371)(2944)
Fringe on Direct Labor @ 29.44% 88,312 Direct Materials 250,000 Subcontractor Expense 300,000 Unallowable OH costs 5,000Overhead Pool (including fringe on OH labor ) 126,126
Total Cost Input Base
Rate
$1,052,123
27%
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Reconciliation$1,052,123 Total Cost Input
284186 G&A
$1,336,309 Subtotal166 BP not in G&A
3000 add unallowable G&A
$1,339,475
$1,339,500
$25 rounding
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Format for Submission(source Health and Human Services)
The Government likes its own formats. Here is a format example from DHHS for provisional billing rates and proposal rates.
Note –This is a format example only. Do not use for allocation method. Follow FAR Part 31. See DCAA Pamphlet “Information for Contractors” for DoD rate formats.
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Schedule A
Lead Schedule
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Schedule B
Indirect Pool
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Schedule C
Fringe Pool
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Schedule D
Bases
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Summary/Questions