Indirect Cost Workshop

Lori L HeathCFO/Contracts Manager

Minerva Engineering(formerly an Independent Consultant for Small Government

Contractors)

Adapted from

Indirect Cost Workshop• What is the Purpose of Rates?• What is a Direct Cost?• What is an Indirect Cost?• What is an Unallowable Cost?• What is an Allocation?

– Pool vs Base– Service Center (Shared Costs/Occupancy)

Indirect Cost Workshop• Rates – Different Methods similar results

– Composite– “Wrap” One rate which includes all indirect elements– Non Composite/Non-Additive (fringe separate bid rate)– Non Composite/Additive (fringe included in OH and

G&A– Subcontracts/Material Handling (sometimes referred to

as “pass through”)

Indirect Cost Workshop

• DCAA Involvement– FPRP = Forward Pricing Rate Package– FPRA = Forward Pricing Rate Agreement– Provisional Billing Rates– Incurred Cost Submissions (ICE)– Accounting System Approvals

• Questions

Income StatementRevenue 207,498 Direct Labor 93,384 Direct Travel 6,000 Direct Consultants - Direct Subcontracts - Direct Materials - Direct ODC 2,000 Total Cost of Goods 101,384 Fringe Expense 30,392 Overhead Expense 31,481 G&A Expense 24,850 IR&D/B&P Expense 527 Total Cost of Operations 87,251 Gross Profit from Operations 18,863 Interest Income (150) Other Income - Interest Expense 3,000 Unallowable Expense 2,000 Total Other 4,850 NET INCOME 14,013Net Profit after Unallowables 7%

Direct Costs = “Base” or Denominator of Rate Computation

Indirect Costs = “Pool” or Numerator of Rate Computation

Unallowable expenses

Total Direct + Indirect Expenses = $188,635

Pool Examples

Holiday Expense

PTO (Vac/Sic/Hol)

Medical Insurance

Dental Insurance

Disability Insurance

Life Insurance

ER Payroll Taxes

Worker's Comp Expense

401(K) Retirement Plan

Bonus Expense

Relocation Expense

Indirect Travel

Education & Seminars

Office Expense/Supplies

Postage/Express Mail

Printing/Stationary

Dues & Subscriptions

Computer Hardware

Computer Software

Computer Supplies

R&M - Equipment

Rent Expense

Utilities

Telephone Expense (cell)

Indirect Travel

Business Meetings

Consulting

Professional Services

Education & Seminars

Bus Dev Travel

Legal Expense

Accounting Expense

General Liability Insurance

Banking Fees

IR&DB&P Related Expenses Plus Fringe and O/H on Labor

Charity/Contributions

First Class Premiums

Fines & Penalites

Alcohol/Entertainment

Interest Expense

Interest Income

Federal Taxes

Fringe Expense Overhead Expense G&A Expense Unallowable Expense

**The colored expenses could be part of an intermediate pool or service center

Rate Scenarios – Proposal with fringe, OH & G&A

Fringe Rate FY14 Forecast – Non Composite

Pool 30,392

Base 95,520

Rate 31.82%

Overhead Rate

Pool 32,025

Base 93,811

Rate 34.14%

G&A Rate

Pool 25,659

Base 162,976

Rate 15.74%

The sum of the G&A Pool

and base = $188,635

The Fringe Rate is a separate bid rate

The O/H pool includes Fringe on O/H Labor only

The G&A pool includes the Fringe on G&A Labor only

Rate Scenarios – proposal with Overhead & G&A

Fringe Rate (Info Only)FY14 Forecast -

Composite

Pool 30,392

Base 95,520

Rate 31.82%

Overhead Rate

Pool 61,874

Base 93,811

Rate 65.96%

G&A Rate

Pool 25,659

Base 162,976

Rate 15.74%

The sum of the G&APool and

base = $188,635

The Fringe Rate is for Info only – no separate fringe rate

The O/H pool included the Fringe on all Labor except G&A

The G&A pool includes the Fringe on G&A Labor

Full Application of RatesComposite Rates

Non Composite/Non Additive Rates

Direct Labor

93,384

O/H on Labor

65.96% 61,592

Direct M/ODC

8,000

Subtotal 162,976

G&A on Subtotal

15.74% 25,659

Total Cost

$188,635

Direct Labor

93,384

Fringe on Labor

31.82% 29,713

O/H on Labor

34.14% 31,879

Subtotal 154,976

Direct M/ODC

8,000

Subtotal 162,976

G&A on Subtotal

15.74% 25,659

Total Cost $188,635

Wrap Rates are used when a single figure captures all the costs often called “fully burdened” For example, a contractor reported the following for as the basis to develop a wrap rate:  1. 50,000 hours direct labor (DL) 2. $1 million DL costs 3. $.5 million manufacturing overhead (OH)4. $.2 million other costs   There are two ways to calculate a wrap rate  $1 million DL cost ÷ 50,000 DL hours = $20 DL rate  $500,000 manufacturing OH ÷ 50,000 DL hours = $10 manufacturing overhead rate  $200,000 other costs ÷ 50,000 DL hours = $4 other costs rate  $34 would be the fully burdened wrap rate for each labor hour 

WRAP Rates

Another way to look at it:

 Direct Labor cost $1,000,000  Manufacturing overhead $500,000  Other costs $200,000

Total $1,700,00 ÷ 50,000 DL hours = $34 fully burdened labor or wrap rate

WRAP Rates continued

14 - 12

Wrap Rates continued again• Yet another way based on rates

– Wage Rate = $52.50 per labor hour – Overhead Rate = (150%)(Wage Rate) = (150%)($52.50)

= $78.75 per labor hour– G&A = (15%)(Wage Rate + Overhead Rate) = (15%)

($52.50 + $78.75) = $19.69 per labor hour– Wrap Rate = Wage Rate + Overhead Rate + Other Cost

Rate = $52.50 + $78.75 + $19.69 – Wrap or fully burdened rate = $150.94 per labor hour

Subcontract/Material Handling• Direct Subcontracts and Direct Materials are removed from the

Base of the G&A Rate• Costs associated with managing these efforts (Subc mgmt,

purchasing, receiving, etc) make up a new Pool plus applicable Fringes

• Remember all costs are recovered – – High Subc or Materials contracts pay less G&A because they

pay the “pass through”– All Labor intensive contracts pay a higher G&A

Other ThingsDifferent bases are used for rates for example:

Direct labor hours Direct labor dollarsNumber of units producedNumber of machine hours

Rule is the base and pool have to have a logical relationship

G&A determinations based on total cost input versus value added

• Some companies apply G&A to all costs, others only consider the value they have added and not the costs for materials or subcontracts – consider for example

Total Cost Rate price Value Added

MaterialMaterial OH 10%

$50,000 $5,000 10%

$50,000 $5,000

EngineeringEng OH 80%

$20,000 $16,000 80%

$20,000 $16,000

ManufacturingMfg OH 200%

$40,000$80,000 200%

$40,000$80,000

Sub total $211,000 $211,000

Less mat ($50,000)

VA base $161,000

G&A 10% $21,100 12.22% $19,678

Total $232,100 $230,678

DCAA Involvement– FPRP = Forward Pricing Rate Package– FPRA = Forward Pricing Rate Agreement– Provisional Billing Rates– Incurred Cost Submissions (ICE)– Accounting System Approvals– Pricing Support for Potential Customers– Bid Validations

Summation on Rate Scenarios• Rates are a means to recover all costs of doing

business – whether direct or indirect• Unallowable come out of profits• Presentation, Presentation, Presentation

Questions?