Understanding Basics of Indirect Rates

Roland Wick Consultant

Understanding Basics of Indirect Rates

NCMA

March 20, 2014

Roland Wick


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


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!!!!


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 %


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.


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


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.


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.


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???


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


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.


How Does this Work?Starting Point for Cost Pools – Trial Balance(Source NCMA presentation PowerPoint 2010)

12

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


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%


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


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%

Roland Wick Consultant16

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%


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


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.


Schedule A

Lead Schedule



Schedule B

Indirect Pool



Schedule C

Fringe Pool



Schedule D

Bases



Summary/Questions

Documents

Understanding Basics of Indirect Rates