Deltek Insight 2010: The Art and Science of Indirect Rates

XT-203: The Art and Science of Indirect Rates

Presented by:

Dave Donley, Executive Vice President, Tech BizSolutions

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The Art and Science of Indirect Rates

• Why do we care?

– Cost & Pricing data (exemptions & thresholds)

– Contract type

– Financing methods (progress payments)

– Economic engine

Copyright © 2010 Deltek, Inc. 2

The Art and Science of Indirect RatesThe Art and Science of Indirect Rates

• Risks by not having established indirect rates

– Capped rates

– Unknown job profitability, pricing too low

– Pricing inconsistent with accounting

– Good practice before progress payments, cost plus contracts, audit

– Unknown limitations (DoD R&D 35%, NIH SBIR)

– Takes time to become familiar



• The question we get a lot – what’s a good rate?

• Answer - The highest your customer is willing to pay


Factors in Designing Rate

• Job cost accounting system on steroids – a simple example

• Type of contract

• Competitive position

• Agency or agencies customs, primes

• Type of business

• Rate structure


Job Cost Accounting System on SteroidsJob Cost Accounting System on Steroids

• Direct Expenses


Cost of Goods Sold Job 1 Job 2 Job 3 Total

Labor $ $ $ $

Material $ $

Subcontracts $ $ $

Travel $ $ $

ODC $ $

Total Direct = $$$


• Indirect Expenses


Fringe $

Occupancy $

Overhead $

G&A $

Bid & proposal $

Marketing and sales $

IR&D $

Total Indirect $$$


• Indirect Rate


Total Indirect (Pool) $

Divided by

Total Direct (Base) $

Indirect Rate xx%


• Total Job Cost


(A) Direct Costs $

(B) Times Indirect Rate $

Add (A) + (B) $ Total Job Cost


• Pricing Model


(A) Direct Costs $

(B) Times Indirect Rate $

Add (A) + (B) $ Total Job Cost

Wrap Rate = 1+Indirect Rate

Contract Risk ContinuumContract Risk Continuum


Buyer’sRisk

Seller’sRisk

Cost reimbursable

Fixed priced

T&M

Factors in Designing Rates

• Competitive position

• Agency or agency customs, primes

• Type of business

• Rate structure


Simple Example, Complex Example

• FAR Part 31 framework– 31.001 - Definitions

– 31.201-1 - Composition of Total Cost

– 31.201-4 - Determining of Allocability

– 31.202 – Direct Costs

– 31.203 – Indirect Costs

• Measuring activity (cost accounting)• Allocation (equitable, consistent methods)• Remarkably flexible• Complexity, structure driven by pricing

– Multiple pools and bases, intermediate pools

– Separate divisions


Cost Accounting Standards (A Quick Word)

• Large business (19 standards, disclosure statement)

• Small Business Exemption

– FAR dictates minimum standards (31.201-2(b))

– CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs

– CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose

– CAS 405 - Accounting for Unallowable Costs

– CAS 406 - Cost Accounting Period

– CAS 418 – Allocation of Direct and Indirect Costs


Professional Services

• Labor only

• Single rate

• Very competitive on cost

• 10-50%


Manufacturing

• Mix of labor and non-labor direct expenses

• Multiple intermediate pools, rates and factors

• Very competitive on cost

• Multiple up to 3x on labor


R&D/Small Contractor

• Labor and some non-labor

• Single, two-rate, three-rate

• Very competitive on technical performance

• Multiple up to 3x on labor


Leveraging the Art

• SBIR example

• “Economic Capacity” – as base grows, so should your rates

• Budget, budget, budget


Leveraging the Art

• Variations in Base

• FAR 52.215-22/23 Excessive passthrough


Action Plan

• Assess your competitive position– GSA schedules, GWACs

– Listen to your customers, competitors, proposal evaluations

• Calculate your historical rates – know where you are before you know where you’re going

• Develop a budget, monitor• Determine an appropriate rate structure• Make adjustments as needed• Monitor jobs for profitability• Test for compliance (Cost & pricing – DCAA info for

contractors, accounting system SF1408)


NCMA Ethics StatementNCMA Ethics Statement

• Each member of NCMA shall:

Conduct oneself in such a manner as to bring credit upon the association, as well as to maintain trust and confidence in the integrity of the acquisition process.



Dave Donley – Executive VP

Tech BizSolutions

303-475-0939

[email protected]

www.techbizsolutions.com


Technology

Deltek Insight 2010: The Art and Science of Indirect Rates