deltek insight 2012: indirect rate strategies & methods
TRANSCRIPT
Indirect Rate Strategies & Methods
Presented by:Kelly McBride, CPA, CEOGlobal Defense [email protected]
2
Agenda
• Understanding Indirect Rates• Indirect Rates and the FAR• Cost Principles – FAR Part 31• Developing Indirect Rates
• Sample Rate Structures• Deltek Systems and Indirect Rates
3
Understanding Indirect Rates
Indirect rate calculations and techniques are not specifically provided in the FAR
Part 31 provides principles to interpret and follow
For new government contractors, indirect rates concepts/methods/strategies can, therefore, be difficult to understand and implement in the early stages of your business
Industry standards & practices, however, provide specific guidance
4
Understanding Indirect Rates
Contract Cost Principles
http://farsite.hill.af.mil/vffara.htm
FAR 31.201 General 31.201-1 Composition of Total Cost 31.201-2 Determining Allowability 31.201-3 Determining Reasonableness 31.201-4 Determining Allocability 31.201-5 Credits 31.201-6 Accounting for Unallowable Costs
FAR 31.202 Direct Costs FAR 31.203 Indirect Costs
5
Understanding Indirect Rates
31.201-1 Composition of Total Cost
Direct and indirect costs allocable to the contract
31.201-2 Allowable Costs
A cost which meets the tests of Reasonableness,
Allocability,
Compliance with standards promulgated by the CASB, if applicable, otherwise GAAP,
Contractual terms, and
Limitations set forth in the FAR
6
Understanding Indirect Rates
Reasonableness (31.201-2):
A cost is reasonable if does not exceed that which a prudent person would incur in the conduct of competitive business
What is reasonable depends on a variety of circumstances, including: Is the type of cost generally recognized as ordinary and necessary for the
conduct of business?
Are sound business practices being followed?
The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large, and
Any significant deviations from the contractor’s established practices
7
Understanding Indirect Rates
Allocability (31.201-2):
A cost that is assignable or chargeable to one or more cost objectives in accordance with the relative benefits received or other equitable relationship
A cost is allocable if it
Is incurred specifically for the contract,
Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received, or
Is necessary to the overall operations of the business
8
Understanding Indirect Rates
Direct Costs (FAR 31.202)
A direct cost is any cost that can be identified specifically with a particular cost objective, e.g., labor in direct support of a contract, materials purchased for a particular contract, travel incurred for a specific contract, subcontractor costs
Typical Direct Cost line items
Direct Labor
Direct Subcontract
Direct Travel
Direct Materials
Other Direct Costs
9
Understanding Indirect Rates
Indirect Costs (FAR 31.203)
An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives
Indirect costs shall be accumulated in logical cost groupings with due consideration of the purpose for incurring such cost and allocated over a base that is common to all cost objectives to which the cost will be allocated
Typical / simple indirect cost groupings or pools Fringe
Overhead
General & Administrative (G&A)
10
Understanding Indirect Rates
Vary from company to company-but typically industry standard is comprised of 2 or 3 tiered structure
Always tracked, monitored and computed over a fiscal year and interim rates are always measured on a year to date basis
Determine the “multiplier” or “markup” rate for the company to recover cost
Are used for:
Budgeting/Forecasting
Billing
Proposals
11
Understanding Indirect Rates
Indirect Rate Calculation
Cost pool/allocation base = indirect rate (%)
Pools are defined by placing costs in logical groupings, e.g., fringe costs, overhead costs, G&A costs, etc.
The allocation base is defined as some measure of cost that can be used to allocate the pool cost, e.g., direct labor hours, direct labor dollars, machine hours, etc.
There must be a relationship between the allocation base and the pool of costs to be allocated to contracts
Examples
12
Sample Rate Structures
Fringe Costs Include:
• Health Insurances
• Payroll Taxes
• PTO
• Benefits Administration Fees
• Retirement Plan Contributions
Fringe Base Include:
• All Labor Costs for Resources that
Receive Benefits
13
Sample Rate Structures
Overhead Costs Include:
• Overhead Labor
• General Mgmt, IT, HR, Security
• Applied Fringe
• Facilities or Facilities Share
• Overhead Travel
• Bonuses for Production Resources
• Supplies and Other Support Cost
Overhead Base Include:
• Direct Labor + Fringe Burden
14
Sample Rate Structures
G&A Costs Include:
• G&A Labor
• Executive, Accounting, BD, B&P Labor, IRAD
• Applied Fringe
• Applied OH to B&P and IRAD
• Facilities Share
• G&A Travel
• Bonuses for G&A Labor
• O/S Accounting Services
• Legal & Professional Fees
• Corporate Insurance
• Allowable Taxes & Licenses
15
Sample Rate Structures
Material Handling Costs Include:
• Purchasing Labor
• Applied Fringe
• Facilities or Facilities Share
• Supplies and Other Support Cost
MH Base Include:
• Direct Materials
16
Sample Rate Structures
Base Excludes Materials!
17
Understanding Indirect Rates
Consider new rates for changing conditions, esp. large bids
Calculate and document new rate projections
Create multiple fringe rates Define labor classes according to fringe benefits
Customize benefits for employees, especially semi-retired
Benefits packages by division or region
Note: Monitor compliance with DOL and 401(k) rules
18
Understanding Indirect Rates
Diversify overhead rate(s) to reflect
Customer site vs. contractor site
Government vs. commercial
Geographic distinctions/Divisions
Product/service lines
19
Understanding Indirect Rates
Separate materials or subcontracts
Create materials acquisition pool (drop-ship equipment, software, purchased maintenance, licenses)
Create separate subcontracts management pool
Strategically different rates
20
Questions & Answers
Kelly McBride, CPA
President and Executive Management Consultant
Global Defense Consulting, Inc.
www.gdcus.com
678-641-4156