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Understanding Basics of Indirect Rates

Understanding Basics of Indirect Rates. NCMA March 20, 2014 Roland Wick. OVERVIEW. Understanding description of indirect costs. Understand bases, pools, rates. Understand basics of indirect rate development from accounting records for final costs. Understand a basic submission format.

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Understanding Basics of Indirect Rates

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  1. Understanding Basics of Indirect Rates NCMA March 20, 2014 Roland Wick Roland Wick Consultant

  2. OVERVIEW Understanding description of indirect costs. Understand bases, pools, rates. Understand basics of indirect rate development from accounting records for final costs. Understand a basic submission format Roland Wick Consultant

  3. 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!!!! Roland Wick Consultant

  4. Indirect Rates are Difficult for New ContractorsWhat 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 % Roland Wick Consultant

  5. 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. Roland Wick Consultant

  6. 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 Roland Wick Consultant

  7. 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. Roland Wick Consultant

  8. 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. Roland Wick Consultant

  9. 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??? Roland Wick Consultant

  10. 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 Roland Wick Consultant

  11. 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. Roland Wick Consultant

  12. How Does this Work?Starting Point for Cost Pools – Trial Balance(Source NCMA presentation PowerPoint 2010) Roland Wick Consultant 12

  13. Fringe Rate Example Roland Wick Consultant 13

  14. IT Service Center Roland Wick Consultant 14

  15. Overhead Rate Roland Wick Consultant 15

  16. Roland Wick Consultant 16

  17. Reconciliation Roland Wick Consultant

  18. 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. Roland Wick Consultant

  19. Schedule A • Lead Schedule Roland Wick Consultant

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  21. Schedule B • Indirect Pool Roland Wick Consultant

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  23. Schedule C • Fringe Pool Roland Wick Consultant

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  25. Schedule D • Bases Roland Wick Consultant

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  27. Summary/Questions Roland Wick Consultant

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