Logistics Solutions for the Warfighter

1. Logistics Solutions for the Warfighter

2. Logistics Solutions for the Warfighter Direct vs Indirect Indirect Cost (Will get on target but not be real precise) Direct Cost (Will be directed at the exact target)

3. Logistics Solutions for the Warfighter Purpose of Training Purpose of this training is to provide an understanding of the differences in direct and indirect cost � not to provide extensive knowledge in cost accounting or cost allocation methodologies. Should also provide insight as to why different contractors propose the same type costs differently and both be correct.

4. Logistics Solutions for the Warfighter Concept of Direct & Indirect Costs The concept of direct and indirect costs embodies safeguards to avoid inequitable cost allocations that would result if costs incurred for the same purpose, under like circumstances were charged direct to some cost objectives and indirect to others Concept supported by FAR and Cost Accounting Standards (CAS) FAR 31.202(a) states �No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly�. CAS 402 definition states �all costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives� CAS 402 also states �All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective�. FAR 31.202(a) states �No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly�. CAS 402 definition states �all costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives� CAS 402 also states �All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective�.

5. Logistics Solutions for the Warfighter Equitable? Fact � Contract A = Firm Fixed Price Fact � Contract B = Cost Plus Fixed Fee � Contractor charges travel on A to overhead Contract charges travel on B to contract � Contractor charges incoming freight on A to overhead Contractor charges incoming freight on B to contract QUESTION: IS THIS EQUITABLE TO THE GOVERNMENT? In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR. In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR.

6. Logistics Solutions for the Warfighter Equitable? NO!!!! WHY NOT?????? In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR. In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR.

7. Logistics Solutions for the Warfighter Equitable? NO!!!! WHY NOT?????? v Cost should follow activity that caused the cost v Less direct cost charged �A� helps increase profits since FFP v Charging normally direct cost to overhead increases the amount of overhead the CPFF contract will have to absorb. v This results in artificially increasing the cost to the CPFF contract and reducing costs to the FFP contract. In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR. In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR.

8. Logistics Solutions for the Warfighter Supporting Regulations FAR 31.202 - �Direct Costs� FAR 31.203 � �Indirect Costs� CAS 9904.401 � �Consistency in Estimating, Accumulating, and Reporting Costs� � �CAS 401� CAS 9904.402 � �Consistency in Allocating Costs Incurred for the Same Purpose� � �CAS 402� CAS 9904.418 � �Allocation of Direct and Indirect Costs� � �CAS 418� Generally Accepted Accounting Principles In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR. In fact: These regulations overlap in requirements. Even if a contractor is not covered by CAS; they will still have to meet the requirements under FAR.

9. Logistics Solutions for the Warfighter Definitions Direct cost means any cost which is identified specifically with a single final cost objective. They are not limited to items which are incorporated in the end product as material or labor. Indirect cost means any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective. Reference: Cost Accounting Standard (CAS) 9904.402-30(a)(3) & (a)(5) 1. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives. Additional definition contained within CAS 9904.402-30(a)(3).1. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives. Additional definition contained within CAS 9904.402-30(a)(3).

10. Logistics Solutions for the Warfighter Definitions (Cont�d) Final cost objective means one & only one job/project/ contract. Consistency means treating cost incurred for the same purpose, in the same circumstances, as either direct or indirect all the time. Allocate means to assign an item of cost, or a group of items of cost, to one or more cost objectives. Reference: Cost Accounting Standard (CAS) 9904.402-30(a)(3) & (a)(5) 1. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives. Additional definition contained within CAS 9904.402-30(a)(3).1. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives. Additional definition contained within CAS 9904.402-30(a)(3).

11. Logistics Solutions for the Warfighter Importance of Distinctions Compliance with FAR and CAS Direct costs are specifically billable to customers More costs classified as direct, the lower the indirect rates The more costs classified as direct, the better the cost allocations The more costs classified as direct, the more precise the pricing FAR 31.203(b) prefers direct charging of costs by stating: �After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives�.

12. Logistics Solutions for the Warfighter Precision vs. Practicality CAS & FAR prefers cost to be allocated direct. Is this always feasible? v Company President salary? v Incoming freight? v Scrap? v Purchasing? v Accounts payable department? v FICA taxes?

13. Logistics Solutions for the Warfighter Precision vs. Practicality CAS & FAR prefers cost to be allocated direct. Is this always feasible? v Company President salary? v Incoming freight? v Scrap? v Purchasing? � NO!!! v Record keeping requirements may be to extensive v Costs may be relatively immaterial/insignificant v Administrative burden may be to costly to track v Customer (you) may not want to pay for as direct

14. Logistics Solutions for the Warfighter Precision vs. Practicality (Continued) REMEMBER Almost any cost can be treated as a direct cost as long as the contractor is willing to expend the time and money to develop policies, procedures, and accounting systems to track and record the costs MOST DO NOT GO TO EXTREMES

15. Logistics Solutions for the Warfighter Contractor Cost Accounting Systems Must develop policies and procedures on what costs will be treated as direct and what costs will treated as indirect. v What is direct labor vs. indirect labor? v What is direct travel vs. indirect travel? v Will overtime be treated as direct or indirect? � What indirect cost pool(s) are necessary? v Fringe benefit pool? v Manufacturing overhead? v General & Administrative cost pool? v ETC. (material handling, subcontract admin�.)

16. Logistics Solutions for the Warfighter Contractor Cost Accounting Systems - Continued What indirect cost pool allocation bases will be used? v Fringe benefits on total salaries? v Manufacturing overhead on direct labor dollars? v General & Administrative cost pool on total costs? � Must be consistent in treatment of cost (for commercial and government projects/jobs/contracts) � Can be their system; does not have to follow any industry standard as long as system results in equitable and consistent cost allocations on the contractors projects/jobs/contracts.

17. Logistics Solutions for the Warfighter Contractor Cost Estimating System � Must be consistent with cost accounting practices and procedures used in accumulating and report costs

18. Logistics Solutions for the Warfighter Generally Indirect Costs Sale of scrap and salvage Purchasing and subcontract administration Training and computer operations Plant/Office rearrangement costs Administrative costs (President, CFO, COO, Accounting, etc) Telephone Cell phones Courier services Office supplies, etc.

19. Logistics Solutions for the Warfighter Generally Indirect Costs (Continued) Health Insurance Employers 401K/Retirement Fund Contribution Vacation Pay Sick Pay Holiday Pay Employer FICA Tax Contributions FUTA and SUTA Any other examples?Any other examples?

20. Logistics Solutions for the Warfighter Generally Direct Costs Freight In and Out Design Engineering Drafting Shift Premium Preproduction Line Inspection Travel Packaging and Preservation Warranty Reword and Scrap

21. Logistics Solutions for the Warfighter Predominantly Direct Cost Subcontracts Trade Discounts Refunds and Allowances on Purchases Purchased Labor Special Tooling Special Test Equipment Material Used on the Contract Direct labor Any other examples?Any other examples?

22. Logistics Solutions for the Warfighter Not Direct or Indirect Overtime Premium Cash Discounts Incoming Material Inspection Inventory Adjustments Holiday Differential (Includes shift differential) However, these costs are normally treated as indirect. Equitable allocation. 1. Overtime premium � what caused the overtime? If customer required � then direct; if not caused by customer then should be indirect. However, remember the contractor has to be consistent. Taking cash discounts is normally a function of cash management � not a function of the contract � normally indirect Inventory adjustments � these are sometimes done long after a contract has been completed, shipped and billed � normally indirect. Holiday and shift differential � same thinking as overtime premium.However, these costs are normally treated as indirect. Equitable allocation. 1. Overtime premium � what caused the overtime? If customer required � then direct; if not caused by customer then should be indirect. However, remember the contractor has to be consistent. Taking cash discounts is normally a function of cash management � not a function of the contract � normally indirect Inventory adjustments � these are sometimes done long after a contract has been completed, shipped and billed � normally indirect. Holiday and shift differential � same thinking as overtime premium.

23. Logistics Solutions for the Warfighter Consistency �All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to the final cost objective� Example: � Contractor proposes 3 firemen to guard highly flammable material used on a contract at a fixed station as �direct cost�. � Contractor also has a firefighting force of 10 for general plant protection which he charges as �indirect cost�. Is this consistent? Yes it is. That is as long as the contractor has disclosed that the separate classes of firemen serve different purposes and it is his practice to allocate the general firefighting force as indirect and to allocate the fixed post firemen as indirect. KEY HERE!!! Purposes are not the same. One is totally devoted to one particular contract � the other is for the overall plant.Yes it is. That is as long as the contractor has disclosed that the separate classes of firemen serve different purposes and it is his practice to allocate the general firefighting force as indirect and to allocate the fixed post firemen as indirect. KEY HERE!!! Purposes are not the same. One is totally devoted to one particular contract � the other is for the overall plant.

24. Logistics Solutions for the Warfighter Allocate/Allocation �Allocate means to assign an item of cost, or a group of items of cost, to one or more cost objectives�. Example: An employee makes $1,200 per week and during one week works 24 hours on a contract, 8 hours on a proposal, and takes 8 hours of vacation. The contractor allocates $720 to the contract, $240 to the proposal, and another $240 to vacation pay. This results in a total allocation of the employees $1,200 of salary. 24 hours/40 hours = 60% X $1,200 = $720.00 to contract (DL) 8 hours/40 hours = 20% X $1,200 = $240.00 to proposal & vac. (Indirect labor) You could also take the hourly rate of $30 per hour and multiply by the hours worked on each separate activity. However, be careful doing this � Some contractors have real �salaried employees� who get paid a set amount regardless of the amount of hours they work � so therefore, the hours by project does not determine pay � in that case the percent of effort is more realistic. IN MY OPINIONYou could also take the hourly rate of $30 per hour and multiply by the hours worked on each separate activity. However, be careful doing this � Some contractors have real �salaried employees� who get paid a set amount regardless of the amount of hours they work � so therefore, the hours by project does not determine pay � in that case the percent of effort is more realistic. IN MY OPINION

25. Logistics Solutions for the Warfighter Summary Direct Costs = Cost which a contractor can directly identify as only benefiting one final cost objective (contract) Indirect Cost = Costs which benefit more than one final cost objective and must be allocated using some equitable allocation method You could also take the hourly rate of $30 per hour and multiply by the hours worked on each separate activity. However, be careful doing this � Some contractors have real �salaried employees� who get paid a set amount regardless of the amount of hours they work � so therefore, the hours by project does not determine pay � in that case the percent of effort is more realistic. IN MY OPINIONYou could also take the hourly rate of $30 per hour and multiply by the hours worked on each separate activity. However, be careful doing this � Some contractors have real �salaried employees� who get paid a set amount regardless of the amount of hours they work � so therefore, the hours by project does not determine pay � in that case the percent of effort is more realistic. IN MY OPINION

26. Logistics Solutions for the Warfighter Direct and Indirect Cost Questions? Examples? Discussion?