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Structuring Indirect Rates

Structuring Indirect Rates. Presented by: Donna Dominguez & Nicole Mitchell January 18, 2011. Donna M. Dominguez – Managing Consultant.

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Structuring Indirect Rates

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  1. Structuring Indirect Rates Presented by: Donna Dominguez & Nicole Mitchell January 18, 2011

  2. Donna M. Dominguez – Managing Consultant Donna Dominguez joined Aronson LLC in 1999 and is a Managing Consultant in the Government Contracts Services Group. With more than ten years experience working with government contractors, she specializes in the preparation of incurred cost submissions, budgets, business consulting, cost proposals, contract/subcontract administration, contract/subcontract negotiation and assisting clients in the use of Deltek GCS, CostPoint, and QuickBooks software. Through her work in public accounting as well as positions held directly with private government contractors, she has comprehensive knowledge and understanding of the complexities of accounting for this unique market. Donna earned her Bachelor’s of Science in Accounting from the University Maryland and has completed additional coursework in Contracts Administration.

  3. Nicole M. Mitchell – Director of Financial Compliance Nicole M. Mitchell joined Aronson LLC in January 1998 and serves as a Director in the Government Contract Services Group. She specializes in accounting and financial issues impacting government contractors. She has a broad based background in generally accepted accounting principles and cost principles related to government contractors including the Federal Acquisition Regulations and Cost Accounting Standards. Nicole has been a guest speaker on various financial and government contracting topics for such organizations as the AICPA, MACPA, Deltek Insight Conference, Howard County Chamber of Commerce, Montgomery County Chamber of Commerce, as well as Aronson & Company. She co-authored a Thompson RIA reference manual for controllers “Doing Business with the Federal Government.” She received a Bachelor of Science majoring in accounting from Frostburg State University and a Masters in Business Administration from Mount Saint Mary’s College with a concentration in leadership. She received an award from the state of Maryland for one of the highest scores on the CPA exam and currently holds an active CPA license in the State of Maryland.

  4. WHICH BOX WOULD YOU CHOOSE? UPS Cardboard Box? or Tiffany’s Blue Box?

  5. COURSE OBJECTIVE • To provide knowledge in understanding your company’s indirect rate structure: • Yielding Auditable Rates that Comply with Federal Regulations • Structuring Indirect Rates • Competitive Range

  6. AGENDA • Definitions • Composition of Indirect Pools and Bases • Various Indirect Rate Structures • Wrap Rates • Q & A

  7. DEFINITIONS

  8. DEFINITIONS • Direct Cost - A cost that can be identified with a final cost objective (FAR Part 31.202) • Indirect Cost - A cost that is not directly identified with a single, final cost objective but identified with two or more final cost objectives or as an intermediate cost objective (FAR Part 31.203) • Costs are arranged into logical and homogeneous pools • Amounts are allocated based on the relationship of the expense to the segment • Allocate - To assign or charge one or more cost objectives with an item of cost, or a group of items of cost on a causal/beneficial relationship • Service Center - Intermediate pools set up to collect costs that are attributable to multiple cost objectives.

  9. DEFINITIONS • Indirect Cost Pool - A group of homogeneous costs that support multiple cost objectives (numerator) • Indirect Cost Base - The factor used to allocate the indirect costs (denominator) • Indirect Cost Rate - the ratio between the total allowable indirect costs and benefiting direct base Indirect Cost Pool = Indirect Cost Rate** Indirect Cost Base **An indirect cost rate percentage is calculated by dividing he pool by the base

  10. COMPOSITION OF INDIRECT POOLS AND BASES

  11. FRINGE Fringe pool is composed of statutory payroll taxes and discretionary benefits typically found in the employee handbook. Fringe base is commonly computed as a percentage of all labor both direct and indirect. • Typical costs • FICA, FUTA, SUTA, Workers’ Compensation • Employee insurance • Leave • Retirement benefits • Other Fringe pools • SCA or Davis Bacon • Statutory (Part-Time) • Divisional

  12. OVERHEAD Overhead pool is composed of costs that can be identified in support one or more final cost objectives. The most common base of the overhead pool is direct labor, B&P labor, and related fringe. • Typical costs • Support labor (Project Control) • Training • Facilities/IT Service Center Allocation • Recruiting • Travel • Other Overhead Pools • Client Site and Home Site • Divisional • Location Specific

  13. SUBCONTRACT & MATERIAL HANDLING Subcontract & Material Handling pool is composed of costs that support the award and administration of subcontracts and purchase orders. The most common base of the subcontract & material handling pool is subcontract labor, subcontractor travel & ODCs, and materials. • Typical costs • Subcontracts labor • Accounts Payable for Subcontractors • Facilities/IT Service Center Allocation • Travel

  14. GENERAL AND ADMINISTRATIVE G&A pool is composed of indirect expenses that cannot be easily attributed to any specific contract objective but are for the general benefit of the company as a whole. There are two types of G&A base total costs input or value added (the most common value added G&A base is over total costs before B&P/IR&D and SM&H base) . • Typical costs • Accounting & Finance • Contract Administration • General Management • Facilities/IT Service Center Allocation • Business Development • Other G&A pools Segments

  15. SERVICE CENTERS Service Centers or intermediate pools are set up to collect costs that are attributable to multiple cost objectives in order that they may be fairly and equitably allocated in a causal/benefit relationship. • Most common: Facilities and IT/Communication • Reasonable basis allocation methods: Square Footage, Labor Hours, Headcount, or Labor Dollars • Typical costs in a facility service center • Rent • Supplies • Property taxes • Depreciation

  16. VARIOUS INDIRECT RATE STRUCTURES

  17. WHAT IS YOUR INDIRECT RATE STRUCTURE ? • Single Rate Structure • G&A rate only • Two Tier Rate Structure • Overhead (one or more) and G&A • Three Tier Rate Structure • Fringe • Overhead (one or more) • G&A

  18. WRAP RATES

  19. WRAP RATE • Understand your wrap rate, especially for small companies, can be the difference of recovering all your costs and making a profit or losing your shirt. • Realize your customers and industry helps to give a competitive edge • Be aware of your size status • 8(a), small business, sole source, • Large business, out grown NAICS codes, full & open • Prepare a good budget and monitor your actuals • Know your Competitive Range (before fee) 1.5 ---------------- 1.8 ----------------- 2.1 (Average for Small to Mid Size Service Related Government Contractor)

  20. HOW TO APPLY WRAP RATE Sample WRAP rate calculation: 3 Tier Structure – Fringe 28%, OH 41%, G&A 12%

  21. Q & A

  22. Contact Information Donna Dominguez (301) 222-8232 ddominguez@aronsonllc.com Nicole Mitchell (301) 222-8231 nmitchell@aronsonllc.om

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