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Indirect Cost Workshop

Indirect Cost Workshop. Adapted from. Lori L Heath CFO/Contracts Manager Minerva Engineering (formerly an Independent Consultant for Small Government Contractors). Indirect Cost Workshop. What is the Purpose of Rates? What is a Direct Cost? What is an Indirect Cost?

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Indirect Cost Workshop

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  1. Indirect Cost Workshop Adapted from Lori L Heath CFO/Contracts Manager Minerva Engineering (formerly an Independent Consultant for Small Government Contractors)

  2. Indirect Cost Workshop • What is the Purpose of Rates? • What is a Direct Cost? • What is an Indirect Cost? • What is an Unallowable Cost? • What is an Allocation? • Pool vs Base • Service Center (Shared Costs/Occupancy)

  3. Indirect Cost Workshop • Rates – Different Methods similar results • Composite • “Wrap” One rate which includes all indirect elements • Non Composite/Non-Additive (fringe separate bid rate) • Non Composite/Additive (fringe included in OH and G&A • Subcontracts/Material Handling (sometimes referred to as “pass through”)

  4. Indirect Cost Workshop • DCAA Involvement • FPRP = Forward Pricing Rate Package • FPRA = Forward Pricing Rate Agreement • Provisional Billing Rates • Incurred Cost Submissions (ICE) • Accounting System Approvals • Questions

  5. Income Statement Revenue 207,498 Direct Labor 93,384 Direct Travel 6,000 Direct Consultants - Direct Subcontracts - Direct Materials - Direct ODC 2,000 Total Cost of Goods 101,384 Fringe Expense 30,392 Overhead Expense 31,481 G&A Expense 24,850 IR&D/B&P Expense 527 Total Cost of Operations 87,251 Gross Profit from Operations 18,863 Interest Income (150) Other Income - Interest Expense 3,000 Unallowable Expense 2,000 Total Other 4,850 NET INCOME 14,013 Net Profit after Unallowables 7% Direct Costs = “Base” or Denominator of Rate Computation Indirect Costs = “Pool” or Numerator of Rate Computation Unallowable expenses Total Direct + Indirect Expenses = $188,635

  6. Pool Examples Fringe Expense Overhead Expense G&A Expense Unallowable Expense **The colored expenses could be part of an intermediate pool or service center

  7. Rate Scenarios – Proposal with fringe, OH & G&A The Fringe Rate is a separate bid rate The O/H pool includes Fringe on O/H Labor only The G&A pool includes the Fringe on G&A Labor only The sum of the G&A Pool and base =$188,635

  8. Rate Scenarios – proposal with Overhead & G&A The Fringe Rate is for Info only – no separate fringe rate The O/H pool included the Fringe on all Labor except G&A The G&A pool includes the Fringe on G&A Labor The sum of the G&APool and base =$188,635

  9. Full Application of Rates Non Composite/Non Additive Rates Composite Rates

  10. WRAP Rates Wrap Rates are used when a single figure captures all the costs often called “fully burdened” For example, a contractor reported the following for as the basis to develop a wrap rate:  1. 50,000 hours direct labor (DL) 2. $1 million DL costs 3. $.5 million manufacturing overhead (OH) 4. $.2 million other costs  There are two ways to calculate a wrap rate  $1 million DL cost ÷ 50,000 DL hours = $20 DL rate  $500,000 manufacturing OH ÷ 50,000 DL hours = $10 manufacturing overhead rate  $200,000 other costs ÷ 50,000 DL hours = $4 other costs rate $34 would be the fully burdened wrap rate for each labor hour

  11. WRAP Rates continued Another way to look at it:  Direct Labor cost $1,000,000  Manufacturing overhead $500,000  Other costs $200,000 Total $1,700,00 ÷ 50,000 DL hours = $34 fully burdened labor or wrap rate

  12. Wrap Rates continued again • Yet another way based on rates • Wage Rate = $52.50 per labor hour • Overhead Rate = (150%)(Wage Rate) = (150%)($52.50) = $78.75 per labor hour • G&A = (15%)(Wage Rate + Overhead Rate) = (15%)($52.50 + $78.75) = $19.69 per labor hour • Wrap Rate = Wage Rate + Overhead Rate + Other Cost Rate = $52.50 + $78.75 + $19.69 • Wrap or fully burdened rate = $150.94 per labor hour

  13. Subcontract/Material Handling • Direct Subcontracts and Direct Materials are removed from the Base of the G&A Rate • Costs associated with managing these efforts (Subc mgmt, purchasing, receiving, etc) make up a new Pool plus applicable Fringes • Remember all costs are recovered – • High Subc or Materials contracts pay less G&A because they pay the “pass through” • All Labor intensive contracts pay a higher G&A

  14. Other Things Different bases are used for rates for example: Direct labor hours Direct labor dollars Number of units produced Number of machine hours Rule is the base and pool have to have a logical relationship

  15. G&A determinations based on total cost input versus value added • Some companies apply G&A to all costs, others only consider the value they have added and not the costs for materials or subcontracts – consider for example

  16. DCAA Involvement • FPRP = Forward Pricing Rate Package • FPRA = Forward Pricing Rate Agreement • Provisional Billing Rates • Incurred Cost Submissions (ICE) • Accounting System Approvals • Pricing Support for Potential Customers • Bid Validations

  17. Summation on Rate Scenarios • Rates are a means to recover all costs of doing business – whether direct or indirect • Unallowable come out of profits • Presentation, Presentation, Presentation

  18. Questions?

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