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UNDERSTANDING INDIRECT COSTS

This guide, authored by Ronald S. Marta, CPA, offers an in-depth understanding of indirect costs as defined in the Federal Acquisition Regulation (FAR). It categorizes costs into direct and indirect, providing examples such as Payroll Overhead and General and Administrative expenses. The document explains indirect cost pools, bases, and rates, essential for organizations engaged in federal contracting. For assistance, reach out to the University of Houston Procurement Technical Assistance Center.

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UNDERSTANDING INDIRECT COSTS

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  1. UNDERSTANDING INDIRECT COSTS RONALD S. MARTA, CPA BUSINESS COUNSELOR UNIVERSITY OF HOUSTON PROCUREMENT TECHNICAL ASSISTANCE CENTER 713-752-8450 rmarta@uh.edu

  2. SOURCES FEDERAL ACQUISITION REGULATION (FAR) • Policies and Procedures for acquisition by executive agencies. CODE OF FEDERAL REGULATIONS (CFR) • Administrative Law • Based on U.S. Code : Statutes enacted by Congress. U.S, ode

  3. FAR Part 31 - Contract Cost Principles and Procedures

  4. Costs Government breaks costs into two basic categories:

  5. Direct Costs(FAR 31.202) • Directly connected with producing a product or providing a service. • Benefit one contract.

  6. Indirect Costs(FAR 31.203) • Costs not connected with a particular product or service, • but are needed for business to • function. • Costs that benefit more than one contract.

  7. Indirect Cost Pools Payroll Overhead Pool: • Social Security, Medicare, health insurance, etc. • Costs associated with labor. General and Administrative Pool: • Expenses that are necessary for the general management and administration of the business. • Management/support labor, home office supplies, professional fees, rent, utilities, etc.

  8. Cost Bases Payroll Overhead Base: Productive Labor (direct and indirect) General and Administrative (G & A) Base: Total Cost Input

  9. Government Cost Model Payroll Overhead % of all other costs (direct costs, payroll o/h, on/off site o/h) G & A Indirect Costs Off Site Overhead On Site Overhead % of Direct Labor; may be on other costs % of Direct Labor Direct Labor Direct Material Other Direct Cost Direct Costs Job 1 Job 2 Job 3

  10. ABC CompanyIndirect Costs OVERHEADG & A ACCOUNTPOOLBASEPOOLBASE COST OF SALES (DIRECT ONLY): DIRECT MATERIAL $ 100 DIRECT LABOR $1,000 1,000 OTHER DIRECT COSTS 300 TOTAL COST OF SALES $1,400 PAYROLL OVERHEAD SOCIAL SECURITY $ 70 MEDICARE 20 HEALTH INSURANCE 30 VACATION, HOLIDAY &SICK 80 TOTAL PAYROLL OVERHEAD $200$ 200 GENERAL AND ADMINISTRATIVE ACCOUNTING $ 20 DEPRECIATION 30 OFFICE SUPPLIES 20 RENT 70 TELEPHONE 20 TOTAL G & A $160 TOTAL POOL / BASE $200$1,000$160$1,600 RATE (%) 20 %10 %

  11. Contact Information University of Houston Procurement Technical Assistance Center 2302 Fannin Street, Ste. 200 Houston, TX 77002 713-752-8477 http://www.ptac.uh.edu

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