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

2. Roland Wick Consultant OVERVIEW 1. Understanding description of indirect costs. 2. Understand bases, pools, rates. 3. Understand basics of indirect rate development from accounting records for final costs. 4. Understand a basic submission format

3. Roland Wick Consultant 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!!!!

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

5. Roland Wick Consultant 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.

6. Roland Wick Consultant 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

7. Roland Wick Consultant 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.

8. Roland Wick Consultant 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.

9. Roland Wick Consultant 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???

10. Roland Wick Consultant 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

11. Roland Wick Consultant 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.

12. Roland Wick Consultant How Does this Work? Starting Point for Cost Pools – Trial Balance (Source NCMA presentation PowerPoint 2010) 12 DirectG&AOHFringeIT SCU/A Direct Labor w/ B&P Labor($10,000) $ 300,000X Subcontractor Expense 300,000X Direct Materials 250,000X Payroll Taxes 30,000X Insurance Expense 50,000X Sick, Holiday & Vacation Expense 65,000X Pension Contribution 25,000X IT Support Labor 35,000X Overhead Labor 72,500X Overhead Travel- Unallowable 5,000X Rent Expense (75% G&A) 16,000XX G&A Labor 170,000X Legal & Professional Fees 10,000X G&A Travel Expense 8,000X G&A Travel Expense – Unallowable 3,000X Total Cost $ 1,339,500

13. Roland Wick Consultant Fringe Rate Example 13 Pool: Payroll Taxes $ 30,000 Insurance Expense 50,000 Sick, Holiday & Vacation Expense 65,000 Pension Contribution 25,000 Total Fringe Pool $ 170,000 Base: Direct Labor/w B&P $ 300,000 IT Support Labor 35,000 Overhead Labor 72,500 G&A Labor 170,000 Total Labor Base $ 577,500 Fringe Rate:29.44%

14. Roland Wick Consultant IT Service Center 14 Pool: IT Support Labor$ 35,000 Fringe on IT Support Labor @ 29.44%10,303 Total Service Center Pool$ 45,303 Base: Overhead Personnel5 Personnel G&A Personnel 3 Personnel Total Headcount Base 8 Service Center Rate: $ 5,663

15. Roland Wick Consultant Overhead Rate 15 Pool:Books Allowable Overhead Labor $ 72,500 $ 72,500 Overhead Travel- Unallowable (excluded from pool) 5,000 0 Fringe on Overhead Labor @ 29.44% 21,342 21,342 IT Service Center Allocation 28,314 28,314 Rent Expense 4,000 4,000 Total OH Pool $ 131,128 $126,156 Base: Direct Labor$ 300,000 Fringe on Direct Labor @ 29.44% 88,312 Total OH Base $388,312 $ 388,312 Overhead Rate: 33.77% 32.49%

16. Roland Wick Consultant 16 G&A Rate Pool: G&A Labor BP Labor Allowable OH on B&P Fringe on B&P $ 170,000 10,000 4,205 2,944 Fringe on G&A Labor @ 29.44% 50,048 IT Service Center Allocation16,989 Legal & Professional Fees 10,000 Travel Expense 8,000 G&A Travel Expense – Unallowable (excluded from pool)0 Rent Expense 12,000 Total G&A Pool $ 284,186 Base: Direct Labor Less BP labor Less BP OH at total rate 33.77% Less Fringe on B&P $ 300,000 (10,000) (4,371) (2944) Fringe on Direct Labor @ 29.44% 88,312 Direct Materials 250,000 Subcontractor Expense 300,000 Unallowable OH costs5,000 Overhead Pool (including fringe on OH labor ) 126,126 Total Cost Input Base Rate $1,052,123 27%

17. Roland Wick Consultant Reconciliation $1,052,123 Total Cost Input 284186G&A $1,336,309 Subtotal 166BP not in G&A 3000add unallowable G&A $1,339,475 $1,339,500 $25 rounding

18. Roland Wick Consultant 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.

19. Roland Wick Consultant Schedule A Lead Schedule

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21. Schedule B Indirect Pool

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23. Schedule C Fringe Pool

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25. Schedule D Bases

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27. Summary/Questions