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

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Presentation on theme: "Indirect Cost Workshop Lori L Heath CFO/Contracts Manager Minerva Engineering (formerly an Independent Consultant for Small Government Contractors) Adapted."— Presentation transcript:

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

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 Holiday Expense PTO (Vac/Sic/Hol) Medical Insurance Dental Insurance Disability Insurance Life Insurance ER Payroll Taxes Worker's Comp Expense 401(K) Retirement Plan Bonus Expense Relocation Expense Indirect Travel Education & Seminars Office Expense/Supplies Postage/Express Mail Printing/Stationary Dues & Subscriptions Computer Hardware Computer Software Computer Supplies R&M - Equipment Rent Expense Utilities Telephone Expense (cell) Indirect Travel Business Meetings Consulting Professional Services Education & Seminars Bus Dev Travel Legal Expense Accounting Expense General Liability Insurance Banking Fees IR&DB&P Related Expenses Plus Fringe and O/H on Labor Charity/Contributions First Class Premiums Fines & Penalites Alcohol/Entertainment Interest Expense Interest Income Federal Taxes Fringe ExpenseOverhead ExpenseG&A ExpenseUnallowable Expense **The colored expenses could be part of an intermediate pool or service center

7 Rate Scenarios – Proposal with fringe, OH & G&A Fringe Rate FY14 Forecast – Non Composite Pool 30,392 Base 95,520 Rate31.82% Overhead Rate Pool 32,025 Base 93,811 Rate34.14% G&A Rate Pool 25,659 Base 162,976 Rate15.74% The sum of the G&A Pool and base = $188,635 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

8 Rate Scenarios – proposal with Overhead & G&A Fringe Rate (Info Only) FY14 Forecast - Composite Pool 30,392 Base 95,520 Rate31.82% Overhead Rate Pool 61,874 Base 93,811 Rate65.96% G&A Rate Pool 25,659 Base 162,976 Rate15.74% The sum of the G&APool and base = $188,635 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

9 Full Application of Rates Composite Rates Non Composite/Non Additive Rates Direct Labor 93,384 O/H on Labor 65.96% 61,592 Direct M/ODC 8,000 Subtotal162,976 G&A on Subtotal 15.74% 25,659 Total Cost $188,635 Direct Labor 93,384 Fringe on Labor 31.82% 29,713 O/H on Labor 34.14% 31,879 Subtotal154,976 Direct M/ODC 8,000 Subtotal162,976 G&A on Subtotal 15.74% 25,659 Total Cost$188,635

10 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 WRAP Rates

11 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 WRAP Rates continued

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) = $78.75 per labor hour – G&A = (15%)(Wage Rate + Overhead Rate) = (15%)($ $78.75) = $19.69 per labor hour – Wrap Rate = Wage Rate + Overhead Rate + Other Cost Rate = $ $ $19.69 – Wrap or fully burdened rate = $ 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 Total Cost Rateprice Value Added Material Material OH10% $50,000 $5,00010% $50,000 $5,000 Engineering Eng OH80% $20,000 $16,00080% $20,000 $16,000 Manufacturing Mfg OH200% $40,000 $80,000200% $40,000 $80,000 Sub total$211,000 Less mat($50,000) VA base$161,000 G&A10% $21, % $19,678 Total$232,100$230,678

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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