1. Indirect Cost Workshop
Adapted from
Indirect Cost Workshop
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
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
**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
Rate
31.82%
Overhead Rate
32,025
93,811
34.14%
G&A Rate
25,659
162,976
15.74%
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
Fringe Rate (Info Only)
FY14 Forecast - Composite
Pool
30,392
Base
95,520
Rate
31.82%
Overhead Rate
61,874
93,811
65.96%
G&A Rate
25,659
162,976
15.74%
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
Direct Labor
93,384
Fringe on Labor
31.82%
29,713
O/H on Labor
34.14%
31,879
Subtotal
154,976
Direct M/ODC
8,000
162,976
G&A on Subtotal
15.74%
25,659
Total Cost
$188,635
Direct Labor
93,384
O/H on Labor
65.96%
61,592
Direct M/ODC
8,000
Subtotal
162,976
G&A on Subtotal
15.74%
25,659
Total Cost
$188,635

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) = $78.75 per labor hour
G&A = (15%)(Wage Rate + Overhead Rate) = (15%)($ $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
Rate
price
Value Added
Material
Material OH
10%
$50,000
$5,000
Engineering
Eng OH
80%
$20,000
$16,000
Manufacturing
Mfg OH
200%
$40,000
$80,000
Sub total
$211,000
Less mat
($50,000)
VA base
$161,000
G&A
$21,100
12.22%
$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?