1. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 1 Establishing Indirect Rates RGF Consulting Corporation is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. NASBA Web site: www.nasba.org. Training For Success in Winning Government Contracts

2. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 2 Instructors: Robert G. Flowers, Jr. Principal Kevin Duncan, CPA MBA Contact RGF Consulting Corporation (RGFCC): Web site:www.rgfcc.com Tel: 888-389-1230 Email: costs@rgfcc.com Training Workshops (Scheduled or By Requests, on-Site or off-Site), in the areas of; Cost Proposals and Indirect Rates, Federal Acquisition Regulation (FAR), Technical Proposals, Marketing Techniques, Labor Law Impact, Cost Proposal Assistance, Accounting Systems and Audit Compliance, Technical Proposal Assistance, Marketing Planning, Labor Law Compliance WHO ARE WE

3. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 3 WHO ARE YOU? When Your Company is Called, Please Respond as Follows: 1.Give your name and title. 2.Briefly describe your firm’s line of business. 3.What accounting system are you currently using? 4. What is your biggest indirect budget concern?

4. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 4 MANUAL ORIENTATION AND ADMINISTRATION Please place your cell phone on vibrate/silent mode, First section consist of the Power Point presentation synchronized with the slides. (page numbers are shown in the bottom left corner of the slides) Financial Statement exercise Tab * Budget exercise Tab * AASHTO Uniform Audit & Accounting Guide Handout Tab Breaks are every hour and lunch is 1 hour 15 minutes starting at 11:45 AM

5. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 5 INTRODUCTION Basic Elements Of Cost Labor (Direct Cost) Material/Equipment (Direct Cost) Indirect Cost  Manual Page 1

6. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 6 OBJECTIVES Familiarize you with the basic terminology associated with the indirect rate process. Define indirect rates and determine their purpose in our business life. Identify the business costs elements that make up these rates. Examine indirect costs pools and how the allocation bases relate to these pools.  Manual Page 1 - 2

7. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 7 OBJECTIVES Identify the typical rate structure. Demonstrate a logical process of analyzing your actual financial data in rate development process and how to classify this data in the rate structure. Step-by-step guidelines on developing indirect rates.  Manual Page 2

8. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 8 DIRECT COSTS OTHER DIRECT COSTS (ODC) INDIRECT COSTS ALLOCABLE COST ALLOCATION BASE ALLOWABLE COSTS  Manual Page 2 - 5 TERMINOLOGY

9. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 9 BID AND PROPOSAL (B&P) COST BILLING RATE BURDENED COST/LOADED COST INPUT COST OBJECTIVE  Manual Page 5 & 6 TERMINOLOGY

10. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 10 DIRECTLY ASSOCIATED COSTS EXPRESSLY UNALLOWABLE COST FRINGE POOL FRINGE BENEFIT RATE OVERHEAD POOL OVERHEAD RATE  Manual Page 6 & 7 TERMINOLOGY

11. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 11 INDIRECT RATE CEILINGS REASONABLENESS OF COSTS UNALLOWABLE COST  Manual Page 9 & 10 TERMINOLOGY

12. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 12 REGULATIONS AND GUIDELINES Generally Accepted Accounting Principles (GAAP) Truth In Negotiation Act (TINA) Cost Accounting Standards (CAS) Federal Acquisition Regulation (FAR) Defense Contract Audit Agency (DCAA) - Federal  Manual Page 10 & 12

13. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 13 Cost ElementsProposal DollarsIndirect Rates Direct Labor$1,000,000 Fringe Rate$ 320,000 32.0% Overhead Rate$ 750,000 75.0% Combined Overhead $1,070,000107.0% Fee$ 165,600 8.0% Total$2,235,600 COMPUTING YOUR WRAP RATE Handout 2

14. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 14  AASHTO Audit Guide Ch-2 Types of Audits Indirect Cost Rate (Overhead) - AASHTO Chapter 8 Contract Pre-Award Accounting System Reviews Contract Costs

15. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 15 INDIRECT COST RATES (OVERHEAD) Render an Opinion on Consultants Overhead Rate For a specific period – Fiscal Year Insure removal of Unallowable Costs Allowable costs: Properly measured Properly allocated

16. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 16 Evaluate the Reasonableness and Accuracy of a Cost Proposal. Auditors may examine: (1) Indirect Cost Rates (2) Accounting System (3) Loan agreements (4) Financial Capability Reviews CONTRACT PRE-AWARDS  AASHTO Audit Guide Ch-2

17. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 17 LABOR CHARGING SYSTEM Timekeeping procedures and controls on labor charges are critical areas. Unlike other costs, labor is not supported by external documentation or physical evidence to provide an independent check or balance. The key link in any sound labor time charging system is the employee. Management must indoctrinate employees on their independent responsibility for accurately recording time charges.  Manual Page 15

18. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 18 Internal controls over labor charging should meet the following criteria: There should be a segregation of responsibilities for labor related activities. Procedures must be evident, clear ‑ cut, and reasonable. Maintenance of controls must be continually verified and violations remedied through prompt and effective action. Individual employees must be constantly made aware of controls.  Manual Page 16 LABOR CHARGING SYSTEM

19. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 19 TTIMECARD PREPARATION Instructions should indicate that the employee is personally responsible for: a. Recording time on the timecard in ink. b. Distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment. c. Listing project numbers and their descriptions per written company instructions. SEE RECOMMENDED TIMEKEEPING POLICY HANDOUT  Manual Page 16 & 17

20. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 20 d. Ensuring that all time card changes are lined through, with the employee's initials beside the change indicating the employee personally made the change and that the change is correct. e. Recording all hours worked whether they are paid or not. (labor costs and associated overheads are affected by total hours worked, not just paid hours worked). f. Signing the timecard at the end of each work period. TIMECARD PREPARATION  Manual Page 14

21. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 21 PENALTIES FOR LABOR MISCHARGING a. The manipulation of charges to a contract may be subject to criminal charges under 18 United States Code (U.S.C.) 1001, which reads as follows: "WHOEVER, IN ANY MATTER WITHIN THE JURISDICTION OF THE EXECUTIVE, LEGISLATIVE, OR JUDICIAL BRANCH OF THE GOVERNMENT OF THE UNITED STATES KNOWINGLY AND WILLFULLY (1) FALSIFIES, CONCEALS OR COVERS UP BY ANY TRICK, SCHEME, OR DEVICE A MATERIAL FACT; (2) MAKES ANY MATERIALLY FALSE, FICTITIOUS OR FRAUDULENT STATEMENT OR REPRESENTATION; OR (3) MAKES OR USES ANY FALSE WRITING OR DOCUMENT KNOWING THE SAME TO CONTAIN ANY MATERIALLY FALSE, FICTITIOUS OR FRAUDULENT STATEMENT OR ENTRY; SHALL BE FINED UNDER THIS TITLE OR IMPRISONED NOT MORE THAN FIVE YEARS, OR BOTH. "  Manual Page 15

22. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 22 b. Subject to the facts surrounding participation, the following can be liable for the violation: (1) Employees who fill in and sign the timecards with the false information. (2) Supervisors who approve the timecards with the knowledge that they contain the false information. (3) Managers and officers who know those facts and make the claim anyway by submitting the invoice based upon the false timecard. PENALTIES FOR LABOR MISCHARGING  Manual Page 16

23. Training For Success in Winning Government Contracts Indirect Cycle PLAN (Budget) Control Price (Proposal) Analyze (Incur) I/S

24. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 24 TYPES OF INDIRECT COST Costs that cannot practically be assigned directly to the production or sale of a particular product or service. In accounting terms, such costs are not directly identifiable with a specific contract. Direct costs of minor dollar amount may be treated as indirect costs if the accounting treatment is consistently applied and it produces substantially the same results as treating the cost as a direct cost.  Manual Page 17

25. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 25 CATEGORIES OF INDIRECT COSTS Indirect costs fall into 1 broad Category: Overhead 2 Subcategories: 1.Fringe. Examples include: FICA/Medicare FUTA (Federal Unemployment Insurance) SUTA (State Unemployment Insurance) Worker’s Compensation Insurance Health and Welfare Holiday’s, Vacation, and Sick Leave Pension Costs  Manual Page 18

26. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 26  Manual Page 18 CATEGORIES OF INDIRECT COSTS 2. Overhead Indirect Costs for Supporting Projects and Conducting Business Home Office and Field Site Overhead

27. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 27 Indirect Rate & Allocation of Costs IDRCompanyContract AContract B Direct Labor$100$70$30 Fringe32.0%$32$22$10 Overhead75.0%$75$53$22 Total Cost $207$145$62 Fee/Profit10.00%$21$14$6 Tot Revenue$228$159$68

28. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 28 INDIRECT COST ALLOCATION BASE Direct labor dollars: Overhead Pool Dollars = Overhead Rate Direct Labor Dollars  Manual Page 19

29. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 29 SELECTING A BASE - CONSIDERATIONS Allocation Bases INDIRECT POOL Fringe Pool (Intermediate) General Overhead Pool (Intermediate) Total Overhead Pool ALLOCATION BASE Direct Labor Dollars  Manual Page 20

30. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 30 Management Responsibility for Accounting Schedule of Indirect & Unallowable Costs Financial Statements Management Representations Accurate Complete In Compliance with Regulations (FAR) Sound Financial data Consistent Assumptions All Actual Indirect Cost Rate are Disclosed  AASHTO Audit Guide Ch-6

31. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 31 ESTIMATING OVERHEAD COST RATES General process should follow five steps: Estimate Sales Volumes for the Period Estimate the direct cost associated with the sales volume Estimate indirect Cost Allocation Bases for the Period Estimated indirect Cost Pools for the Period Estimate Indirect Cost Rates for the Period  Manual Page 21

32. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 32 ESTIMATING YOUR SALES Sales Estimates Should: Be based on the best information available? Consider all work likely to benefit from the indirect cost pool? Include: Current Contract Work Option Years that may be exercised High probability Proposals Solicitations in hand Other anticipated customer requirements  Manual Page 22

33. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 33 Assign a probability percentage to sales volume forecast: Contracts in hand would be 100 percent. Other estimates in hand would be assigned a lower “win” probability, based on a probability. If sales consists of only a few large Government contracts, place less faith in your statistical estimates, and more faith in your Marketing Department.  Manual Page 22 ESTIMATING YOUR SALES

34. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 34 ESTIMATING YOUR ALLOCATION BASE  Translate the sales volume forecast into performance  Forecast total direct costs (DL, materials, and base)  Forecast indirect costs for each indirect cost pool  Consider costs in each account of your chart of accounts  Consider whether the cost type is more fixed or variable Insure that data is: Accurate Complete Current  Manual Page 25

35. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 35 SAMPLE COSTSFAR REF. AUAAWR Alcoholic Beverages31.205-51X Bad Debts31.205-3X Bonding Costs31.205-4X Contingencies31.205-7XX Contributions or Donations31.205-8X Cost of Money31.205-10X Depreciation31.205-11X Emp. Morale, Health & Welfare31.205-13XX Entertainment Cost31.205-14X Fines and Penalties31.205-15XX Gains & Losses on Disposal of Depre. Prop 31.205-16X Goodwill31.205-49X

36. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 36 SAMPLE COSTSFAR REF.AUAAWR Idle Facilities31.205-17XX IR&D/B&P Costs31.205-18XX Insurance31.205-19XXX Interest & Financial31.205-20XX Legal31.205-47XX Lobbying Costs31.205-50X Losses on Other Contracts31.205-23X Org. Costs (Student Fill in)31.205-27 Patent Costs31.205-30XXX Plant Re-conversion. Costs31.205-31XX Pre-contract Costs31.205-32X Prof. & Consulting Cost31.205-33XXX

37. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 37 SAMPLE COSTSFAR REF. AUAAWR Public Relations & Advertising31.205-1XX Recruitment Costs31.205-34XXX Relocation (Student Fill in)31.205-35 Selling Costs31.205-38XX Taxes31.205-41XX Termination Costs31.205-42XX Trade, Business, Tech., & Prof. Activity Costs 31.205-43XX Training & Education Costs31.205-44XXX Transportation Costs31.205-45X Travel Costs31.205-46X

38. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 38 ACCOUNTING SYSTEMS To be approved for government cost-type contract, it must contain the following attributes (SF1408): 1.Be in conformance with (GAAP) 2.Provides for: a.) The proper segregation of direct cost from indirect costs. Identification and accumulation of direct costs by contract. b.) A logical and consistent method for the allocation of indirect cost to intermediate and final costs Objectives. c.) Accumulation of cost under general ledger control.  Manual Page 30

39. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 39 e.) A time keeping system that identifies employee’s labor to the appropriate cost objectives. f.) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives. g.) Interim ( AT least monthly) determination of costs charged to a contract through routine posting of books and account.  Manual Page 30 ACCOUNTING SYSTEMS

40. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 40 h.) Exclusive of costs charged to government contract of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions. i.) Identification of costs by contract line items and by units (as if each unit or line item was a separate contract) if required by the proposed contract. j.) Segregation of pre-production costs from production costs.  Manual Page 30 ACCOUNTING SYSTEMS

41. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 41 3. Provides financial information to support: a. Requirements by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation of payments (FAR 52.216-16). b. Requirements to support requests for progress payments. 4. Maintenance of records in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions. 5. The system is currently in full operation. 6. Recommended that the system have the capability to prepare billings on government cost-type.  Manual Page 31 ACCOUNTING SYSTEMS

42. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 42 FIVE ESSENTIAL NUMBERS NumberCalculationImportance 1. Cash Balance Bk. Bal.-Outstanding Cks. The more the merrier 2. Current Ratio Cur. Assets/Cur. Liabilities 2 or more good/ 1 or less bad 3. Wrap Rates- Contracted Actual (1+Contracted Fringe Rate) X (1+Contracted OH Rate) X (1+Contracted G&A Rate) (1+Actual Fringe Rate) X (1+ Actual OH Rate) X (1+Actual G&A Rate) If Contracted is greater than Actual – Profit If Actual is greater than Contracted - Loss Handout No.

43. Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 43 FIVE ESSENTIAL NUMBERS 4. Average Collection Period Billed Accounts Receivable (Annual Sales/360) Expressed in days: - 45 days is good - 60 days is average - more than 60 days indicates your firm’s billing and collection process need work 5. Contract BacklogContract Value-Contract Billings Gives a good indication of how long you will be in business without new contracts. Handout No.