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

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)

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”)

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

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

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

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

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

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

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

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

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%)($52.50 + $78.75) = $19.69 per labor hour Wrap Rate = Wage Rate + Overhead Rate + Other Cost Rate = $52.50 + $78.75 + $19.69 Wrap or fully burdened rate = $150.94 per labor hour

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

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

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

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

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

Questions?