Training For Success in Winning Government Contracts
Training For Success
in Winning Government Contracts
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.
Copyright © RGFCC 2002
Slide 1
Training For Success in Winning Government Contracts
WHO ARE WE
Instructors:
Robert G. Flowers, Jr. Principal
Kevin Duncan, CPA MBA
Contact RGF Consulting Corporation (RGFCC):
Web site:
Tel:
Email:
www.rgfcc.com
888-389-1230
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
WHO ARE YOU?
1.
2.
3.
4.
When Your Company is Called, Please
Respond as Follows:
Give your name and title.
Briefly describe your firm’s line of business.
What accounting system are you currently
using?
What is your biggest indirect budget
concern?
Copyright © RGFCC 2002
Slide 3
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
INTRODUCTION
Basic Elements Of Cost
 Labor (Direct Cost)
 Material/Equipment (Direct Cost)
 Indirect Cost
 Manual Page 1
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
TERMINOLOGY
 DIRECT COSTS
 OTHER DIRECT COSTS (ODC)
 INDIRECT COSTS
 ALLOCABLE COST
 ALLOCATION BASE
 ALLOWABLE COSTS
 Manual Page 2 - 5
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
TERMINOLOGY
 DIRECTLY ASSOCIATED COSTS
 EXPRESSLY UNALLOWABLE COST
 FRINGE POOL
 FRINGE BENEFIT RATE
OVERHEAD POOL
OVERHEAD RATE
 Manual Page 6 & 7
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
TERMINOLOGY
 INDIRECT RATE CEILINGS
 REASONABLENESS OF COSTS
 UNALLOWABLE COST
 Manual Page 9 & 10
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
COMPUTING YOUR WRAP RATE
Cost Elements
Proposal Dollars
Indirect Rates
Direct Labor
$1,000,000
Fringe Rate
$ 320,000
32.0%
Overhead Rate
$ 750,000
75.0%
Combined
Overhead
$1,070,000
107.0%
Fee
$ 165,600
8.0%
Total
$2,235,600
Handout 2
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
Types of Audits
Indirect Cost Rate (Overhead) AASHTO Chapter 8
Contract Pre-Award
Accounting System Reviews
Contract Costs
 AASHTO Audit Guide Ch-2
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
CONTRACT PRE-AWARDS
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
 AASHTO Audit Guide Ch-2
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
LABOR CHARGING SYSTEM
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
TIMECARD PREPARATION
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.
 Manual Page 14
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
PENALTIES FOR LABOR MISCHARGING
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.
 Manual Page 16
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
Indirect Cycle
PLAN
(Budget)
Control
Price
(Proposal)
Analyze
(Incur) I/S
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
CATEGORIES OF INDIRECT COSTS
1.
•
•
•
•
•
•
•
Indirect costs fall into 1 broad Category: Overhead
2 Subcategories:
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
CATEGORIES OF INDIRECT COSTS
2. Overhead
• Indirect Costs for Supporting Projects and Conducting
Business
• Home Office and Field Site Overhead
 Manual Page 18
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
Indirect Rate & Allocation of Costs
IDR
Direct Labor
Company
Contract A
Contract B
$100
$70
$30
Fringe
32.0%
$32
$22
$10
Overhead
75.0%
$75
$53
$22
$207
$145
$62
$21
$14
$6
$228
$159
$68
Total Cost
Fee/Profit
Tot Revenue
10.00%
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
INDIRECT COST ALLOCATION BASE
Direct labor dollars:
Overhead Pool Dollars = Overhead Rate
Direct Labor Dollars
 Manual Page 19
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
SELECTING A BASE - CONSIDERATIONS
Allocation Bases
INDIRECT POOL
ALLOCATION BASE
• Fringe Pool
(Intermediate)
• Direct Labor Dollars
• General Overhead Pool
(Intermediate)
• Total Overhead Pool
 Manual Page 20
• Direct Labor Dollars
• Direct Labor Dollars
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
ESTIMATING YOUR SALES
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
SAMPLE COSTS
FAR
REF.
Alcoholic Beverages
31.205-51
X
Bad Debts
31.205-3
X
Bonding Costs
31.205-4
X
Contingencies
31.205-7
X
Contributions or Donations
31.205-8
Cost of Money
31.205-10
X
Depreciation
31.205-11
X
Emp. Morale, Health & Welfare 31.205-13
A
UA
AWR
X
X
X
X
Entertainment Cost
31.205-14
X
Fines and Penalties
31.205-15
X
Gains & Losses on Disposal of
Depre. Prop
31.205-16
Goodwill
31.205-49
X
X
X
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
SAMPLE COSTS
FAR REF.
A
Idle Facilities
31.205-17
X
X
IR&D/B&P Costs
31.205-18
X
X
Insurance
31.205-19
X
X
Interest & Financial
31.205-20
X
X
Legal
31.205-47
X
X
Lobbying Costs
31.205-50
X
Losses on Other Contracts
31.205-23
X
Org. Costs (Student Fill in)
31.205-27
Patent Costs
31.205-30
Plant Re-conversion. Costs
31.205-31
Pre-contract Costs
31.205-32
Prof. & Consulting Cost
31.205-33
X
X
UA
AWR
X
X
X
X
X
X
Copyright © RGFCC 2002
X
X
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Training For Success in Winning Government Contracts
SAMPLE COSTS
FAR
REF.
Public Relations & Advertising
31.205-1
Recruitment Costs
31.205-34
Relocation (Student Fill in)
31.205-35
Selling Costs
A
UA
AWR
X
X
X
X
X
31.205-38
X
X
Taxes
31.205-41
X
X
Termination Costs
31.205-42
X
X
Trade, Business, Tech., & Prof.
Activity Costs
31.205-43
X
X
Training & Education Costs
31.205-44
X
Transportation Costs
31.205-45
X
Travel Costs
31.205-46
X
Copyright © RGFCC 2002
X
X
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
ACCOUNTING SYSTEMS
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
ACCOUNTING SYSTEMS
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
ACCOUNTING SYSTEMS
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
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
FIVE ESSENTIAL NUMBERS
Number
Calculation
Importance
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 RatesContracted
(1+Contracted Fringe Rate)
X (1+Contracted OH Rate) X
(1+Contracted G&A Rate)
If Contracted is greater
than Actual – Profit
Actual
(1+Actual Fringe Rate) X
(1+ Actual OH Rate) X
(1+Actual G&A Rate)
If Actual is greater than
Contracted - Loss
Handout No.
Copyright © RGFCC 2002
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Training For Success in Winning Government Contracts
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 Backlog
Contract Value-Contract
Billings
Gives a good indication
of how long you will be
in business without new
contracts.
Handout No.
Copyright © RGFCC 2002
Slide 43