Understanding Basics of
Indirect Rates
NCMA
March 20, 2014
Roland Wick
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OVERVIEW
1.
2.
3.
4.
Understanding description of indirect
costs.
Understand bases, pools, rates.
Understand basics of indirect rate
development from accounting records for
final costs.
Understand a basic submission format
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Why Need Indirect Rates?



Proposals
Final Indirect Rate Submissions
Provisional Billing Rates (not same as proposals)

Main Reason: Survival. Recover indirect costs on
direct work effort.

One significant reason small business fails?
No proper recovery of indirect costs!!!!
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Indirect Rates are Difficult for New
Contractors
What are Indirect Rates and Indirect Costs?

An indirect cost is any cost not directly identified with a single, final cost objective
(contract), but identified with two or more final cost objectives or an intermediate cost
objective. It is not subject to treatment as a direct cost.

In simple terms, indirect costs are those costs not readily identified with a specific
contract but incurred for the joint benefit of all contracts.

An indirect cost rate is simply a method for determining fairly and expeditiously
the proportion of general (non-direct) expenses that each project will bear. It is the
ratio between the total indirect costs and some equitable cost base.
Indirect Costs Ratio
Indirect Cost Pool
Cost Base
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=Indirect Cost Rate %
What are Indirect Rates and Indirect Costs?
How To Develop

To develop a logical and consistent method for allocating indirect
costs:

Start
Develop indirect costs grouped into common

pools.
Then
Pick a common cost or costs that appear to have a causal relationship
to the pool costs. The method for allocating a pool of indirect costs is
determined by what caused the costs and/or what benefits from the
costs. That is, what is the most likely reason the indirect costs are
incurred? What effort do the indirect costs support? The selected
driver of the indirect cost pools will be the base. That is also called the
benefiting objective.
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Examples of Common Indirect
Pools and Allocation Bases

Fringe pool costs / total labor cost base

Overhead costs/ direct labor base

G&A Costs/ total cost input base
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FAR Part 31 Impacts Pools and
Bases!!!

“Unallowable cost” means any cost which,
under the provisions of any pertinent law,
regulation, or contract, cannot be included
in prices, cost-reimbursements, or
settlements under a Government contract
to which it is allocable.
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Unallowable Cost Requirements


All items properly includable in an indirect cost
base shall bear a pro rata share of indirect
costs irrespective of their acceptance as
Government contract costs.
For example, when a cost input base is used for
the allocation of G&A costs, the contractor shall
include in the base all items that would properly
be part of the cost input base, whether
allowable or unallowable, and these items
shall bear their pro rata share of G&A costs.
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What???

Example:
 Have
$100 of unallowable direct labor
(unusual)
 For discussion, have 10% overhead and 10%
G&A rates (assume direct labor base for
everything).
How much do you exclude from bill???
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Unallowable Question
Must exclude $100 of direct labor
 Exclude $10 of overhead
 Exclude $10 of G&A

Each indirect base still keeps the $100 of
direct labor cost
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G&A Unallowables?

Just remove from the pool. They are not
in an allocation base. No adjustment to the
base.

Luckily, most small contractors only have
G&A unallowables.
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How Does this Work?
Starting Point for Cost Pools –
Trial Balance
(Source NCMA presentation PowerPoint 2010)
Direct Labor w/
B&P Labor($10,000)
G&A
OH
Fringe
300,000
X
Subcontractor Expense
300,000
X
Direct Materials
250,000
X
Payroll Taxes
30,000
X
Insurance Expense
50,000
X
Sick, Holiday & Vacation Expense
65,000
X
Pension Contribution
25,000
X
IT Support Labor
35,000
Overhead Labor
72,500
Overhead Travel- Unallowable
$
Direct
X
5,000
X
16,000
X
G&A Labor
170,000
X
Legal & Professional Fees
10,000
X
G&A Travel Expense
8,000
X
G&A Travel Expense – Unallowable
3,000
$ 1,339,500
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U/A
X
Rent Expense (75% G&A)
Total Cost
IT SC
X
X
Fringe Rate Example
Pool:
Payroll Taxes
$
30,000
Insurance Expense
50,000
Sick, Holiday & Vacation Expense
65,000
Pension Contribution
25,000
Total Fringe Pool
$
170,000
$
300,000
Base:
Direct Labor/w B&P
IT Support Labor
35,000
Overhead Labor
72,500
G&A Labor
170,000
Total Labor Base
$
Fringe Rate:
577,500
29.44%
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IT Service Center
Pool:
IT Support Labor
$
Fringe on IT Support Labor @ 29.44%
35,000
10,303
Total Service Center Pool
$
45,303
Base:
Overhead Personnel
5 Personnel
G&A Personnel
3 Personnel
Total Headcount Base
8
Service Center Rate:
$
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5,663
Overhead Rate
Pool:
Books
Overhead Labor
$ 72,500
Overhead Travel- Unallowable (excluded from pool)
Allowable
$ 72,500
5,000
0
Fringe on Overhead Labor @ 29.44%
21,342
21,342
IT Service Center Allocation
28,314
28,314
Rent Expense
4,000
4,000
Total OH Pool
$ 131,128
$126,156
Base:
Direct Labor
$ 300,000
Fringe on Direct Labor @ 29.44%
88,312
Total OH Base
$388,312
Overhead Rate:
33.77%
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$ 388,312
32.49%
G&A Rate
Pool:
$
G&A Labor
170,000
10,000
BP Labor
4,205
Allowable OH on B&P
2,944
Fringe on B&P
Fringe on G&A Labor @ 29.44%
IT Service Center Allocation
Legal & Professional Fees
Travel Expense
G&A Travel Expense – Unallowable (excluded from pool)
Rent Expense
Total G&A Pool
$
50,048
16,989
10,000
8,000
0
12,000
284,186
Base:
$
Direct Labor
Less BP labor
Less BP OH at total rate 33.77%
Less Fringe on B&P
Fringe on Direct Labor @ 29.44%
Direct Materials
Subcontractor Expense
Unallowable OH costs
Overhead Pool (including fringe on OH labor )
300,000
(10,000)
(4,371)
(2944)
88,312
250,000
300,000
5,000
126,126
$1,052,123
Total Cost Input Base
Rate
27%
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Reconciliation
$1,052,123
284186
Total Cost Input
G&A
$1,336,309
Subtotal
166
BP not in G&A
3000
add unallowable G&A
$1,339,475
$1,339,500
$25
rounding
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Format for Submission
(source Health and Human Services)

The Government likes its own formats.
Here is a format example from DHHS for
provisional billing rates and proposal rates.

Note –This is a format example only. Do not use for allocation
method. Follow FAR Part 31. See DCAA Pamphlet “Information
for Contractors” for DoD rate formats.
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Schedule A

Lead Schedule
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Schedule B

Indirect Pool
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Schedule C

Fringe Pool
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Schedule D

Bases
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Summary/Questions
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