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Project Manufacturing
Human Resources
Project Management
Financial Management
Enabling Success
Winning More Business
Reducing the Cost of Compliance
Increasing Project Visibility
Improving Cash Flow
CRM and Capture Management
Teaming Solutions
Market Intelligence
Business Performance Management
Know More
Win More
Do More
04/18/20233 ©2011 Deltek, Inc. All Rights Reserved
Project Manufacturing
Human Resources
Financial Management
Project Management
Do More
CRM and Capture Management
Teaming Solutions
Market IntelligenceWin More
Do More
Project Execution & Management
Reporting, GRC & Compliance
Project & Corp Accounting
Time, Expense, Labor, Payroll
Business Performance Management
Know More
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Agenda Definitions
Composition of indirect pools and bases
Workshop
Strategic plan and design of indirect rates
Common errors
Q & A
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Key Takeaways To provide direction to enable you to strategically design an indirect
rate structure that has the following attributes:
Complies with Federal Regulations
Maximizes cost recovery
Aligns with the vision of your organization
Incorporates best practices and industry standards
04/18/20237 ©2011 Deltek, Inc. All Rights Reserved
Direct Cost - A cost that can be identified with a final cost objective
Indirect Cost - A cost that is not directly identified with a single, final cost objective but identified with two or more final cost objectives
Costs are arranged into logical and homogeneous pools
Amounts are allocated based on the relationship of the expense to the segment
Allocate - To assign an item of cost, or a group of items of cost, to one or more cost objectives
Service Center - Intermediate pools set up to collect costs that are attributable to multiple cost objectives.
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Indirect Cost Pool – A group of homogeneous costs that support multiple cost objectives (numerator)
Indirect Cost Base – The factor used to allocate the indirect costs (denominator)
Indirect Cost Rate - the ratio between the total allowable indirect costs and benefiting direct base
Indirect Cost Pool = Indirect Cost Rate**
Indirect Cost Base
**An indirect cost rate percentage is calculated by dividing the pool by the base
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The allocation of costs should be accomplished on a cost benefit basis
Pools – composed of indirect costs accumulated with other like costs (homogeneous pools)
Base – allocation method
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Sample of indirect pools Fringe
Statutory
Discretionary
SCA
Union
Divisional
Subcontractor & Material Handling
Overhead
Client site
Home site
Divisional
Location specific
General & Administrative
Segments
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Indirect bases Fringe
Total Labor Dollars
Overhead
Direct labor, fringe applied to direct labor, B&P labor, fringe applied to B&P labor
Subcontractor & Material Handling
Subcontracts and Materials
General & Administrative
Direct Labor, ODC, fringe on direct labor, and overhead costs
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FRINGE Fringe pool is composed of statutory payroll taxes and benefits typically
found in the employee handbook. Fringe is most commonly computed as a percentage of all labor both direct and indirect.
Typical costs
FICA, FUTA, SUTA, Workers’ Compensation
Employee insurance
Leave
Retirement benefits
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OVERHEAD Overhead pool is composed of costs that support existing contract work
and direct contract personnel. The most common base of the overhead pool is direct labor, B&P labor, and related fringe.
Typical costs
Support labor (Project Control)
Training
Facilities
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GENERAL AND ADMINISTRATIVE G&A pool is composed of indirect expenses that cannot be attributed to
any specific contract but are for the general benefit of the company as a whole. The most common base of the G&A pool is total costs input or value added.
Typical costs
Accounting & Finance
Contract Administration
General management
Facilities
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SERVICE CENTERS Service Centers or intermediate pools are set up to collect costs that are
attributable to multiple cost objectives in order that they may be fairly and equitably allocated in a causal/benefit relationship.
Most common: Facilities and IT/Communication
Reasonable basis allocation methods: Square Footage, Labor Hours, Headcount, or Labor Dollars
Typical costs in a facility service center
Rent
Supplies
Property taxes
Depreciation
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Placement of costs Bonuses
Should only be in fringe if a universal plan exists
Review plan documents
Treatment of deferred plans
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Placement of costs Bonuses
Direct vs. Indirect
Labor
Depreciation
Leases (office, equipment, vehicles)
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Placement of costs Bonuses
Direct vs. Indirect
Overhead vs. G&A
Look at the components of G&A to see if costs can be moved to Overhead
This will lower the G&A rate which is looked at with more scrutiny
HR, IT, Contracts, Security, Recruiting and Operational Accounting
Service centers
provide an easy way of allocating costs from G&A to Overhead
Can be allocated based on direct labor dollars, head count, or other methods
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Placement of costs Bonuses
Direct vs. Indirect
Overhead vs. G&A
Sound financial data
Helps understand the cost of getting new business
If you have the infrastructure in place you will know the risks you are taking
DCAA or other agency reps do not approve job cost accounting software packages; they approve job cost accounting practices
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Architecture Appearance
Not changing total costs
Understand your business and your options
Understand your customers and how they evaluate costs and the role costs play in a contract award
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Architecture Appearance
Fringe rate
Reduced scrutiny
Without a fringe rate overhead is inflated
Placing fringe on direct labor in the base of the overhead pool
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Architecture Appearance
Fringe rate
Overhead rate
Client site vs. Home site
If principal effort is to chase client site work limit overhead
Look at options of classifying client site overhead as a direct costs
Setting up divisions
Treat consultants like employees and put the consultant labor in the base of overhead
Single overhead pool with a facility adder for employees working at different offices
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Architecture Appearance
Fringe rate
Overhead rate
Other rates
Consider setting up a Subcontractor Material & Handling rate
This will take the subs out of the base of G&A
Does not include travel or ODC’s
Consultants can be contested if included in this pool
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Architecture Appearance
Fringe rate
Overhead rate
Other rates
Cost vs. benefit
Should be considered with all decisions
When allocating service centers if you use a manual base instead of direct labor the allocation can not be run automatically
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Hedging your bets Impact of new business
Adjust rates in bids for impact of new business
Understand the relationship between indirect costs and business volume
How will additional workforce and costs effects rates
Will you need to open a new office in a new location
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Hedging your bets Impact of new business
Knowing how an indirect cost will react to a change in volume is important for such pricing actions as equitable adjustments and terminations and for the projection of indirect costs
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Total value proposition Wrap rate
Calculation
Knowing your market space
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Total value proposition Wrap rate
Subcontract material & handling
When should you have one
Effect on other rates
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Noncompliance with FAR 31.203(c)
Indirect costs should be accumulated by logical cost groupings so as to permit use of an allocation base that is common to all cost objectives to which the groupings is to be allocated.
Unallowable costs are to remain in the base from which they originate.
Noncompliance with CAS 402
Requires consistency in accumulating costs incurred for the same purpose
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Inaccurate rate calculations
Proof of indirect rates
Exclusion of B&P labor from the base of overhead
Exclusion of SM&H costs from the base of G&A
Submitting actual rates inconsistent with provisional rates
Noncompliance with FAR 52.232-20 and 21
Indirect rate limitations (ceilings)
Limitation on costs
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Questions
©2011 Deltek, Inc. All Rights Reserved
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Call to Action Philip Steigner – Senior Manager Audit & Assurance
805 King Farm Blvd, Suite 300, Rockville, MD 20850 301-222-8280 [email protected]
Philip Steigner joined Aronson LLC in September 1997 and is a Senior Manager in the firm’s Government Contracting Services Group. He has 13 years of public accounting experience with a concentration over the past ten years in government contracting.
His focus is on complex financial reporting including mergers & acquisitions, consolidations, foreign entity transactions, joint ventures, income taxes, and ESOP’s. Over the course of his career, Phil has managed client accounts from various areas including government contractors, construction contractors, and real estate partnerships. Philip is a featured speaker on financial and operational accounting topics. He is a graduate of Washington & Jefferson College and currently holds an active CPA license in the state of Maryland.