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Copyright © RGFCC 2002 Slide 1
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.
Training For Successin Winning Government Contracts
Copyright © RGFCC 2002 Slide 2
Training For Success in Winning Government Contracts
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: [email protected]
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
Copyright © RGFCC 2002 Slide 3
Training For Success in Winning Government Contracts
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?
Copyright © RGFCC 2002 Slide 4
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 Slide 5
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 Slide 6
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 Slide 7
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 Slide 8
Training For Success in Winning Government Contracts
DIRECT COSTS
OTHER DIRECT COSTS (ODC)
INDIRECT COSTS
ALLOCABLE COST
ALLOCATION BASE
ALLOWABLE COSTS
Manual Page 2 - 5
TERMINOLOGY
Copyright © RGFCC 2002 Slide 10
Training For Success in Winning Government Contracts
DIRECTLY ASSOCIATED COSTS
EXPRESSLY UNALLOWABLE COST
FRINGE POOL
FRINGE BENEFIT RATE
OVERHEAD POOL
OVERHEAD RATE Manual Page 6 & 7
TERMINOLOGY
Copyright © RGFCC 2002 Slide 11
Training For Success in Winning Government Contracts
INDIRECT RATE CEILINGS
REASONABLENESS OF COSTS
UNALLOWABLE COST
Manual Page 9 & 10
TERMINOLOGY
Copyright © RGFCC 2002 Slide 12
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 Slide 13
Training For Success in Winning Government Contracts
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
COMPUTING YOUR WRAP RATE
Handout 2
Copyright © RGFCC 2002 Slide 14
Training For Success in Winning Government Contracts
AASHTO Audit Guide Ch-2
Types of Audits
Indirect Cost Rate (Overhead) - AASHTO Chapter 8
Contract Pre-Award
Accounting System Reviews
Contract Costs
Copyright © RGFCC 2002 Slide 15
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 Slide 16
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 17
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 Slide 18
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 19
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 Slide 20
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 21
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 Slide 22
Training For Success in Winning Government Contracts
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
Training For Success in Winning Government Contracts
Indirect Cycle
PLAN
(Budget)
Control Price (Proposal)
Analyze (Incur) I/S
Copyright © RGFCC 2002 Slide 24
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 Slide 25
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 26
Training For Success in Winning Government Contracts
Manual Page 18
CATEGORIES OF INDIRECT COSTS
2. Overhead
• Indirect Costs for Supporting Projects and Conducting Business
• Home Office and Field Site Overhead
Copyright © RGFCC 2002 Slide 27
Training For Success in Winning Government Contracts
Indirect Rate & Allocation of Costs
IDR Company Contract A Contract B
Direct Labor $100 $70 $30
Fringe 32.0% $32 $22 $10
Overhead 75.0% $75 $53 $22
Total Cost $207 $145 $62
Fee/Profit 10.00% $21 $14 $6
Tot Revenue $228 $159 $68
Copyright © RGFCC 2002 Slide 28
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 Slide 29
Training For Success in Winning Government Contracts
SELECTING A BASE - CONSIDERATIONS
Allocation Bases
INDIRECT POOL
• Fringe Pool (Intermediate)
• General Overhead Pool (Intermediate)
• Total Overhead Pool
ALLOCATION BASE
• Direct Labor Dollars
• Direct Labor Dollars
• Direct Labor Dollars
Manual Page 20
Copyright © RGFCC 2002 Slide 30
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 Slide 31
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 Slide 32
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 Slide 33
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 34
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 Slide 35
Training For Success in Winning Government Contracts
SAMPLE COSTS FAR REF.
A UA AWR
Alcoholic Beverages 31.205-51 X
Bad Debts 31.205-3 X
Bonding Costs 31.205-4 X
Contingencies 31.205-7 X X
Contributions or Donations 31.205-8 X
Cost of Money 31.205-10 X
Depreciation 31.205-11 X
Emp. Morale, Health & Welfare
31.205-13 X X
Entertainment Cost 31.205-14 X
Fines and Penalties 31.205-15 X X
Gains & Losses on Disposal of Depre. Prop
31.205-16 X
Goodwill 31.205-49 X
Copyright © RGFCC 2002 Slide 36
Training For Success in Winning Government Contracts
SAMPLE COSTS FAR REF. A UA AWR
Idle Facilities 31.205-17 X X
IR&D/B&P Costs 31.205-18 X X
Insurance 31.205-19 X 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 X X X
Plant Re-conversion. Costs 31.205-31 X X
Pre-contract Costs 31.205-32 X
Prof. & Consulting Cost 31.205-33 X X X
Copyright © RGFCC 2002 Slide 37
Training For Success in Winning Government Contracts
SAMPLE COSTS FAR REF.
A UA AWR
Public Relations & Advertising 31.205-1 X X
Recruitment Costs 31.205-34 X X X
Relocation (Student Fill in) 31.205-35
Selling Costs 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 X X
Transportation Costs 31.205-45 X
Travel Costs 31.205-46 X
Copyright © RGFCC 2002 Slide 38
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 Slide 39
Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 40
Training For Success in Winning Government Contracts
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
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Training For Success in Winning Government Contracts
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
Copyright © RGFCC 2002 Slide 42
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 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.
Copyright © RGFCC 2002 Slide 43
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.