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# Deltek Insight 2012: Indirect Rate Strategies & Methods

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Our speakers will present insights into indirect rate methods and strategies for contractors operating in today’s government contracting industry. Whether you are a small, mid-size, or large contractor, this program offers multiple perspectives and in-depth discussions involving indirect rate establishment and computation, cost pools and allocation bases, compliance, pricing considerations, incurred cost submissions, DCAA audit preparation, and more.

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### Deltek Insight 2012: Indirect Rate Strategies & Methods

1. 1. Indirect Rate Strategies & MethodsPresented by:Kelly McBride, CPA, CEOGlobal Defense Consulting678-641-4156kmcbride@gdcus.com
2. 2. Agenda• Understanding Indirect Rates • Indirect Rates and the FAR • Cost Principles – FAR Part 31 • Developing Indirect Rates• Sample Rate Structures• Deltek Systems and Indirect Rates2
3. 3. Understanding Indirect Rates  Indirect rate calculations and techniques are not specifically provided in the FAR  Part 31 provides principles to interpret and follow  For new government contractors, indirect rates concepts/methods/strategies can, therefore, be difficult to understand and implement in the early stages of your business  Industry standards & practices, however, provide specific guidance3
4. 4. Understanding Indirect Rates Contract Cost Principles  http://farsite.hill.af.mil/vffara.htm  FAR 31.201 General  31.201-1 Composition of Total Cost  31.201-2 Determining Allowability  31.201-3 Determining Reasonableness  31.201-4 Determining Allocability  31.201-5 Credits  31.201-6 Accounting for Unallowable Costs  FAR 31.202 Direct Costs  FAR 31.203 Indirect Costs4
5. 5. Understanding Indirect Rates 31.201-1 Composition of Total Cost  Direct and indirect costs allocable to the contract  31.201-2 Allowable Costs  A cost which meets the tests of  Reasonableness,  Allocability,  Compliance with standards promulgated by the CASB, if applicable, otherwise GAAP,  Contractual terms, and  Limitations set forth in the FAR5
6. 6. Understanding Indirect Rates  Reasonableness (31.201-2):  A cost is reasonable if does not exceed that which a prudent person would incur in the conduct of competitive business  What is reasonable depends on a variety of circumstances, including:  Is the type of cost generally recognized as ordinary and necessary for the conduct of business?  Are sound business practices being followed?  The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large, and  Any significant deviations from the contractor’s established practices6
7. 7. Understanding Indirect Rates  Allocability (31.201-2):  A cost that is assignable or chargeable to one or more cost objectives in accordance with the relative benefits received or other equitable relationship  A cost is allocable if it  Is incurred specifically for the contract,  Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received, or  Is necessary to the overall operations of the business7
8. 8. Understanding Indirect Rates  Direct Costs (FAR 31.202)  A direct cost is any cost that can be identified specifically with a particular cost objective, e.g., labor in direct support of a contract, materials purchased for a particular contract, travel incurred for a specific contract, subcontractor costs  Typical Direct Cost line items  Direct Labor  Direct Subcontract  Direct Travel  Direct Materials  Other Direct Costs8
9. 9. Understanding Indirect Rates  Indirect Costs (FAR 31.203)  An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives  Indirect costs shall be accumulated in logical cost groupings with due consideration of the purpose for incurring such cost and allocated over a base that is common to all cost objectives to which the cost will be allocated  Typical / simple indirect cost groupings or pools  Fringe  Overhead  General & Administrative (G&A)9
10. 10. Understanding Indirect Rates  Vary from company to company-but typically industry standard is comprised of 2 or 3 tiered structure  Always tracked, monitored and computed over a fiscal year and interim rates are always measured on a year to date basis  Determine the “multiplier” or “markup” rate for the company to recover cost  Are used for:  Budgeting/Forecasting  Billing  Proposals10
11. 11. Understanding Indirect Rates  Indirect Rate Calculation  Cost pool/allocation base = indirect rate (%)  Pools are defined by placing costs in logical groupings, e.g., fringe costs, overhead costs, G&A costs, etc.  The allocation base is defined as some measure of cost that can be used to allocate the pool cost, e.g., direct labor hours, direct labor dollars, machine hours, etc.  There must be a relationship between the allocation base and the pool of costs to be allocated to contracts  Examples11
12. 12. Sample Rate Structures Fringe Costs Include: Fringe Base Include: • Health Insurances • All Labor Costs for Resources that • Payroll Taxes Receive Benefits • PTO • Benefits Administration Fees • Retirement Plan Contributions12
13. 13. Sample Rate Structures Overhead Costs Include: Overhead Base Include: • Overhead Labor • Direct Labor + Fringe Burden • General Mgmt, IT, HR, Security • Applied Fringe • Facilities or Facilities Share • Overhead Travel • Bonuses for Production Resources • Supplies and Other Support Cost13
14. 14. Sample Rate Structures G&A Costs Include: • G&A Labor • Corporate Insurance • Executive, Accounting, BD, B&P • Allowable Taxes & Licenses Labor, IRAD • Applied Fringe • Applied OH to B&P and IRAD • Facilities Share • G&A Travel • Bonuses for G&A Labor14 • O/S Accounting Services • Legal & Professional Fees
15. 15. Sample Rate Structures Material Handling Costs Include: MH Base Include: • Purchasing Labor • Direct Materials • Applied Fringe • Facilities or Facilities Share • Supplies and Other Support Cost15
16. 16. Sample Rate Structures Base Excludes Materials!16
17. 17. Understanding Indirect Rates  Consider new rates for changing conditions, esp. large bids  Calculate and document new rate projections  Create multiple fringe rates  Define labor classes according to fringe benefits  Customize benefits for employees, especially semi-retired  Benefits packages by division or region Note: Monitor compliance with DOL and 401(k) rules17
18. 18. Understanding Indirect Rates  Diversify overhead rate(s) to reflect  Customer site vs. contractor site  Government vs. commercial  Geographic distinctions/Divisions  Product/service lines18
19. 19. Understanding Indirect Rates  Separate materials or subcontracts  Create materials acquisition pool (drop-ship equipment, software, purchased maintenance, licenses)  Create separate subcontracts management pool  Strategically different rates19
20. 20. Questions & Answers Kelly McBride, CPA President and Executive Management Consultant Global Defense Consulting, Inc. kmcbride@gdcus.com www.gdcus.com 678-641-415620