Complex organizations, those with more than one product or service offering, require advanced indirect rates to align related costs with their appropriate drivers. Creating advanced indirect rates requires a significant amount of planning and implementation. In this webinar we’ll discuss the common reasons for, and the mechanics of, creating multiple rates. A basic understanding of indirect rates either from work experience or by watching our previous webinar, Fundamentals of Indirect Rates, is recommended before joining this session.

1. Advanced
Indirect Rates

2. We Know Government
Contracts

3. Who we are
Left Brain Professionals is a boutique accounting firm that serves
government contractors. We specialize in accounting system design
& implementation, audit support, training, and cybersecurity
compliance.

4. Our Services

5. Our Team
Robert E. Jones
Government Contracts &
Accounting Expert
CPA, CPCM, NCMA Fellow
Melissa Metzger
Government Accounting &
Finance Advisor
MAFM, CPA Candidate
Steven Bressler
Government Contract
Associate
steve@LeftBrainPro.commelissa@LeftBrainPro.comrobert@LeftBrainPro.com

6. Learning
Objectives
• Identify the need for advanced
indirect rates
• List the advantages of multiple
indirect rates
• Describe how multiple indirect
rates are structured
• List the requirements for
multiple indirect rates

7. The Need for
Advanced (Multiple)
Indirect Rates

8. Why Advanced (Multiple) Indirect Rates
The number one complaint from clients: we’re losing
money on…
a particular contract.
a particular product.
a particular service.
Cont…

9. Why Advanced (Multiple) Indirect Rates,
Continued…
We often find complex
organizations operating on a single
indirect rate structure.
In other words, an indirect rate
structure that does not match
business operations.

10. Advantages of
Multiple Indirect
Rates

11. Advantage of Multiple Indirect Rates
Multiple indirect rates lead to better
alignment of cost pools and bases
resulting in improved profit margins.

12. B&P and IRAD
B&P – Bids & Proposals – pen to paper response to RFP/Q
IRAD – Internal Research and Development
Some companies encounter the need to capture B&P and
IRAD costs before more advanced indirect rate needs.
Cont…

13. B&P and IRAD, Continued…
• Included in G&A pool
• Treated as direct expense so
they receive applied Overhead
• Proper calculation of G&A is
tricky as Overhead applied in
G&A pool and removed from
G&A base

14. How Multiple Indirect
Rates are Structured

15. Intermediate Cost Pools
Facilities
Often one part of the business occupies an unfair portion of the
building but pays a lower allocated cost. Collect facility related costs:
Cont…
• Rent
• Depreciation
• Utilities
• Repairs & maintenance
• Taxes
• Insurance
• Labor
Allocated over square footage.

16. Intermediate Cost Pools, Continued…
IT
Often one part of the business utilizes an unfair portion of the IT
resources but pays a lower allocated cost. Collect IT related costs:
• Labor
• Hardware
• Software
• Communications (telephone and internet)
Allocated over number of employees or number of devices.

17. Multiple Fringe
Separate fringe pools for separate groups of employees with
different benefits.
• Union vs Non-Union
• Government vs Commercial
• SCA vs Non-SCA
You must have legally defined and segregated groups of
employees. In other words, you cannot discriminate by violating
labor laws. You MUST have written plans to provide significantly
different benefits.

18. Multiple Overhead
Separate office locations.
• Cost of doing business in San Francisco, CA is vastly different than
Columbus, OH.
• Cost pools aligned with direct costs associated with each office.
Rental rates per square foot according to Jones Lang LaSalle Jan 2020 report.

19. Multiple Overhead, Continued…
Separate operating locations (client site vs contractor site).
Cont…
• Cost of employee based at client site is cheaper than contractor
site.
• Client is already paying rent, utilities, maintenance, equipment,
etc.
• Government does not like paying contractor OH for employees
based at government site.
• Not a requirement, but often becomes an issue in long-term
contracts and/or when multiple employees involved.

20. Multiple Overhead, Continued…
Separate operating divisions (manufacturing vs engineering).
Cont…
• Cost of manufacturing is significantly higher than cost of
engineering or services.
• Think of all the manufacturing machinery and equipment
(depreciation, repairs, maintenance)
• Engineers need a PC and a cubicle.

21. Multiple Overhead, Continued…
Separate product or service lines.
Cont…
• Cost of some products or services are higher than others.
• Special equipment, testing, coating, painting
Single overhead rate often results in non-competitive (overpriced)
products or services AND, underpriced products or services (but who
complains about that?)

22. Multiple Overhead, Continued…
Any combination of the previously mentioned.
Not uncommon for a company to have:
• Manufacturing rate
• Client site services rate
• Contractor site services rate
• Material & Subcontract Handling

23. Material & Subcontract Handling (M&SH)
Cont…
Some contractors process a significant amount of materials and/or
subcontracts on behalf of the government.
• Those costs are typically burdened with G&A.

24. M&SH, Continued…
Cont…
G&A rates can get out of control (>~25%) and clients will question
the value of the “management and administrative fee”.
• Contractor then moves all costs of administering materials and
subcontracts to a separate pool allocated over the direct
materials and subcontractors.
• The costs are usually nominal in comparison to significant
material and subcontract costs resulting in a lower rate.
• This rate is used only for materials and subcontracts.

25. M&SH, Continued…
M&SH results in a value-added G&A rate (vs Total Cost Input) since
you’ve now separated some of the overhead and G&A costs (pool)
and segregated the direct costs (base).
Important Note:
Contractors can always negotiate a M&SH fee that is less than their
G&A without creating a separate M&SH pool.

26. Requirements for
Multiple Indirect Rates

27. Requirements for Multiple Indirect Rates
You must have cost pools and bases that are clearly defined
and easily segregable.
This means costs can be easily assignable to a group of employees,
locations, products, or services. And bases that are easily segregable
from other bases (e.g. direct manufacturing vs direct engineering).
From a single rate:
• Engineering costs are allocated over engineering direct labor.
• Manufacturing costs are allocated over manufacturing direct
labor.
Cont…

28. Requirements for Multiple Indirect Rates,
Continued…
You must have a general ledger structure that aligns with
your new structure.
This means new G/L accounts, codes, classes, tags, etc.
Cont…

29. Requirements for Multiple Indirect Rates,
Continued…
You must have tools to aid in
cost collection.
This means timekeeping, expense
reporting, requisitions, and purchase
orders.
Cont…

30. Requirements for Multiple Indirect Rates,
Continued…
You must have significant costs to achieve the benefit of
splitting pools.
You don’t do this to shave off a few percentage points.
Cont…

31. Requirements for Multiple Indirect Rates,
Continued…
Basic math of splitting cost
pools and creating multiple
indirect rates.
One rate will go up and one rate will
go down. It’s simple math.

32. Fringe

33. Facilities

34. Overhead 1

35. Overhead 2

36. Material & Subcontract Handling

37. General & Administrative (G&A)

38. Unrecovered Costs

39. LBP Indirect Rate Calculator Tool
https://www.leftbrainpro.com/indirect-rate-calculator/

40. This is no small task and not for the faint of heart. It’s not rocket
science, but requires a significant amount of design,
implementation and maintenance.
Advanced Indirect Rates

41. Connect
with us
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