Deltek Insight 2010: The Art and Science of Indirect Rates

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Deltek Insight 2010: The Art and Science of Indirect Rates

  1. 1. XT-203: The Art and Scienceof Indirect RatesPresented by:Dave Donley, Executive Vice President, Tech BizSolutions 1
  2. 2. The Art and Science of Indirect Rates• Why do we care? – Cost & Pricing data (exemptions & thresholds) – Contract type – Financing methods (progress payments) – Economic engineCopyright © 2010 Deltek, Inc. 2
  3. 3. The Art and Science of Indirect Rates• Risks by not having established indirect rates – Capped rates – Unknown job profitability, pricing too low – Pricing inconsistent with accounting – Good practice before progress payments, cost plus contracts, audit – Unknown limitations (DoD R&D 35%, NIH SBIR) – Takes time to become familiarCopyright © 2010 Deltek, Inc. 3
  4. 4. The Art and Science of Indirect Rates• The question we get a lot – what’s a good rate?• Answer - The highest your customer is willing to payCopyright © 2010 Deltek, Inc. 4
  5. 5. Factors in Designing Rate• Job cost accounting system on steroids – a simple example• Type of contract• Competitive position• Agency or agencies customs, primes• Type of business• Rate structureCopyright © 2010 Deltek, Inc. 5
  6. 6. Job Cost Accounting System on Steroids• Direct Expenses Cost of Goods Sold Job 1 Job 2 Job 3 Total Labor $ $ $ $ Material $ $ Subcontracts $ $ $ Travel $ $ $ ODC $ $ Total Direct = $$$Copyright © 2010 Deltek, Inc. 6
  7. 7. Job Cost Accounting System on Steroids• Indirect Expenses Fringe $ Occupancy $ Overhead $ G&A $ Bid & proposal $ Marketing and sales $ IR&D $ Total Indirect $$$Copyright © 2010 Deltek, Inc. 7
  8. 8. Job Cost Accounting System on Steroids• Indirect Rate Total Indirect (Pool) $ Divided by Total Direct (Base) $ Indirect Rate xx%Copyright © 2010 Deltek, Inc. 8
  9. 9. Job Cost Accounting System on Steroids• Total Job Cost (A) Direct Costs $ (B) Times Indirect Rate $ Add (A) + (B) $ Total Job CostCopyright © 2010 Deltek, Inc. 9
  10. 10. Job Cost Accounting System on Steroids• Pricing Model (A) Direct Costs $ (B) Times Indirect Rate $ Add (A) + (B) $ Total Job Cost Wrap Rate = 1+Indirect RateCopyright © 2010 Deltek, Inc. 10
  11. 11. Contract Risk Continuum Cost reimbursable T&M Buyer’s Risk Fixed priced Seller’s RiskCopyright © 2010 Deltek, Inc. 11
  12. 12. Factors in Designing Rates• Competitive position• Agency or agency customs, primes• Type of business• Rate structureCopyright © 2010 Deltek, Inc. 12
  13. 13. Simple Example, Complex Example• FAR Part 31 framework – 31.001 - Definitions – 31.201-1 - Composition of Total Cost – 31.201-4 - Determining of Allocability – 31.202 – Direct Costs – 31.203 – Indirect Costs• Measuring activity (cost accounting)• Allocation (equitable, consistent methods)• Remarkably flexible• Complexity, structure driven by pricing – Multiple pools and bases, intermediate pools – Separate divisionsCopyright © 2010 Deltek, Inc. 13
  14. 14. Cost Accounting Standards (A Quick Word)• Large business (19 standards, disclosure statement)• Small Business Exemption – FAR dictates minimum standards (31.201-2(b)) – CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs – CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose – CAS 405 - Accounting for Unallowable Costs – CAS 406 - Cost Accounting Period – CAS 418 – Allocation of Direct and Indirect CostsCopyright © 2010 Deltek, Inc. 14
  15. 15. Professional Services• Labor only• Single rate• Very competitive on cost• 10-50%Copyright © 2010 Deltek, Inc. 15
  16. 16. Manufacturing• Mix of labor and non-labor direct expenses• Multiple intermediate pools, rates and factors• Very competitive on cost• Multiple up to 3x on laborCopyright © 2010 Deltek, Inc. 16
  17. 17. R&D/Small Contractor• Labor and some non-labor• Single, two-rate, three-rate• Very competitive on technical performance• Multiple up to 3x on laborCopyright © 2010 Deltek, Inc. 17
  18. 18. Leveraging the Art• SBIR example• “Economic Capacity” – as base grows, so should your rates• Budget, budget, budgetCopyright © 2010 Deltek, Inc. 18
  19. 19. Leveraging the Art• Variations in Base• FAR 52.215-22/23 Excessive passthroughCopyright © 2010 Deltek, Inc. 19
  20. 20. Action Plan• Assess your competitive position – GSA schedules, GWACs – Listen to your customers, competitors, proposal evaluations• Calculate your historical rates – know where you are before you know where you’re going• Develop a budget, monitor• Determine an appropriate rate structure• Make adjustments as needed• Monitor jobs for profitability• Test for compliance (Cost & pricing – DCAA info for contractors, accounting system SF1408)Copyright © 2010 Deltek, Inc. 20
  21. 21. NCMA Ethics Statement• Each member of NCMA shall: Conduct oneself in such a manner as to bring credit upon the association, as well as to maintain trust and confidence in the integrity of the acquisition process.Copyright © 2010 Deltek, Inc. 21
  22. 22. The Art and Science of Indirect Rates Dave Donley – Executive VP Tech BizSolutions 303-475-0939 ddonley@techbizsolutions.com www.techbizsolutions.comCopyright © 2010 Deltek, Inc. 22

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