Structuring Indirect Rates

Structuring Indirect Rates
Donna M. Dominguez | June 22, 2016
http://blogs.aronsonllc.com/fedpoint/

1© 2016 | www.aronsonllc.com | www.aronsonllc.com/blogs |
Course Objective
• To provide knowledge in understanding your company’s
indirect rate structure to:
– Yield Auditable Rates that Comply with Federal Regulations
– Structure Competitive Indirect Rates

Agenda
• Definitions
• Composition of Indirect Pools and Bases
• Various Indirect Rate Structures
• Wrap Rates
• Q & A

Definitions

Definitions
• 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 he pool by the base

Composition of Indirect Pools
and Bases

Fringe
• Typical costs
– FICA, FUTA, SUTA, Workers’
Compensation
– Employee insurance
– Leave
– Retirement benefits
• Other Fringe pools
– SCA or Davis Bacon
– Statutory (Part-Time)
– Divisional
Fringe pool is composed of statutory payroll taxes and discretionary
benefits typically found in the employee handbook. Fringe base is
commonly computed as a percentage of all labor both direct and
indirect.

Overhead
• Typical costs
– Support labor (Project Control)
– Training
– Facilities/IT Service Center
Allocation
– Recruiting
– Travel
• Other Overhead Pools
– Client Site and Home Site
– Divisional
– Location Specific
Overhead pool is composed of costs that can be identified in support one or
more final cost objectives. The most common base of the overhead pool is
direct labor, B&P labor, and related fringe.

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: Labor Hours, Labor Dollars,
Headcount, or Square Footage
• Typical costs in a facility service center
– Rent
– Supplies
– Property taxes
– Depreciation

General and Administrative
• Typical costs
– Accounting & Finance
– Contract Administration
– General Management
– Facilities/IT Service Center
Allocation
– Business Development
• Other G&A pools
– Segments
G&A pool is composed of indirect expenses that cannot be easily attributed to
any specific contract objective but are for the general benefit of the company as
a whole. There are two types of G&A base total costs input or value added (the
most common value added G&A base is over total costs before B&P/IR&D and
SM&H base).

Subcontract & Material Handling
Subcontract & Material Handling pool is composed of costs that support the
award and administration of subcontracts and purchase orders. The most
common base of the subcontract & material handling pool is subcontract labor,
subcontractor travel & ODCs, and materials.
• Typical costs
– Subcontracts labor & ODCs
– Accounts Payable for Subcontractors
– Facilities/IT Service Center Allocation
– Travel

Various Indirect Rate Structures

What is Your Indirect Rate Structure ?
• Single Rate Structure
– G&A rate only
• Two Tier Rate Structure
– Overhead (one or more) and G&A
• Three Tier Rate Structure
– Fringe
– Overhead (one or more)
– G&A

Wrap Rates

Wrap Rate
• Understand your wrap rate, especially for small companies, can be the
difference of recovering all your costs and making a profit or losing your
shirt.
• Realize your customers and industry helps to give a competitive edge
• Be aware of your size status
– 8(a), small business, sole source,
– Large business, out grown NAICS codes, full & open
• Prepare a good budget and monitor your actuals
• Know your Competitive Range (before fee)
1.4 ---------------- 1.6 ----------------- 1.9
(Average for Small to Mid Size Service Related Government Contractor)

How to Apply Wrap Rate
Sample WRAP rate calculation:
3 Tier Structure – Fringe 28%, OH 12%, G&A 16%
• Calculation of rate
28% 12% 16%
Direct
Labor Fringe Sub-Total Overhead Sub-Total G&A
Wrap
Rate
Wrap
Rate with
6% Fee
1.00 0.28 1.28 0.15 1.43 0.23 1.66 1.76

How to Apply Wrap Rate
Hourly rate needed for an Employee making $80,000 to earn
6% or $7,200 on the position for the year
With 6% Fee Break Even
Salary $ 80,000.00 $ 80,000.00
Hourly Pay $ 38.46 $ 38.46
Wrap Rate 1.76 1.66
Loaded Bill Rate $ 67.80 $ 63.96
Billable Hours 1,880.00 1,880.00
Loaded Bill Rate $ 67.80 $ 63.96
Total Proposed
Cost $127,460.71 $120,245.96
Profit in $ $ 7,214.76

About Aronson LLC
• Thinking ahead for clients for more than 50 years
• 225+ professionals located in Rockville, MD
• 80+ professionals dedicated to supporting government contractors
• Aronson helps clients rethink the way they approach their business
through innovative, industry-specific services and advice:
– Audit, Assurance and Tax
– Deltek Systems and Outsourcing
– Financial and Contract Compliance
– GSA Schedules
• www.aronsonllc.com/blogs/fedpoint/ – News and trends and insight
for today’s savvy government contractor

Donna Dominguez is a principal consultant in Aronson LLC’s Government
Contract Services Group, where she provides a wide range of financial
compliance advisory services for government contractors. She is experienced
in matters related to Federal Acquisition Regulations (FAR), cost accounting
standards (CAS), incurred cost submissions, DCAA/cognizant audit support,
provisional billing rates, establishing/revising indirect rate structures and cost
proposal support.
Donna works with contractors to help them grow their business while keeping
their accounting systems adequate in the eyes of the government and their
billing systems current and relevant. She is also involved in supporting the
government contracting community as a frequent guest speaker on a variety of
compliance topics.
Donna earned her bachelor’s degree in accounting from the University
Maryland and has completed additional coursework in contracts administration.
She is a contributor to Aronson’s Fed Point blog and has co-authored articles
for NCMA Contract Management Magazine.
Principal Consultant, Government Contract Services Group
301.222.8232
ddominguez@aronsonllc.com
Donna M. Dominguez

Q & A

301.222.8232
Contact Donna Dominguez / Aronson LLC
ddominguez@aronsonllc.com
https://www.linkedin.com/in/donna-
dominguez-664b26b
https://twitter.com/Aronsonllc

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