Advanced Indirect Rates

We Know GovernmentContracts

Who we areLeft Brain Professionals is a boutique accounting firm that serves

government contractors. We specialize in accounting system

design & implementation, audit support, training, and

cybersecurity compliance.

Our Team

Robert E. Jones Government Contracts &

Accounting ExpertCPA, CPCM, NCMA Fellow

Melissa MetzgerGovernment Accounting &

Finance AdvisorMAFM, CPA Candidate

Steven BresslerGovernment Contract

Associate

steve@LeftBrainPro.commelissa@LeftBrainPro.comrobert@LeftBrainPro.com

Our Services

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

The Need for

Advanced (Multiple)

Indirect Rates

Why Advanced (Multiple) Indirect Rates

The number one compliant from clients: we’re losing

money on…

a particular contract.

a particular product.

a particular service.

Cont…

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.

Room Poll

Why might your organization need multiple indirect rates?

A. We operate multiple physical locations.

B. We have multiple operating divisions (e.g. manufacturing and engineering)

C. We have multiple product lines.

D. We have multiple service lines.

Advantages of

Multiple Indirect

Rates

Advantage of Multiple Indirect Rates

Multiple indirect rates lead to better

alignment of cost pools and bases

resulting in improved profit margins.

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…

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

How Multiple Indirect

Rates are Structured

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.

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.

Room Poll

Which of the following are not intermediate cost pools?

A. IT

B. Direct

C. Fringe

D. Facilities

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.

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.

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.

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.

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?)

Multiple Overhead, Continued…

Any combination of the previously mentioned.

Cont…

Not uncommon for a company to have:

• Manufacturing rate

• Client site services rate

• Contractor site services rate

• Material & Subcontract Handling

Room Poll

Which of the following are acceptable ways to split overhead? (select all that apply)

A. Operating division

B. Operating location

C. Product line

D. Service line

Material & Subcontract Handling (MS&H)

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.

MS&H, 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.

MS&H, 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.

Room Poll

Which of the following costs are not part of the base of MS&H?

A. Travel

B. Direct Labor

C. Subcontracts

D. Material

Requirements for

Multiple Indirect Rates

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…

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…

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…

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…

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.

Before we dive into the

math, let’s have another

polling question!

Room Poll

Which of the following is not a requirement for creating multiple indirect rates?

A. Clearly defined cost pools

B. Tools to capture time and expenses

C. G/L structure that aligns with the business structure

D. New software

Fringe

Facilities

Overhead 1

Overhead 2

Material & Subcontract Handling

General & Administrative (G&A)

Unrecovered Costs

LBP Indirect Rate Calculator Tool

https://www.leftbrainpro.com/indirect-rate-calculator/

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

Room Poll

How much help do you need calculating advanced indirect rates?

A. None, we’ve got this under control.

B. Unsure. Do we even need advanced rates?

C. Some. A quick review would be nice.

D. Lots. We’re drowning over here.

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Developing Your First Cost & Price ProposalTuesday, April 28

9:00 to 10:30 AM EST