Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 1 Establishing...

Copyright © RGFCC 2002 Slide 1

Training For Success in Winning Government Contracts

Establishing Indirect Rates

RGF Consulting Corporation is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. NASBA Web site: www.nasba.org.

Training For Successin Winning Government Contracts



Instructors:Robert G. Flowers, Jr. Principal

Kevin Duncan, CPA MBA

Contact RGF Consulting Corporation (RGFCC):Web site: www.rgfcc.com

Tel: 888-389-1230

Email: [email protected]

Training Workshops (Scheduled or By Requests, on-Site or off-Site), in the areas of;

Cost Proposals and Indirect Rates, Federal Acquisition Regulation (FAR), Technical Proposals,

Marketing Techniques, Labor Law Impact, Cost Proposal Assistance, Accounting Systems and

Audit Compliance, Technical Proposal Assistance, Marketing Planning, Labor Law Compliance

WHO ARE WE



WHO ARE YOU?

When Your Company is Called, Please Respond as Follows:

1. Give your name and title.

2. Briefly describe your firm’s line of business.

3. What accounting system are you currently using?

4. What is your biggest indirect budget concern?



MANUAL ORIENTATION AND ADMINISTRATION

• Please place your cell phone on vibrate/silent mode,• First section consist of the Power Point presentation

synchronized with the slides. (page numbers are shown in the bottom left corner of the slides)

• Financial Statement exercise Tab *• Budget exercise Tab *• AASHTO Uniform Audit & Accounting Guide• Handout Tab • Breaks are every hour and lunch is 1 hour 15 minutes

starting at 11:45 AM



INTRODUCTION

Basic Elements Of Cost

Labor (Direct Cost)

Material/Equipment (Direct Cost)

Indirect Cost

Manual Page 1



OBJECTIVES

• Familiarize you with the basic terminology associated with the indirect rate process.

• Define indirect rates and determine their purpose in our business life.

• Identify the business costs elements that make up these rates.

• Examine indirect costs pools and how the allocation bases relate to these pools. Manual Page 1 - 2



OBJECTIVES

• Identify the typical rate structure.

• Demonstrate a logical process of analyzing your actual financial data in rate development process and how to classify this data in the rate structure.

• Step-by-step guidelines on developing indirect rates.

Manual Page 2



DIRECT COSTS

OTHER DIRECT COSTS (ODC)

INDIRECT COSTS

ALLOCABLE COST

ALLOCATION BASE

ALLOWABLE COSTS

Manual Page 2 - 5

TERMINOLOGY



DIRECTLY ASSOCIATED COSTS

EXPRESSLY UNALLOWABLE COST

FRINGE POOL

FRINGE BENEFIT RATE

OVERHEAD POOL

OVERHEAD RATE Manual Page 6 & 7

TERMINOLOGY



INDIRECT RATE CEILINGS

REASONABLENESS OF COSTS

UNALLOWABLE COST

Manual Page 9 & 10

TERMINOLOGY



REGULATIONS AND GUIDELINES

• Generally Accepted Accounting Principles (GAAP)

• Truth In Negotiation Act (TINA)

• Cost Accounting Standards (CAS)

• Federal Acquisition Regulation (FAR)

• Defense Contract Audit Agency (DCAA) - Federal Manual Page 10 & 12



Cost Elements Proposal Dollars Indirect Rates

Direct Labor $1,000,000

Fringe Rate $ 320,000 32.0%

Overhead Rate $ 750,000 75.0%

Combined Overhead

$1,070,000 107.0%

Fee $ 165,600 8.0%

Total $2,235,600

COMPUTING YOUR WRAP RATE

Handout 2



AASHTO Audit Guide Ch-2

Types of Audits

Indirect Cost Rate (Overhead) - AASHTO Chapter 8

Contract Pre-Award

Accounting System Reviews

Contract Costs



INDIRECT COST RATES (OVERHEAD)

Render an Opinion on Consultants Overhead Rate

• For a specific period – Fiscal Year

• Insure removal of Unallowable Costs

• Allowable costs:

• Properly measured

• Properly allocated



Evaluate the Reasonableness and Accuracy of a Cost Proposal. Auditors may examine:

(1) Indirect Cost Rates

(2) Accounting System

(3) Loan agreements

(4) Financial Capability Reviews

CONTRACT PRE-AWARDS




LABOR CHARGING SYSTEM

• Timekeeping procedures and controls on labor charges are critical areas.

• Unlike other costs, labor is not supported by external documentation or physical evidence to provide an independent check or balance.

• The key link in any sound labor time charging system is the employee.

• Management must indoctrinate employees on their independent responsibility for accurately recording time charges. Manual Page 15



Internal controls over labor charging should meet the following criteria:

• There should be a segregation of responsibilities for labor related activities.

• Procedures must be evident, clear‑cut, and reasonable.

• Maintenance of controls must be continually verified and violations remedied through prompt and effective action.

• Individual employees must be constantly made aware of controls.

Manual Page 16

LABOR CHARGING SYSTEM



TTIMECARD PREPARATION

Instructions should indicate that the employee is personally responsible for:

a. Recording time on the timecard in ink.

b. Distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment.

c. Listing project numbers and their descriptions per written company instructions.

SEE RECOMMENDED TIMEKEEPING POLICY HANDOUT Manual Page 16 & 17



d. Ensuring that all time card changes are lined through, with the employee's initials beside the change indicating the employee personally made the change and that the change is correct.

e. Recording all hours worked whether they are paid or not. (labor costs and associated overheads are affected by total hours worked, not just paid hours worked).

f. Signing the timecard at the end of each work period.

TIMECARD PREPARATION

Manual Page 14



PENALTIES FOR LABOR MISCHARGING

a. The manipulation of charges to a contract may be subject to criminal charges under 18 United States Code (U.S.C.) 1001, which reads as follows:

"WHOEVER, IN ANY MATTER WITHIN THE JURISDICTION OF THE EXECUTIVE, LEGISLATIVE, OR JUDICIAL BRANCH OF THE GOVERNMENT OF THE UNITED STATES KNOWINGLY AND WILLFULLY (1) FALSIFIES, CONCEALS OR COVERS UP BY ANY TRICK, SCHEME, OR DEVICE A MATERIAL FACT; (2) MAKES ANY MATERIALLY FALSE, FICTITIOUS OR FRAUDULENT STATEMENT OR REPRESENTATION; OR (3) MAKES OR USES ANY FALSE WRITING OR DOCUMENT KNOWING THE SAME TO CONTAIN ANY MATERIALLY FALSE, FICTITIOUS OR FRAUDULENT STATEMENT OR ENTRY; SHALL BE FINED UNDER THIS TITLE OR IMPRISONED NOT MORE THAN FIVE YEARS, OR BOTH. "

Manual Page 15



b. Subject to the facts surrounding participation, the following can be liable for the violation:

(1) Employees who fill in and sign the timecards with the false information.

(2) Supervisors who approve the timecards with the knowledge that they contain the false information.

(3) Managers and officers who know those facts and make the claim anyway by submitting the invoice based upon the false timecard.

PENALTIES FOR LABOR MISCHARGING

Manual Page 16


Indirect Cycle

PLAN

(Budget)

Control Price (Proposal)

Analyze (Incur) I/S



TYPES OF INDIRECT COST

Costs that cannot practically be assigned directly to the production or sale of a particular product or service. In accounting terms, such costs are not directly identifiable with a specific contract.

Direct costs of minor dollar amount may be treated as indirect costs if the accounting treatment is consistently applied and it produces substantially the same results as treating the cost as a direct cost.

Manual Page 17



CATEGORIES OF INDIRECT COSTS

Indirect costs fall into 1 broad Category: Overhead

2 Subcategories:

1. Fringe. Examples include:• FICA/Medicare• FUTA (Federal Unemployment Insurance)• SUTA (State Unemployment Insurance)• Worker’s Compensation Insurance• Health and Welfare • Holiday’s, Vacation, and Sick Leave• Pension Costs

Manual Page 18



Manual Page 18

CATEGORIES OF INDIRECT COSTS

2. Overhead

• Indirect Costs for Supporting Projects and Conducting Business

• Home Office and Field Site Overhead



Indirect Rate & Allocation of Costs

IDR Company Contract A Contract B

Direct Labor $100 $70 $30

Fringe 32.0% $32 $22 $10

Overhead 75.0% $75 $53 $22

Total Cost $207 $145 $62

Fee/Profit 10.00% $21 $14 $6

Tot Revenue $228 $159 $68



INDIRECT COST ALLOCATION BASE

Direct labor dollars:

Overhead Pool Dollars = Overhead Rate

Direct Labor Dollars

Manual Page 19



SELECTING A BASE - CONSIDERATIONS

Allocation Bases

INDIRECT POOL

• Fringe Pool (Intermediate)

• General Overhead Pool (Intermediate)

• Total Overhead Pool

ALLOCATION BASE

• Direct Labor Dollars



Manual Page 20



Management Responsibility for Accounting

• Schedule of Indirect & Unallowable Costs• Financial Statements•Management Representations

• Accurate• Complete• In Compliance with Regulations (FAR)• Sound Financial data• Consistent Assumptions• All Actual Indirect Cost Rate are Disclosed




ESTIMATING OVERHEAD COST RATES

General process should follow five steps:

Estimate Sales Volumes for the Period

Estimate the direct cost associated with the sales volume

Estimate indirect Cost Allocation Bases for the Period

Estimated indirect Cost Pools for the Period

Estimate Indirect Cost Rates for the Period Manual Page 21



ESTIMATING YOUR SALES

Sales Estimates Should:

Be based on the best information available?

Consider all work likely to benefit from the indirect cost pool?

Include:

• Current Contract Work

• Option Years that may be exercised

• High probability Proposals

• Solicitations in hand

•Other anticipated customer requirements

Manual Page 22



Assign a probability percentage to sales volume forecast:

Contracts in hand would be 100 percent.

Other estimates in hand would be assigned a lower “win” probability, based on a probability.

If sales consists of only a few large Government contracts, place less faith in your statistical estimates, and more faith in your Marketing Department.

Manual Page 22

ESTIMATING YOUR SALES



ESTIMATING YOUR ALLOCATION BASE

Translate the sales volume forecast into performance Forecast total direct costs (DL, materials, and base) Forecast indirect costs for each indirect cost pool Consider costs in each account of your chart of accounts Consider whether the cost type is more fixed or variable

Insure that data is:• Accurate• Complete• Current

Manual Page 25



SAMPLE COSTS FAR REF.

A UA AWR

Alcoholic Beverages 31.205-51 X

Bad Debts 31.205-3 X

Bonding Costs 31.205-4 X

Contingencies 31.205-7 X X

Contributions or Donations 31.205-8 X

Cost of Money 31.205-10 X

Depreciation 31.205-11 X

Emp. Morale, Health & Welfare

31.205-13 X X

Entertainment Cost 31.205-14 X

Fines and Penalties 31.205-15 X X

Gains & Losses on Disposal of Depre. Prop

31.205-16 X

Goodwill 31.205-49 X



SAMPLE COSTS FAR REF. A UA AWR

Idle Facilities 31.205-17 X X

IR&D/B&P Costs 31.205-18 X X

Insurance 31.205-19 X X X

Interest & Financial 31.205-20 X X

Legal 31.205-47 X X

Lobbying Costs 31.205-50 X

Losses on Other Contracts 31.205-23 X

Org. Costs (Student Fill in) 31.205-27

Patent Costs 31.205-30 X X X

Plant Re-conversion. Costs 31.205-31 X X

Pre-contract Costs 31.205-32 X

Prof. & Consulting Cost 31.205-33 X X X



SAMPLE COSTS FAR REF.

A UA AWR

Public Relations & Advertising 31.205-1 X X

Recruitment Costs 31.205-34 X X X

Relocation (Student Fill in) 31.205-35

Selling Costs 31.205-38 X X

Taxes 31.205-41 X X

Termination Costs 31.205-42 X X

Trade, Business, Tech., & Prof. Activity Costs

31.205-43 X X

Training & Education Costs 31.205-44 X X X

Transportation Costs 31.205-45 X

Travel Costs 31.205-46 X



ACCOUNTING SYSTEMS

To be approved for government cost-type contract, it must contain the following attributes (SF1408):

1. Be in conformance with (GAAP)

2. Provides for:

a.) The proper segregation of direct cost from indirect costs. Identification and accumulation of direct costs by contract.

b.) A logical and consistent method for the allocation of indirect cost to intermediate and final costs Objectives.

c.) Accumulation of cost under general ledger control.

Manual Page 30



e.) A time keeping system that identifies employee’s labor to the appropriate cost objectives.

f.) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.

g.) Interim ( AT least monthly) determination of costs charged to a contract through routine posting of books and account.

Manual Page 30

ACCOUNTING SYSTEMS



h.) Exclusive of costs charged to government contract of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions.

i.) Identification of costs by contract line items and by units (as if each unit or line item was a separate contract) if required by the proposed contract.

j.) Segregation of pre-production costs from production costs.

Manual Page 30

ACCOUNTING SYSTEMS



3. Provides financial information to support:

a. Requirements by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation of payments (FAR 52.216-16).

b. Requirements to support requests for progress payments.

4. Maintenance of records in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions.

5. The system is currently in full operation.

6. Recommended that the system have the capability to prepare billings on government cost-type.

Manual Page 31

ACCOUNTING SYSTEMS



FIVE ESSENTIAL NUMBERS

Number Calculation Importance

1. Cash Balance Bk. Bal.-Outstanding Cks.

The more the merrier

2. Current Ratio Cur. Assets/Cur. Liabilities

2 or more good/ 1 or less

bad

3. Wrap Rates-

Contracted

Actual

(1+Contracted Fringe Rate) X (1+Contracted OH Rate) X (1+Contracted G&A Rate)

(1+Actual Fringe Rate) X

(1+ Actual OH Rate) X (1+Actual G&A Rate)

If Contracted is greater than Actual – Profit

If Actual is greater than Contracted - Loss

Handout No.



FIVE ESSENTIAL NUMBERS

4. Average Collection Period

Billed Accounts Receivable (Annual Sales/360)

Expressed in days:

- 45 days is good

- 60 days is average

- more than 60 days indicates your firm’s billing and collection process need work

5. Contract Backlog Contract Value-Contract Billings

Gives a good indication of how long you will be in business without new contracts.

Handout No.

Training For Success in Winning Government Contracts Copyright © RGFCC 2002Slide 1 Establishing...

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