Fully Burdened Labor Rates

Inquiry:

As a firm that invoices based on Fully Burdened Labor Rates using Commercial Market or Catalog Labor Rates, are the methods, as we discussed and information reviewed, used to support and invoice our customer appropriate and adequate?  What level of detail do we need in supporting our fully burdened rates for audit?  What about the level of detail for our accounting system and information we request from our subcontractors?  

Response Summary:

From the review of your contract agreement it appears your level of effort is based on a Time and Materials type contract.  In other words, you bill them fully burdened labor rates for all Direct Labor Hours worked.  In addition, you bill them for any Other Non-Labor Direct Costs, including Subcontracts, Consultants, and Travel that is specially charged to the contract.  

The agreement is between your company and the Prime Contractor.  As a newly formed company, you used market surveys and other sample support data representing similar type work as support for your Fully Burdened Labor Rates.  This is an acceptable way of pricing when your direct staff or subcontractors meet the training, education and experience levels of those labor categories you are comparing with.  From our discussions, this appears to be the case.  

It also appears to me, based on our discussions, that your work is also made available to the commercial industry and is based on market rates.  Under commercial market pricing, generally any review from the government side would be in determining the reasonableness of the fully burdened labor rates and categories proposed.  You should have a commercial catalog or list of your pricing as available to the public.  

When you bid on government effort, you can reference this Commercial Price or Catalog List as pricing support.  In addition, you will be able to use any existing or historical contracts, both government and commercial, as supporting data for the labor rates you are proposing.  If you have no history, it is acceptable to use data from similar companies, industries, etc.  

Your other direct costs will typically require more detailed support such as vendor quotes, travel per diem references (JTR, etc.), and estimates.  This is typically not difficult to obtain from potential vendors, subcontractors, consultants, etc.  

You appear to be following this process.  I suggest you begin to document these activities as part of your company policy manual (see recommendation on policy manual at the end of this response).  

Alternatively: There may be cases when a government customer, directly or through a prime, will request a further breakdown of your fully burdened labor rates.  Hey, it happens.  In this case, you would then build up your fully burdened labor rate from the bottom up.  

• Direct Labor Hourly Rate (Annual salary divided by 2,080 hours)
• Fringe Benefits Percentage (If you are estimating the rate, my opinion would be between 31% and 36%).  Fringe benefits & company portion of payroll taxes can be quite high, considering group health, life, disability, etc.
• Overhead (O/H) and General & Administrative (G&A) - Some companies have only 1 and some have 2 but it is only a matter of splitting out the total Indirect Costs.
• Fee or Profit - This is what you add on your Total Labor+Fringe+O/H+G&A.  This is negotiable and depends on industry, contract type, what the contracting officer or prime is accustomed to, etc.  If you have to break down your cost at this level, you can typically expect not to get as high of profit as if you were able to use your fully burdened commercial rates.  

In my opinion, when your prime negotiated your labor rates, they determined they were reasonable based on their own history and review process.  Therefore, your rates should be acceptable and the prime has met their burden of performing a price analysis of proposed subcontractors.  

It becomes the hours that you bill times those labor rates that should be reviewed, monitored, and controlled to meet the overall contract dollar limits.  The hours we are talking about are only direct billed.  That is what your accounting system should be tracking, as well as actual cost.  

Recovery of Non-Billable Effort:  So how do you recover all of the other work and costs that you cannot or do not charge directly (i.e. administrative, top management efforts, vacation, leave, contract non-billable support, etc.)?  Well that is where your Fringe, Overhead, and G&A indirect costs pools and rates come in.   

So, if out of the available 2,080 hours in a year (40 x 52), you plan on only having 800 billable for hours for the president, plus 240 hours for various type leave, plus 700 hours to run the company (G&A), plus 340 hours to support non-billable contract operations (O/H):  Then, each of these groups of hours would be multiplied by the hourly base rate.  (i.e. - $156,000 annual salary divided by 2,080 hours equals $75.00 base hourly rate.)  

1.       Direct Labor                                                       $75.00 x    800 = $  60,000

2.       Leave Labor (goes into Fringe Pool)                     $75.00 x    240 = $  18,000

3.       Overhead                                                           $75.00 x    340 = $  25,500

4.       G&A                                                                 $75.00 x    700 = $  52,500

When you list cost in your Indirect Pools, you would include the Leave, Overhead and G&A costs above.  This is how you recover all the other labor costs.  Moreover, this would apply to every employee of the company.  

As for your subcontractors and/or consultants, it should not matter as much because they are submitting invoices to you for their fully burdened rates and costs, including hours if required.  Their total invoice to you becomes the one line item on your invoice (as you have been doing) for the direct cost of subcontracts.  Their invoice should indicate the direct (billable) hours worked and at the fully burdened rate agreed to.  Their support should be similar to your support to your prime.  

Level of detail for billing:  You appear to be providing more than adequate support to your prime with your invoicing.  Your are billing at the agreed upon commercial fixed fully burdened rates and you are providing support for hours of yours and your subcontractors.  You are also providing travel expense vouchers.  

It is not necessary to show non-productive direct hours because they are covered in your fully burdened rates that have already been agreed to.  It is the Direct Hours for proposed Level of Effort that should be of importance to the prime and government.  

Time Tracking: In my opinion, you should continue to tract all time worked internally on your time sheets.  This allows you, the prime, and the government to see the segregation of direct and indirect labor.  You can provide a summary of only direct labor in support of invoicing to your prime, but internally you should be tracking and aware of all hour spent by your staff.  

It is appropriate to charge a subcontract-handling fee on subcontract and consultant work as well as travel costs.  Typically, this is the overall G&A rate for the company (if you use all of your total cost in the base used to calculate the company G&A rate).  This is not a profit rate but a rate applied to account for the administrative effort related to subcontracts.  

You should only have one G&A rate at this point.  Remember, your indirect costs and rates are calculated for the Entire Company first.  Then you apply them to your individual direct labor category Base Labor Rates.  

This level of detail is More for Internal Purposes when your normal policy is to use Market or Commercial rates.  Tracking in the detail above is for you to know if your rates charged cover your cost and allow for a reasonable profit.  This detail also provides you with negotiating power to know how low you can go to get that government contract!  

Summary: Well in summary of the above, it is my opinion that you are on the right track in your fully burdened price, and related support, your invoices, and related support, and meeting the requirements of your prime.  You should continue to move in the direction of improving your accounting system to track and record actual costs during the year.  Starting with the Chart of Accounts and everyone recording all time worked, direct or indirect.  

In addition, as you asked in our conversation, when you are listing your indirect cost budget items, include costs such as my time that is being charged to this now and any similar costs you may expect in the future.  Also, include anticipated cost of accounting software upgrades, additional rental space, receptionist, accounting, outside CPA, tax, legal costs, etc.  That is why I encourage you to review the detailed chart of accounts you have and look at some of the expense line items.  Many people see costs that they did not consider.  

There is so much more and this is an ongoing learning process but I will end here based on time limits.