INQUIRY

Paul: I just reviewed part of your presentation to the audience at the American Legion.  I have a concern.  Your Indirect Costs include Fringe Benefits and Payroll Taxes.  In my experience, if I have a clerk assigned to a particular contract, I classify that clerk’s wages, H&W, payroll taxes, worker’s compensation and general liability as direct costs. This is ok as long as that clerk devotes his/her full work day to that contract.  Is there a problem here?

RESPONSE 

Good question and it shows colleagues such as you are delving into the issues, statements and opinions.  We received great response on this overview presentation.  We welcome feedback, questions, other opinions and concerns.  Feedback, such as yours provide our members/readers with valuable insight from various points of view.

First of all, there are various ways to classify cost and it depends on a company and industry.  In making presentations I strive to select what may be typically used as examples of a “concept”.  As a matter of fact, someone could look at the methodology in your inquiry and question it because it is different then there’s.  But read on and hopefully your question gets addressed.

The Answer: It depends!  Either way could be okay, as long as the method results in a fair and reasonable assignment of the costs to final cost objectives (contracts) AND the method is consistently used.  It must also Not result in double charging of a cost to contracts.

The presentation you reviewed is an Overview.  During our Live Group or DVD training, we delve into greater detail and address specific questions such as yours.

As a former DCAA auditor, but more importantly, extensive practical experience, I see both methods used as selected by various firms.  However, one must be careful when assigning indirect type labor activities, such as clerks, as direct.  If your Normal Policy is to always do this, AND there are chargeable direct labor categories, then that’s fine.  Again, as long as similar type clerical effort is charged direct to all other contracts.

However, if you come across a contract where they do not have or allow a direct labor category for clerical type activities, and it happens, than what will you do with the costs?  You have the option to argue your point, and it could be a valid point, that this is your normal policy.  Then hopefully you can negotiate with your customer to allow these costs as direct. 

The key is that similar type activities must be consistently applied.  So you must be careful if you have similar type clerical duties that are also included in Overhead or G&A that are getting allocated back to contracts as well those that are being charged direct to avoid double dipping/charging of similar costs to a contract, job, or product. 

It’s not as black and white as one would like.  This issue could be subject to interpretation.  Each situation and firm must look at their policy and the application of that policy specifically.

Based on the limited information in your inquiry, it appears you are okay, but just keep the issues discussed above in mind for future reference.  Hopefully you clearly document what you do in your Policy Manual.

Thanks for your great question!  Perhaps we will get additional input/feedback from others on this.

 

Paul Sr.

 

To see the overview presentation follow this link Cost and Price Overview Presentation