INQUIRY: Hi Paul, I, along with two colleagues, took you Cost & Pricing class in El Paso, TX yesterday. I have two quick questions that I’m hoping you will answer. I’m currently putting together information for our Pools and Bases. My two questions are:
1)I’m trying to decide on 2 Pools or 3 Pools. Some in our company feel that having 3 Pools (FOG) makes us appear better organized and that the government prefers to see 3 Pools. Others feel that 2 Pools (O-including Fringe and G&A) is adequate. Does the government actually have a preference?
2)This question stems from the first question. If I go with 3 Pools, my equation will look like this:
Pool 1: Fringe
Base: Total Productive Labor (this includes direct labor)
Pool 2: Overhead
Base: Direct Labor
Pool 3: G&A
Base: Total Cost Input
My question is: if we go with the 3 Pools can we “double dip” the direct labor as a base for Pool 1 and Pool 2? Could this “double dipping” be a good reason to use 2 Pools instead of the 3?
Currently, our system costing is set up to calculate each Pools rate, then I calculate the total hours to execute a project *our unloaded rate. I’m taking that total and applying our P/R rate. I’m applying those rates as such:
Total Unloaded Labor Rates x Pool 1 Rate = Total #1
Total #1 x Pool 2 Rate = Total #2
Total #2 x Pool 3 Rate = Total Loaded Labor Rates
Once our Total Loaded Labor Rates are added to the Material, etc. costs, we are adding the 10% fee.
I hope that I am interpreting the information that we learned yesterday correctly. Please let me know if I am not understanding.
Thank you so much. We all enjoyed your class so much we are hard at work implementing the new systems.
RESPONSE: Good Questions, and it is good to see you reaching out for confirmation and checking your process Prior To any potential audits and to ensure you are pricing to recover all allowable cost. As you will see, there are no Quick Questions in Government Contracting!
One advantage to having a Fringe Pool separated is that it isolates these cost for analysis and in many cases the government may ask for the rate. Whether they do or not, you would have the rate and cost readily available, especially during the proposal phase of developing your cost proposal or to meet any SCA reporting requirements.
In addition, there is a psychological benefit because the separate rates will generally be smaller than when they are combined so it “looks” better.
I would consider moving to 3 pools if you find it is requested more during the proposal stage or if you want to move toward reviewing and analyzing the Fringe and Other Overhead Cost or Rate separately.
Your calculations appear accurate except for one oversight. Whenever you chose a base for a pool you must apply the rate for that pool in the same manner as you calculated it. So, since you used Direct Labor as the base for Overhead you must apply your Overhead rate to only Direct Labor and not to Direct Labor + Fringes as you show in your calculations. Alternately, you can change the base for your Overhead to Direct Labor + Fringes and then you will be consistent in your proposed application of the Overhead Rate.
As for Double Dipping: You are not Double Dipping when you use Direct Labor or any other cost in more than one base. Remember, the Allocation Base purpose is only to ALLOCATE a specific POOLS cost. It bears no relationship to what is happening in another POOL. You choose a base to allocate Pool #1’s cost and then that Pools cost get allocated. Finished with that one. Then you choose a base to allocate Pool #2’s cost and then that Pools cost get allocated. Finished with that one. And so on.
I hope this helps!