Inquiry and Challenge:
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 workday to that contract. Is there a problem here?
Very good question and observation. I accept your challenge 👍 The following is my point of view and then you can decide, OK?
First, there are various ways to classify cost and it depends on a company and industry. In making presentations I strive to select what is typically used as examples of a “concept”. Someone could look at your methodology and question it because it is different then theirs'. That is why I am so open to your input and opinion. It provides the opportunity to give our members/readers other options based on their unique situation. So read on and hopefully your question gets addressed.
The Answer: 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.
That is why I pointed out that the presentation was an OVERVIEW. During training we delve into greater detail and address valuable questions such as yours.
As a former DCAA auditor and with extensive experience, I have seen both methods used as selected by various firms. One must also 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.
However, if you come across a contract where they do not allow a direct labor category for clerical type activities, and it happens, then what will you do with the costs? You have the option to argue your point, and it is a valid one, that this is your normal policy.
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.
It appears you are okay, but just keep the issues discussed above in mind.
Thanks for your great question!