Inquiry: Paul, I was in your Cost and Pricing Workshop that you put on for SBA in Birmingham awhile ago. When I was looking at my Indirect and G&A rates and looked at your notebook I did not see an example of when a company uses Direct Labor hours instead of Direct Labor dollars as the base.
Do you have an example of how that works? I am a small company and primarily labor based, so I think it would be easier and just as correct to use direct labor hours to obtain the rate. Do you agree? Thanks for your help.
Response: To use Direct Labor Dollars as a base, you would simply divide the Indirect Cost by your Direct Labor HOURS instead of Direct Labor Dollars. This will yield an indirect cost per DOLLAR $ Rate instead of a PERCENTAGE % Rate.
You will now have an Indirect Cost per Hour.
This is generally acceptable and used when a firm believes Hours represent a more fair and reasonable allocation of indirect costs to contracts/jobs than does Dollars, or in their opinion, the difference using either option is immaterial.
Be prepared to support that conclusion with some type of spreadsheet analysis. Also, don't forget to go to your Policy Manual and note or update your policy on the Base you will be using going forward.
If this is a change in your historical, normal policy, and you have any active government contracts that could be affected by this change, then you should notify your CO or ACO or your Prime (as applicable) of your proposed change.
If you submit any Incurred Cost proposals to the DCAA or DCMA then you should notify them also of your change.
Let me remind you that the example I use in my live workshops and on my DVD are just that; one example of the typical and most used base for Overhead. I presented several other acceptable options to be used as a base including Direct Labor Hours. Again, your Policy Manual should detail this choice.
Here is a brief, simple example: Assumptions: Overhead (O/H) = $100,000; Direct Labor (D/L) Dollars = $200,000; Direct Labor Hours = 5,000 Now let's calculate the rate under each scenario:
a) O/H Rate using D/L Dollars [$100,000/$200,000=50%]
b) O/H Rate using D/L Hours [$100,000/5,000=$20.00 per hour]
Either way, you will recover the $100,000. The government just wants to make sure that each contract is getting its "fair share" of the $100,000 charged that particular contract.
Hope this helps.