Cost and Pricing

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, I assign them differently.  Is there a problem?

Response: 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.  But let's look a bit deeper......

Inquiry: Hi Paul, At the present time DCAA is in the process of auditing our G&A and in directs.   If you have any examples of how we calculate fringes, it would be helpful.  They seem to think we are low on our fringes.

Response: We do have an electronic file (e-file) that should help you.  Many others have used it as a template to get a quick look at "what might be".  They replaced the sample numbers with their own and the spreadsheet calculated their rates.  It is very inexpensive!  Here is where to go.....

INQUIRY: Hi Paul,  Can you explain the difference of putting travel and client expenses into B&P versus G/A?  RESPONSE: B&P (Bid and Proposal) expenses are typically for costs incurred during the Proposal Phase while similar type costs would typically go into G&A when they are incurred for the General and Administrative activities of the company, but not for B&P purposes. Lets look closer....

Inquiry: Any subcontract costs we incur will be a part of our G&A base, so my question would be is there anything in FAR 52-232-7 that precludes us from adding G&A on top of these subcontract costs?

Response: Let me answer in the Affirmative Tense: The simple answer is Generally Yes; you can add G&A to subcontract costs.   FAR 52.232-7 clearly lists Subcontracts under Materials and allows for adding Indirect costs to these.

However, your inquiry is much more in-depth than first meets the eye, and it should be.  So let’s look beyond the obvious...

INQUIRY: I have seen different options for developing Wrap Rates or Multipliers using compounding factors. Is there a difference in the resultant Wrap Rate or Multiplier based on a firms choice of Base?  RESPONSE: The quick and simple answer is no. But the devil is in the details. So if you dare, read on because it gets very interesting...

Are government accounting system requirements only applicable for Cost Reimbursement Type Contracts? This is a widely misunderstood concept. Many contractors feel that they do not have to worry about audits since they do not have any cost plus fixed fee (CPFF) type contracts. Others feel that since their contract(s) are small they are okay. Boy do they find out the hard way that this is not true. Let me tell you how it generally works...

Paul, in setting up accounting systems, I always recommend that the company have a lag between the timesheet cutoff date and the payday, so that the employee’s hours can be collected and paid based on timesheets.  However, if a company chooses to keeps its payday, and if all their employees are salaried, are they technically forecasting time.  Example, they have to send payroll data on Friday, August 10 for hours thru August 15th.  So to me, they are forecasting Monday Aug 13 to Wednesday August 15.

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. 

Inquiry: In contracting and coming up with the bases for estimates, and taking into consideration competitiveness. What does a company need to be aware of when contracting out 1099 vs employees.

Response: When you develop your indirect rates, you should review the level of Fringe Benefits provided 1099 employees versus regular employees. You must ensure (to the best of your knowledge and ability) that according to.............

Even if a contract is not covered by the Cost Accounting Standards (CAS), the FAR will compel any contractor subject to these FAR principals to account for unallowable costs in accordance with CAS 405.

In essence, the government is saying that when FAR tells you that a specific Cost Accounting Standard, or some part of the CAS applies, then it applies, even though you may be exempt from CAS as a small business. It is what it is!

Although there are many types of Unallowable Costs, there are certain types that are Declared Expressly Unallowable by Federal statute or regulations. These type carry with them a higher incidence of fines, penalties, and interest if they are not excluded, or if they are included but not specifically identified, from billings, claims, proposals, or other types of data submitted to the government where the date could be used in decision making of any kind by the government.

Can we propose lower indirect rates than our projected rates and how would we go about doing it?

RESPONSE: Generally YES. There are important issues and guidance you should be aware of and follow as applicable. Understanding these guidelines will minimize questions and concerns later on. 

The very first issue to consider is the financial impact on your bottom line of making such a choice.  But there is valuable guidance as follows......

Things to consider when deciding what to include in the Handling Pool and the type of Base to use.