decoding budgeted indirect rates

Decoding Budgeted Indirect RatesDonna Dominguez & Aisha Mian | October 20, 2016

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Main Reasons for Budgeted Indirect Rates







Reasons to Prepare an Indirect Rate Budget

• Contractual requirements (FAR 52.216-7(e) & Subpart 42.7)

• Evaluating your business now and future goals

• Best practices for budgeting process

• Benefits for other contract types

• Budget rates for proposals







Billing







Contractual Requirements

FAR 52.216-7(e) – Allowable Cost & Payment Clause

• (e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment when the final rates are established. These billing rates –– (1) Shall be the anticipated final rates; and– (2) May be prospectively or retroactively revised by mutual

agreement, at either party’s request, to prevent substantial overpayment or underpayment.







Contractual Requirements

FAR Subpart 42.703-1 – Indirect Rate Policy

(a) A single agency (see 42.705-1) shall be responsible for establishing final indirect cost rates for each business unit. These rates shall be binding on all agencies and their contracting offices, unless otherwise specifically prohibited by statute. An agency shall not perform an audit of indirect cost rates when the contracting officer determines that the objectives of the audit can reasonably be met by accepting the results of an audit that was conducted by any other department or agency of the Federal Government (10 U.S.C. 2313(d) and 41 U.S.C. 4706(e)).

(b) Billing rates and final indirect cost rates shall be used in reimbursing indirect costs under cost-reimbursement contracts and in determining progress payments under fixed-price contracts.







Evaluating The Business

• Start by looking at how things have been done in the past and assess if any rates have been under utilized

• Is it time to implement a new indirect rate structure?

• Make sure there is an understanding of where the company is headed. – Will there be any significant changes?

• Do you have any CAS covered contracts?







Evaluating The Business

• Are we anticipating any wins/losses, or re-competes in the next year? What is the probability of those wins/losses and re-competes?

• Has my company had any acquisitions or asset purchases in the past year? – How will my contract mix be affected if I revise my rate

structure?

Overall answers to these questions will help determine the best structure for your company







Best Practices for Budgeting Process

Bottoms Up Approach• Approach is to budget costs at each cost element• Current year’s Trial Balance• Begin with Labor • Direct Costs• Assess all other indirect expenses• Ensuring Unallowables have been excluded








Contractor Actions – Internal Process

Prepare an Annual

Indirect Rate Budget

Approval by Executive

Management

Calculate & Finalize

Provisional Indirect Rates








Contractor Actions – External Process

Submit Budget Indirect Rate Proposal to ACO/CO or

DCAA/Cognizant Audit Agency

Once Rates are Established Begin Billing

Audits/ Negotiations/

Formal Approvals?







Monitor Billing Rates to Actual Rates

• At the beginning of your fiscal year you will begin using the proposed FY Budget Rates

• Monitor actual rates compared to billing rates on a monthly basis

• If you materially deviate from the billing rates what do you do?– Try to adjust expenditures internally – Request adjustment if actuals materially deviate from the billing

rates







Effect & Benefits on Other Contract Types

• Establishing annual budgeted indirect rates benefits the profitability and management of Firm Fixed Price (FFP), Labor Hour (LH) and Time & Materials (T&M) contracts.








Time & Material (T&M)

Budget Rates 27.00% 17.00% 19.00% 8.00%Proposed Labor

Categories Hourly Pay Fringe Overhead G&ABreak Even Fee

Loaded Bill Rate

Billed # of Hours

Billed to Year to Date (YTD)

Program Manager 95.00$ 25.65$ 20.51$ 26.82$ 167.98$ 13.44$ 181.42$ 1,000.00 181,419.47$ Position - Lvl 4 85.00$ 22.95$ 18.35$ 24.00$ 150.30$ 12.02$ 162.32$ 1,880.00 305,166.65$ Position - Lvl 3 75.00$ 20.25$ 16.19$ 21.17$ 132.62$ 10.61$ 143.23$ 1,880.00 269,264.69$ Position - Lvl 2 65.00$ 17.55$ 14.03$ 18.35$ 114.93$ 9.19$ 124.13$ 1,880.00 233,362.73$ Position - Lvl 1 55.00$ 14.85$ 11.87$ 15.53$ 97.25$ 7.78$ 105.03$ 1,880.00 197,460.78$

1,186,674.33$








Actual Rates 28.00% 18.00% 25.00%Proposed Labor

Categories Hourly Pay Fringe Overhead G&ABreak Even

Billed # of Hours

Total Actual Costs

Total Billed Costs

(Income) or Loss

Program Manager 95.00$ 26.60$ 21.89$ 35.87$ 179.36$ 1,000.00 179,360.00$ 181,419.47$ (2,059.47)$ Position - Lvl 4 85.00$ 23.80$ 19.58$ 32.10$ 160.48$ 1,880.00 301,702.40$ 305,166.65$ (3,464.25)$ Position - Lvl 3 75.00$ 21.00$ 17.28$ 28.32$ 141.60$ 1,880.00 266,208.00$ 269,264.69$ (3,056.69)$ Position - Lvl 2 65.00$ 18.20$ 14.98$ 24.54$ 122.72$ 1,880.00 230,713.60$ 233,362.73$ (2,649.13)$ Position - Lvl 1 55.00$ 15.40$ 12.67$ 20.77$ 103.84$ 1,880.00 195,219.20$ 197,460.78$ (2,241.58)$

1,173,203.20$ 1,186,674.32$ (13,471.12)$







Proposals







Budgeted Rates for Proposals

Helpful Tip – Prepare an annual budget indirect rates that can be used for ALL cost proposals

• Impact budget only for cost proposals that will significantly impact the rates– Adding new indirect rates (e.g. New Fringe or SM&H)

• Self impose ceilings on rates– Keep in mind this affects the profitability on the contract.

• What if the contract will trigger CAS coverage?







Budgeted Rates for Proposals

• Helpful Tip: Remember that having approved provisional billing rates by your ACO (or cognizant audit agency) may help you score more points on the proposal!







Adequate Estimating System

• Part of having an adequate estimating system is ensuring you have proper processes & procedures for budgeting, planning, and estimating methods in place to help safe guard the expense passed to the Government (DFARS 215.215-7002).

– How can this be accomplished? Establish budget indirect rates annually and apply them consistently to all cost proposals and invoices.

– Helpful Tip: For cost proposal submission, a contractor can score more points with an estimating system approved by their ACO (or cognizant audit agency)!







Year End Reconciliation to Actual Rates

• Per FAR 52.216-7, you must submit a final indirect cost rate proposal (i.e. Incurred Cost Submission) to the CO and audit agency within 6 months of the end of each fiscal year

• After submission, the ICS is audited • Final Indirect Rates are established – “True Up” invoices are submitted (or refund as

required)







Conclusion

Ideally the budget indirect rates will be low enough to be competitive and win new work yet high enough to recover all allowable indirect expenses.

Sometimes there will be tradeoffs and business decisions that will be necessary. However you can only make intelligent decisions if you know all the facts.

“Do not prepare in a vacuum”







About Aronson LLC

Aronson LLC provides a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals. For more than 50 years, we have purposefully expanded our service offerings and deepened our industry specialties to better serve the needs of our clients, people, and community. From startup to exit, we help our clients maximize opportunity, minimize risk, and unlock their full potential.







About Aronson LLC

• Thinking ahead for clients for more than 50 years• 225+ professionals located in Rockville, MD• 80+ professionals dedicated to supporting government contractors • Aronson helps clients rethink the way they approach their business

through innovative, industry-specific services and advice:– Audit, Assurance and Tax– Deltek Systems and Outsourcing– Financial and Contract Compliance– GSA Schedules

• www.aronsonllc.com/blogs/fedpoint/ – News and trends and insight for today’s savvy government contractor



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Awards / Accolades / Affiliations

The Gazette of Politics & Business Exceptional 53 Business Award In 2012, Aronson received the PB53 award for the third year in a row. The program acknowledges the top businesses and organizations in Maryland based on criteria that includes the company’s annual revenue, employee growth, noteworthy product or service innovations, community service efforts and more.

Accounting Today Top Firm In 2013, Aronson was once again named to Accounting Today’s list of the top 100 firms in the country. Accounting Today is a leading provider of online business news for the tax and accounting community.

Washington Business Journal Top 25 Aronson is ranked #12 on the Washington Business Journal’s Top 25 Accounting Firms in the DC Metropolitan area.

INSIDE Public Accounting Top 100 Once again, Aronson has earned a spot in the top 100 of this prestigious list, released by INSIDE Public Accounting. This is the longest running, most comprehensive and accurate independent analysis focusing on management and operations of America’s large local, regional and national firms.

Washington Business Journal Best Places to Work Aronson has been recognized five times as one of the Metro area’s “Best Places to Work.” The award recognizes a company’s achievements in creating a positive work environment that attracts and retains employees through a combination of employee satisfaction, working conditions and company culture.

Montgomery County Chamber Corporate Social Responsibility AwardIn 2010, Aronson was honored to receive the MCCC’s Corporate Social Responsibility Award based on the depth and breadth of the company’s energetic commitment to support young people, in the areas of education, housing and health.







Aisha N. Mian is a managing consultant in Aronson LLC’s Government Contract Services Group. She has more than eight years of experience in the government contracting industry, with expertise in both project control and financial compliance. Her professional skills include contract/project financial analysis and various areas of financial compliance, including preparation of incurred cost submissions; support in evaluating, preparing and advising appropriate indirect rate structures; preparation of disclosure statements; and analysis and impact of cost accounting standards (CAS). She has also worked alongside in-house DCAA auditors supporting audits for incurred cost submissions during her time in the industry. Aisha has been a guest speaker on financial and government contracting topics at the GWSCPA Government Contracting Conference and has hosted Aronson LLC webinars related to government contracting topics. She earned her bachelor’s degree in finance from George Mason University and her MBA from the Robert H. Smith School at the University of Maryland College Park.

Managing Consultant, Government Contract Services Group

240..364.2614

[email protected]

Aisha N. Mian







Donna Dominguez is a director in Aronson LLC’s Government Contract Services Group, where she provides a wide range of financial compliance advisory services for government contractors. She is experienced in matters related to Federal Acquisition Regulations (FAR), cost accounting standards (CAS), incurred cost submissions, DCAA/cognizant audit support, provisional billing rates, establishing/revising indirect rate structures and cost proposal support. Donna works with contractors to help them grow their business while keeping their accounting systems adequate in the eyes of the government and their billing systems current and relevant. She is also involved in supporting the government contracting community as a frequent guest speaker on a variety of compliance topics. Donna earned her bachelor’s degree in accounting from the University Maryland and has completed additional coursework in contracts administration. She is a contributor to Aronson’s Fed Point blog and has co-authored articles for NCMA Contract Management Magazine.

Director, Government Contract Services Group

301.222.8232

[email protected]

Donna M. Dominguez







Contact

301.222.8232

[email protected]

https://www.linkedin.com/in/donna-dominguez-664b26b


240.364.2614

[email protected]

https://www.linkedin.com/in/aishamian


Donna Dominguez Aisha Mian







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decoding budgeted indirect rates

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