AGENDA FOR LUNCH SEMINAR WITH FMI AUGUST 28, :30 PM INTRODUCTION TO GOVERNMENT CONTRACTING

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1 AGENDA FOR LUNCH SEMINAR WITH FMI AUGUST 28, :30 PM INTRODUCTION TO GOVERNMENT CONTRACTING 1. NICRA - What is a NICRA? - Who has a NICRA? - Do I need a NICRA? - How do I get a NICRA? 2. INDIRECT RATES - LABOR, LABOR, LABOR! - How are Indirect costs different from Direct costs? - What is included in Indirect Rates? - Definition of Fringe Benefits, Overhead and G&A How do you determine which expense goes into what pool? - What is the base for calculating indirect rates? - How often must indirect rates be calculated? Changed? - Why are Indirect Rates important? - Multiplier what is it? How is it applied to labor to arrive at a Loaded Labor Rate? 3. TYPES OF CONTRACTS - CPFF, T&M, FFP - How are Indirect Rates important to each type of contract? - How does the profit margin differ among different types of contracts? 4. REPORTING REQUIREMENTS

2 1. NICRA What is a NICRA? NICRA is a Negotiated Indirect Cost Rate Agreement. Who has a NICRA? A prime contractor with a cost-reimbursable type contract. Do I need a NICRA? Not if you are only a subcontractor, even if you have a cost-reimbursable type contract. How do I get a NICRA? You cannot apply for a NICRA. It has to be requested/required based on being the prime contractor on a cost-reimbursable type contract. Once you have been requested to submit a NICRA, your NICRA proposal will be audited by the cognizant agency or DCAA (Defense Contract Audit Agency). In FMI s case, your cognizant agency is U.S. Agency for International Development (USAID)

3 2. INDIRECT RATES LABOR, LABOR, LABOR! Why is labor so important? FMI COSTS 2007 YTD % 28% vs. For FMI, in 2007 total labor was $1,360,287 which represents 24% of total costs. Year-to-Date for 2008 is 28%. Each element in computing Indirect Rates direct costs, fringe benefits, overhead, G&A - includes labor. Each time you complete a timesheet, your labor dollars are allocated depending on where you spent your time direct or indirect. For costreimbursable type contracts, each labor dollar you spend on a project/job must be recorded in the accounting records and the exact amount billed to the client

4 How are Indirect costs different from Direct costs? FAR defines direct cost as any cost that can be identified specifically with a particular final cost objective (i.e., cost incurred for a specific contract). This includes costs for which you can claim reimbursement and costs that you cannot claim for reimbursement. An example might be exceeding the per diem limit for a certain location. If the daily per diem is $200 and you incur and claim $250, the extra $50 is not a reimbursable cost, but must still be identified as a direct cost for purposes of computing indirect rates. FAR defines an indirect cost as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. Indirect costs cannot be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective (e.g. telephone costs). Because of their nature, indirect costs cannot be charged to final cost objectives on an individual basis. Therefore, indirect costs are classified and grouped together into indirect cost pools (fringe, overhead and G&A). The pools in turn are allocated to final cost objectives using an indirect cost allocation base

5 Fringe Benefits, Overhead and G&A How do you determine which expense goes into which pool? Fringe Benefits costs that directly benefit employees: 1. Paid time off including vacation, sick leave, holiday, personal leave. 2. Employer s portion of payroll tax related to total salary, including FICA, federal and state unemployment taxes. 3. Profit sharing contributions to employee accounts. 4. Performance bonuses. 5. Life insurance. 6. Medical insurance. Overhead costs that are incurred for or that only benefit an identifiable unit or activity of a contractor s internal organization. 1. Overhead labor 2. Allocated portion of shared services. G&A costs that are necessary to the overall operation of the business as a whole, but for which a direct relationship to any particular cost objective cannot be shown. G&A includes top management functions for executive control and direction, HR, accounting, finance, public relations, and legal. 1. G&A labor 2. Bid & Proposal labor 3. Business insurance 4. Dues 5. Marketing general 6. Bank charges 7. Accounting 8. Legal 9. Taxes & licenses 10. Allocated portion of shared services - 4 -

6 Shared Services certain costs can be either overhead or G&A and are called shared services. Shared services are allocated based on a relationship between the selected allocation base and the pool of costs to be allocated. In the case of FMI, shared services are allocated to overhead and G&A based on the ratio of Overhead Labor + Direct Labor vs G&A Labor + Bid & Proposal Labor to the total labor pool. Overhead Labor + Direct Labor Total Labor Pool vs. G&A Labor + Bid & Proposal Labor Total Labor Pool For example, in 2007, Total Overhead labor + Direct Labor was 80.37% of the total labor pool and G&A Labor + Bid & Proposal Labor was 19.63% of the total labor pool. Therefore, the total shared services pool was allocated 80.37% to Overhead and 19.63% to G&A. Shared Services includes: 1. Temporary help 2. Rent 3. Communications 4. Postage & Courier 5. Equipment 6. Office Supplies & Expense 7. Other Expense 8. Computer Support 9. Depreciation 10. Recruiting 11. Staff Development - 5 -

7 What is the base for calculating indirect rates? 1. Fringe Benefits Pool divided by Fringe Benefits Base Fringe Benefits Base = Total Labor PTO Labor 2. Overhead Pool divided by Overhead Base Overhead Base = Direct Labor Applied Fringe on Direct Labor Expatriate Professional Labor Local Professional Labor B&P Labor Applied Fringe on B&P Labor 3. G&A Pool divided by G&A Base G&A Base = Total Cost less G&A Pool How often must indirect rates be calculated? Changed? Actual rates should be calculated and analyzed at least quarterly. If there are large variances between actual and provisional rates, especially from one year to the next, the contractor should submit a proposal to its cognizant agency annually to request new provisional rates. If the contractor expects that a major proposal will change its volume or require a different indirect rate structure (e.g. offsite overhead or materials handling or subcontract handling), new indirect rates based on winning the proposal should be calculated. If the contractor has cost-reimbursable type contracts (or T&M contracts with an ODC component), actual incurred costs must be calculated annually and submitted to the cognizant agency within six months of the fiscal year end (June 30 for FMI) (see discussion in section 4 below for Incurred Cost Submissions)

8 Why are indirect rates important? If you do not know what your indirect rates are, you cannot accurately bid on proposals or project profitability. On cost-reimbursable type contracts, you are assured reimbursement of total costs, direct and indirect, so you must develop a provisional rate for billing purposes, and monitor your actual rates so that you are reasonably close to the provisional rates and do not exceed any ceiling rates that the contract may impose. If you are bidding on T&M contracts, you must know what your indirect rates are so you know how to burden your labor dollars to arrive at a loaded labor rate. If you are bidding on a fixed price contract, you must know what indirect costs are associated with each direct labor dollar you except to incur on the project, so you can predict your total cost and profit. Multiplier - What is it and how is it applied to labor to arrive at a loaded labor rate? The multiplier is simply the mathematical sum of fringe plus overhead plus G&A. The multiplier is calculated as follows: Direct Labor $1.00 Plus 30.86% Plus 29.08% Plus 10.30%.1740 Multiplier before fee %.1490 Total Multiplier So, if you are bidding on a T&M contract and want to develop the loaded labor rate you would multiply the direct labor times If your actual hourly labor rate was $50, your loaded labor rate would be $50 x = $

9 3. TYPES OF CONTRACTS CPFF Cost Plus Fixed Fee CPIF Cost Plus Incentive Fee CPAF Cost Plus Award Fee T&M Time & Materials LH Labor Hour FFP Firm Fixed Price FFP with Level of Effort How does the profit margin differ among different types of contracts? Generally, the fee on proposals for work with the federal government range between 6% to 12%. The fee is usually lower on a cost-reimbursement type contract because the risk to the contractor is lower than any other type of contract. If the contractor keeps its indirect rates within the provisional rates, it is guaranteed to recover its actual costs on the contract (within the contract budget and available funds). The fee on a fixed price contract would generally be higher because there is a greater degree of risk to the contractor. On a fixed price contract, the contractor has agreed to provide a product or a service and it must be done within the negotiated price of the contract. If the contractor underestimates his costs, he will be cutting into the profit margin that was bid on the contract. The profit margin on T&M contracts is probably somewhere in between costreimbursable and fixed price contracts. However, if the T&M contract is multiyear, the contractor has the risk of its indirect rates in future years being higher than originally bid. In this case, the contractor would again be cutting into its profit margin to cover the increase in indirect rates

10 WEIGHTED GUIDELINE METHOD OF CALCULATING FEE Factor Rate Weight Value 1. Degree of risk 20% Relative difficulty of work 15% Size of job 15% Period of performance 15% Contractor s investment 5% Assistance by Government 5% Subcontracting 25% Total 100% Evaluation 1. Degree of Risk by contractor should be rated between.03 and.12. Lump sum bids should have higher risks than unit price contracts. The higher the subcontractor ratio, the lower the risk. 2. Relative Difficulty of work should be rated between.03 and.12. The more difficult and complex of a job, the higher the rating. 3. Size of Job. $100,00 or less =.12. $100,000 to $5,000,000 shall be proportionately weighted for.12 to.05. Work from $5,000,000 to $10,000,000 =.04. Work above $10,000,000 = Period of performance. Work less than 1 month =.03. Work in excess of 24 months =.12. Duration in between are to proportionately weighted between.03 and Contractor s Investment. To be weighted from.03 to.12. Items to consider include amount of subcontracting, data, water tests method of progress payments and mobilization payment items. 6. Assistance by Government. To be weighted from.12 to.03 on the basis to above average. Consider use of Government expediting assistance. 7. Subcontracting. To be weighted inversely proportional to the amount of subcontracting. 80% subcontracting = % contractor s own forces =.12. Weight

11 4. REPORTING REQUIREMENTS - CPFF contracts Incurred Cost Submission, all direct expenses billed must tie to accounting records; all indirect expenses billed at provisional rates must be trued up to actual rates; provisional NICRA must be updated annually. - T&M contracts Incurred Cost Submission, labor hours billed must match labor hours worked per timesheets; ODC must tie to accounting records; provisional G&A billed must be trued up to actual G&A. - FFP No reporting of direct or indirect expenses is necessary

12 Questions? Jerrold Rosenberg, CPA, CFP Judith Lasley, CPA John Pace, CPA, CVA Gelman, Rosenberg & Freedman 4550 Montgomery Avenue, Suite 650 North Bethesda, MD Phone: (301) ; Fax: (301) Web:

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