Latest News

06-24-2010

With the federal government spending billions of dollars on goods and services annually, and a designated 23% targeted to small businesses, growth is looking promising among contractors, particularly smaller firms.

More>>

more news>>

Your browser needs Flash installed to view this content.

Selecting an Indirect Rate Model

Selecting an indirect rate structure is a very important decision for a Federal contractor. The indirect rate structure becomes the foundation for how pricing is developed, analyzed and proposed for the contractor’s work. It is certainly possible for a contractor to change its structure if it becomes necessary to do so, however, the Government looks for the contractor to accumulate and allocate indirect costs in a logical and consistent manner.

There are legitimate reasons for designing indirect rate structures in different ways.

• For example, a contractor may determine that its clients prefer not to deal with three indirect rates (fringe, overhead, G&A), but would prefer to deal only with two (overhead and G&A). Under such a scenario, the contractor may decide to accumulate payroll fringe costs in a separate pool, but rather than computing a fringe rate for bidding purposes, the contractor will simply allocate this pool to the overhead and G&A pools, rather than allocate any of this pool to final cost objectives.
• Another scenario may require that a field or client-site overhead rate be computed and proposed on certain work separate from a company-site overhead rate. This scenario would arise if the contractor employs workers who report regularly to a client site. Such employees would not require all of the overhead that employees working at the company site would require. Therefore, the client would be averse to paying total company overhead on these workers.
• Additionally, a contractor may wish to allocate costs, like facilities, not to a final cost objective, but rather to cost pool or to another allocation center.

Below are explanations and examples of the most common indirect rate structures typically used by small and mid-sized government contractors.

1. Fringe, Overhead, and G&A
2. Overhead and G&A (fringe pool is allocated to the other two pools)
3. Fringe, Company Site Overhead, Client Site Overhead, and G&A
4. Fringe, Overhead, Subcontract/Material Handling OH, and G&A
5. Fringe, Company Site Overhead, Client Site Overhead, Subcontract/Material Handling OH, and G&A Specific detail for each of the model types is included in the expanded Indirect Rate Models section.
6. Fringe, Overhead, Facilities (as an allocation center) and G&A
7. Overhead, Facilities (as an allocation center) and G&A (fringe pool is allocated to the other two pools)
8. Fringe, Company Site Overhead, Client Site Overhead, Facilities (as an allocation center) , and G&A
9. Fringe, Overhead, Subcontract/Material Handling OH, Facilities (as an allocation center) , and G&A
10. Fringe, Company Site Overhead, Client Site Overhead, Subcontract/Material Handling OH, Facilities (as an allocation center) , and G&A

Once an Indirect Rate Model is selected, the Chart of Accounts must be created or reconstructed to facilitate the accumulation of costs appropriately.