Indirect rates are computed by accumulating costs by cost pools which are numerators and cost bases which are denominators. For this episode, we will focus solely on cost pools.
Indirect rates typically consist of fringe, overhead, facilities and administration, or F & A, and general and administrative G & A rates. While there are other rate structures, this episode will focus on the big four.
Overhead costs are costs that support direct activities and general and administrative activities. Overhead costs that support direct activities are included 100% in the overhead cost pool such as overhead labor, lab supplies, travel, meals, recruiting, outside services, etc. Overhead costs that support G & A activities are allocated using a reasonable basis. For example, G & A square footage over total square footage, or G & A labor over total productive labor. These shared costs typically include occupancy costs (rent, business insurance, property taxes, utilities, telephone).
Both groups of overhead costs are accumulated and any allocation to G & A is deducted, creating the overhead cost pool. For contractors that do not have a fringe rate, but do have an overhead rate, the fringe cost pool is included in the overhead cost pool with a portion allocated to G & A.
General and administrative costs are costs that support the general business operations and include the CEO, CFO, controller, human resources, allowable legal costs, state corporate taxes (C-corporations only), bank fees, office supplies, computer supplies, G & A professional fees, etc. In addition, a portion of overhead that supports G & A activities is allocated to the G & A cost pool.
The G & A cost pool also includes an overhead allocation to bid and proposal, and independent or internal research and development labor. There is also a fringe allocation where a separate fringe rate exists.
Fringe costs are costs related to having employees, normally, fringe benefits. Fringe costs include vacation pay, sick pay, holiday pay, or other paid time off. In addition, fringe costs include bonuses, health and dental insurance (net of any amount withheld from employees' paychecks contributing to insurance premiums), worker's compensation insurance, employer portion of retirement plans, such as 401(k)'s, and the employer's portion of payroll taxes.
Facilities and administrative costs are costs that support both direct and G & A activities. In other words, the F & A cost pool includes overhead and G & A cost pools combined. If your company only has an F & A rate, fringe costs would be included in the F & A rate, otherwise, your organization may have a separate fringe rate.
Cost pools NEVER include unallowable costs. Unallowable costs must be clearly separated within the accounting system.
After computing your cost pools, you would divide the cost pool by its respective cost base which is covered in Episode 2.
Indirect cost rate structures consist of 1, 2 and 3-tier structures. 1-tier structures combine overhead and G & A rate, or F & A rate only, which may be used by any agency. 2-Tier structures that consist of fringe and F & A are typically for the National Institutes of Health (NIH) and the National Science Foundation (NSF). 2-tier structures that consist of overhead and G & A are typically used by the Departments of Defense and Homeland Security. 3-tier structures that consist of fringe, overhead and G & A are not as common, but typically used by the Departments of Defense and Homeland Security. Other agencies may fall into one of these traditional models or may have a preferred method of their own.
Doing business with the US government becomes challenging at times. However you should never lose sight of the fact that you are a business first, and the government is just one of your customers. Most small business government contractors become polarized when dealing with the government and develop business practices that can jeopardize the commercial viability of their organizations.
At Moker CPA, we help businesses understand the complexity of government contracting as well as the challenges of commercializing research leading to viable and sustainable organizations. We help simplify the complex to free your capacity and advance your research, while leaving the administrative burden to us. Please visit us at www.mokercpa.com for more information.
DISCLAIMER: The content included in the video is included for informational purposes only and is not expected to be definitive in nature. Each contractor may have specific facts and circumstances that require treatment of costs and bases in a different manner. Therefore, we do not provide a representation or warranty of any kind for the content provided herein.