Navigating The Sea of Overhead January 24 th , 2016 The Fundamentals - PowerPoint PPT Presentation

@DHG_GovCon Navigating The Sea of Overhead January 24 th , 2016 The Fundamentals of Government Contracting Webinar Series government contracting 1

Your Presenters @DHG_GovCon Mike Mardesich Dixon Hughes Goodman LLP 703.970.0508 mike.mardesich@dhgllp.com Brad Tress Dixon Hughes Goodman LLP 703.226.0043 brad.tress@dhgllp.com government contracting 2

Fundamentals of Government @DHG_GovCon @DHG_GovCon Contracting – Season 2 Subject Matter • Season 2 topics will include: – Year End Closing – Contract Types and Associated Risks – Indirect Rates – Incurred Cost Submissions – Introduction to the Cost Accounting Standards – Timekeeping – Unallowable Costs – Contractor Compensation – Labor Law Compliance – Budgeting and Provisional Rates – Accounting Systems – Procurement Systems – Estimating Systems government contracting 3

Agenda @DHG_GovCon @DHG_GovCon • Indirect Cost Management Guide – “Navigating The Sea of Overhead” – Defense Systems Management College – 3 rd Edition, Oct 2001 – Only single published source for the general audience of acquisition personnel to provide a complete overview of indirect-cost management • Ch 1 - Introduction • Ch 2 - Essentials for Understanding Indirect Costs • Ch 3 - Typical Indirect-Cost Pools • Ch 4 - Allocation of Indirect Costs • Ch 5 - Contractor Management of Indirect Costs • Ch 6 - Impact of Government Contracting Requirements • Ch 7 - Cost Accounting Standards Requirements • Ch 8 - How the Government Monitors Indirect Costs government contracting 4

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Introduction government contracting 5

Introduction @DHG_GovCon @DHG_GovCon • Objective – Provide acquisition management personnel, with insight into the process by which contractors manage and government personnel monitor indirect costs. • Significance of Indirect or Overhead Costs – Estimate 53% of total costs incurred by DoD • Difficulty of Control – Often no clear-cut relationship between indirect expenses and profit as there is with direct costs – Government vs Commercial base • Current Environment – Lower defense budget / base = higher indirect rates – Preference for FFP contracting - 2017 NDAA • Importance of a Team Approach – Gov’t preference is to monitor contractor indirect rate management processes rather than individual expenditures. – Gov’t expects contractor to monitor own costs but influence contractor processes and take action prior to costs being incurred. • Negotiation of Forward Pricing Rates based on accurate contractor budgets and sales forecasts. government contracting 6

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Essentials for Understanding Indirect Costs government contracting 7

Essentials for Understanding Indirects @DHG_GovCon @DHG_GovCon • Introduction – Commercial = price based / Government = often cost based – Level of Indirect Costs ≠ inefficiency • Direct or Indirect – Direct = any cost that can be identified specifically with a particular final cost objective – Indirect = any cost not directly identified with a single, final cost objective; but it is identified with two or more cost objectives or an intermediate cost objective – Final cost objective is in this case a specific contract that has both direct and indirect costs allocated to it government contracting 8

Variable or Fixed Costs @DHG_GovCon @DHG_GovCon • Various costs do not all behave in the same way as production volume or business activity increases or decreases • Variable costs fluctuate directly and proportionally with business activity • Fixed costs are relatively constant and, within reasonable limits of capacity, do not vary with changes in production volume in the short run government contracting 9

Essentials for Understanding Indirects @DHG_GovCon @DHG_GovCon • Allowable or Unallowable Costs − Reasonableness − Allocability − CAS or GAAP − Contract Terms or FAR 31.201 • Capitalized Versus Expensed − small general-purpose costs are:(1) typically classified as expenses and (2) placed into indirect-cost pools for subsequent allocation to many contracts. − larger amounts are classified as assets and are considered to be capitalized where only a portion of the costs is placed into indirect-cost pools in the form of a depreciation expense each year. • Controllable or Non-controllable Costs • Responsibility Accounting / Manager Control government contracting 10

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Typical Indirect-Cost Pools government contracting 11

Typical Indirect-Cost Pools @DHG_GovCon @DHG_GovCon • Overhead Pools – Benefit a part of the business segment, e.g., a functional organization such as engineering or manufacturing • Service Centers – Departments or other functional organizations that perform specific technical or administrative work for the benefit of other organizational units. Their costs may be allocated, based on some measure of usage, partially to contracts as direct costs and partially to other indirect-cost pools • General and Administrative Expense Pool – Benefits the entire organization government contracting 12

Typical Contractor Cost Hierarchy @DHG_GovCon @DHG_GovCon CONTRACTOR BUSINESS SEGMENT T R SEGMENT GENERAL AND ADMINISTRATIVE EXPENSES I A G&A N CORPORATE OFFICE EXPENSE ALLOCATION N  D INDEPENDENT RESEARCH AND DEVELOPMENT / BID AND PROPOSAL EXPENSES S C I  F O OVERHEAD COST POOLS R E  S ENGINEERING PRODUCT MATERIAL HANDLING OFF-SITE E R T  C SERVICE CENTERS R T  E INFORMATION TECHNOLOGY FACILITIES D  D  CONTRACT A CONTRACT B CONTRACT C IR&D / B&P PROJECTS T I C O R DIRECT LABOR DIRECT LABOR DIRECT LABOR DIRECT LABOR O E DIRECT MATERIALS DIRECT MATERIALS DIRECT MATERIALS DIRECT MATERIALS S G C OTHER DIRECT COSTS OTHER DIRECT COSTS OTHER DIRECT COSTS OTHER DIRECT COSTS & T T A government contracting 13

Major Categories of Indirect Expenses @DHG_GovCon @DHG_GovCon • • Supplies/Services: Salaries & Wages: – Operating – Supervision – Maintenance – Indirect Labor – Perishable Tools – Training – Cal & Cert – Idle Time – Office Supplies • • Other Expenses: Fringe Benefits: – Travel – Health & Life Insurance – Telephone – Workmen’s Comp – Business Meetings – Annual Leave – Employee Relocation – Holiday – Dues & Subscriptions – – Sick & Personal Leave Employee Welfare – FICA Taxes – • Unemployment Taxes Allocations: – – Retirement Plan Use & Occupancy – – Computing Services Savings Plan – Operations Services – Industrial Engineering government contracting 14

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Allocation of Indirect Costs government contracting 15

Allocation of Indirect Costs @DHG_GovCon @DHG_GovCon • Allocation of Overhead – Typical Pools and Bases • Allocation of General and Administrative Expenses – Total Cost Input Direct Labor 1.00 – Value-Added Base Fringe 20% 0.20 – Single Element Subtotal 1.20 • Wrap Rates Overhead 5% 0.06 Subtotal 1.26 G&A 25% 0.32 Wrap Rate 1.575 government contracting 16

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Contractor Management of Indirect Costs government contracting 17

Contractor Management of Indirect Costs @DHG_GovCon @DHG_GovCon • Planning • Forecasting • Budgeting • Control • Variance Analysis • Ratio Analysis • Trend Analysis • Management Metrics • Regression Analysis • Industrial Engineering Analysis • Contractor Actions to Reduce Overhead government contracting 18

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Impact of Government Contracting Requirements government contracting 19

Impact of Government Contracting Requirements @DHG_GovCon @DHG_GovCon • Relevance of Contract Type • Federal Acquisition Regulation (FAR) Requirements – Cost Allowability – Reasonableness – Allocability – Generally Accepted Accounting Practices – Contract Terms • Selected Areas of Cost • Advance Agreements • Certification of Indirect Costs • Unusual Indirect-Cost Requirements • Current Issues government contracting 20

@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Cost Accounting Standards (CAS) Requirements government contracting 21

CAS Requirements @DHG_GovCon @DHG_GovCon • Applicability • Disclosure Statement • Cost Accounting Standards Relating to Indirect Costs – CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs – CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose – CAS 403 - Allocation of Home Office Expenses to Segments – CAS 404 - Capitalization of Tangible Assets – CAS 406 - Cost Accounting Period – CAS 410 - Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives – CAS 418 - Allocation of Direct and Indirect Costs – CAS 420 - Accounting for Independent Research and Development and Bid and Proposal Costs government contracting 22