Decoding Budgeted Indirect Rates

Decoding Budgeted Indirect Rates
Donna Dominguez & Aisha Mian | October 20, 2016
http://blogs.aronsonllc.com/fedpoint/

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&A
Break
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&A
Break
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

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 Award
In 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
amian@aronsonllc.com
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
ddominguez@aronsonllc.com
Donna M. Dominguez

Contact
301.222.8232
ddominguez@aronsonllc.com
https://www.linkedin.com/in/
donna-dominguez-664b26b
https://twitter.com/Aronsonllc
240.364.2614
amian@aronsonllc.com
https://www.linkedin.com/
in/aishamian
https://twitter.com/Aronsonllc
Donna Dominguez Aisha Mian

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Decoding Budgeted Indirect Rates

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