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

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

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@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

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government contracting

@DHG_GovCon

Navigating The Sea of Overhead

January 24th, 2016

The Fundamentals of Government Contracting Webinar Series

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government contracting

@DHG_GovCon

Brad Tress

Dixon Hughes Goodman LLP 703.226.0043 brad.tress@dhgllp.com

Mike Mardesich

Dixon Hughes Goodman LLP 703.970.0508 mike.mardesich@dhgllp.com

Your Presenters

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Fundamentals of Government 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

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Agenda

  • Indirect Cost Management Guide – “Navigating The Sea of

Overhead”

– Defense Systems Management College – 3rd 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
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Introduction

The Fundamentals of Government Contracting Webinar Series

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Introduction

  • 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.
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Essentials for Understanding Indirect Costs

The Fundamentals of Government Contracting Webinar Series

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Essentials for Understanding Indirects

  • 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

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Variable or Fixed Costs

  • 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

  • f capacity, do not vary

with changes in production volume in the short run

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Essentials for Understanding Indirects

  • 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
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Typical Indirect-Cost Pools

The Fundamentals of Government Contracting Webinar Series

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Typical Indirect-Cost Pools

  • 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

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Typical Contractor Cost Hierarchy

 

ENGINEERING PRODUCT MATERIAL HANDLING OFF-SITE

  

D I R E C T C O S T

CONTRACT A DIRECT LABOR DIRECT MATERIALS OTHER DIRECT COSTS CONTRACT B DIRECT LABOR DIRECT MATERIALS OTHER DIRECT COSTS CONTRACT C DIRECT LABOR DIRECT MATERIALS OTHER DIRECT COSTS IR&D / B&P PROJECTS DIRECT LABOR DIRECT MATERIALS OTHER DIRECT COSTS

 

T R A N S F E R R E D T O G & A FACILITIES

CONTRACTOR BUSINESS SEGMENT G&A I N D I R E C T C O S T OVERHEAD COST POOLS

SEGMENT GENERAL AND ADMINISTRATIVE EXPENSES CORPORATE OFFICE EXPENSE ALLOCATION INDEPENDENT RESEARCH AND DEVELOPMENT / BID AND PROPOSAL EXPENSES

SERVICE CENTERS

INFORMATION TECHNOLOGY

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Major Categories of Indirect Expenses

  • Salaries & Wages:

– Supervision – Indirect Labor – Training – Idle Time

  • Fringe Benefits:

– Health & Life Insurance – Workmen’s Comp – Annual Leave – Holiday – Sick & Personal Leave – FICA Taxes – Unemployment Taxes – Retirement Plan – Savings Plan

  • Supplies/Services:

– Operating – Maintenance – Perishable Tools – Cal & Cert – Office Supplies

  • Other Expenses:

– Travel – Telephone – Business Meetings – Employee Relocation – Dues & Subscriptions – Employee Welfare

  • Allocations:

– Use & Occupancy – Computing Services – Operations Services – Industrial Engineering

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Allocation of Indirect Costs

The Fundamentals of Government Contracting Webinar Series

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Allocation of Indirect Costs

  • Allocation of Overhead

– Typical Pools and Bases

  • Allocation of General and Administrative Expenses

– Total Cost Input – Value-Added Base – Single Element

  • Wrap Rates

Direct Labor 1.00 Fringe 20% 0.20 Subtotal 1.20 Overhead 5% 0.06 Subtotal 1.26 G&A 25% 0.32 Wrap Rate 1.575

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Contractor Management of Indirect Costs

The Fundamentals of Government Contracting Webinar Series

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Contractor Management of Indirect Costs

  • Planning
  • Forecasting
  • Budgeting
  • Control
  • Variance Analysis
  • Ratio Analysis
  • Trend Analysis
  • Management Metrics
  • Regression Analysis
  • Industrial Engineering Analysis
  • Contractor Actions to Reduce Overhead
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Impact of Government Contracting Requirements

The Fundamentals of Government Contracting Webinar Series

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Impact of Government Contracting Requirements

  • 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
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Cost Accounting Standards (CAS) Requirements

The Fundamentals of Government Contracting Webinar Series

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CAS Requirements

  • 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

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How the Government Monitors Indirect Costs

The Fundamentals of Government Contracting Webinar Series

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The Indirect Rate Life Cycle

  • ICS rates are comprised of costs which are allocable,

reasonable, and allowable on Government contracts.

Contractor Indirect Rate Cycle

  • Bid and bill with Provisional rates
  • Monitor the Provisional rates versus

Actual rates periodically.

  • Compare the rates at the end of

year, at Incurred Cost Submission (ICS) submittal, and when the ICS is settled.

  • Submit revised rates if there is a

material difference throughout contract

  • Submit final rates in ICS
  • Settle final rates at contract closeout
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Government Monitoring

  • Government Team
  • Monitoring Techniques
  • Indirect Rate Life Cycle
  • Tracking Indirect Costs
  • Contractor Systems Reviews

– Accounting (252.242-7006) – Estimating (252.215-7002) – Material Management & Accounting System (MMAS) (252-242-7004) – Earned Value Management (EVM) (252.234-7002) – Purchasing (252.244-7001) – Government Property (252.245-7003)

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Questions?

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Join us next month for An Introduction to the Incurred Cost Submission on Tuesday, February 21th

The Fundamentals of Government Contracting Webinar Series

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22nd Annual Government Contracting Update

DHG’s 22nd Annual Government Contracting Update: shaping today’s challenges into tomorrow’s success When: May 4th, 2017 Where: The Hyatt Regency in Tysons Corner, VA CPE: 8 hours (pending approval) Visit www.dhgllp.com/govcon to learn more!