deltek insight 2010: pool structures for every client: making your indirect costs work for you

GCS 209: Pool Structures for Every Client: Making Your Indirect Costs Work for You

Presented by: Laura Sproat,

Strategic Consulting Solutions, Inc.

Copyright © 2010 Deltek, Inc. 2

Agenda

• Function of Pools• Factors Affecting Indirect Costs• Reasons and Timing for Restructuring Cost Pools• Methods of Restructuring Cost Pools


Key Takeaways

• More Thorough Knowledge of Regulations Regarding Cost Pools

• Advanced Cost Pool Setup• Additional Methods to Recover Costs and Increase Profit

FAR Regulationshttp://farsite.hill.af.mil/

http://farsite.hill.af.mil/


FAR 31.201-2 – Determining Cost Allowability

A Cost Is Allowable Only When the Cost Complies With All of the Following Requirements:– (1) Reasonableness

– (2) Ability to be fairly allocated to applicable costs

– (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances

– (4) Terms of the contract

– (5) Any limitations set forth in this subpart


FAR 31.201-3 – Determining Reasonableness

• Definition: A Cost Is Reasonable If, in its Nature and Amount, it Does Not Exceed That Which Would be Incurred by a Prudent Person in the Conduct of Competitive Business

• Reasonableness Depends upon a Variety of Considerations and Circumstances, including– (1) Necessary for the business

– (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations

– (3) The contractor’s responsibilities

– (4) Significant deviation from contractor’s standard practice


FAR 31.201-4 – Determining Allocability

• Definition - A cost is allocable if it is chargeable to one or more cost objectives on the basis of benefits received or other equitable relationship. – A cost is allocable to a government contract if it:

• (a) Is incurred specifically for the contract

• (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received, or

• (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown

• Pool Factors– Homogeneity of costs – group like costs together

– Beneficial / causal relationship – who benefits?


FAR 31.201-6 – Accounting for Unallowable Costs

• (a) Costs that are expressly unallowable or mutually agreed to be unallowable….shall be identified and excluded from any billing, claim, or proposal applicable to a government contract– A directly associated cost is any cost that is generated solely as a result of

incurring another cost, and that would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.

• (b) If a Directly Associated Cost Is Included in a Cost Pool That Is Allocated Over a Base That Includes the Unallowable Cost With Which it Is Associated, the Directly Associated Cost Shall Remain in the Cost Pool.


FAR 31.203 – Indirect Costs

• (a) Indirect Costs Are Those Remaining to Be Allocated to Intermediate or Two or More Final Cost Objectives. No Final Cost Objective Shall Have Allocated to it as an Indirect Cost Any Cost, If Other Costs Incurred for the Same Purpose, in Like Circumstances, Have Been Included as a Direct Cost of That or Any Other Final Cost Objective (Be Consistent)

• (b) The Contractor Shall Accumulate Indirect Costs by Logical Cost Groupings With Due Consideration of the Reasons for Incurring Such Costs. The Contractor Shall Determine Each Grouping So as to Permit Use of an Allocation Base That Is Common to All Cost Objectives to Which the Grouping Is to Be Allocated (Causal Relationship)


FAR 2.101(b) – Definitions

• Indirect Cost - Any Cost Not Directly Identified With a Single Final Cost Objective, but Identified With Two or More Final Cost Objectives or With at Least One Intermediate Cost Objective

• Indirect Cost Rate - The Percentage or Dollar Factor That Expresses the Ratio of Indirect Expense Incurred in a Given Period to Appropriate Base for the Same Period

Indirect Cost Pool ÷ Allocation Base = Indirect Rate (expressed as a %)

Fun Facts About Pools(Let’s dive into the deep end!)


Info You Need to Know

• Only One Pool Is Necessary - G&A• Number and Composition of Pools

– Left to the convenience of the contractor– Deltek GCS Premier® allows seven pools per division– Changes MUST be approved by Cognizant Audit Agency

• FAR Part 31.205 Describes Various Indirect Costs and Their Allowability

• Purpose of Pools– Improves the visibility of difficult to control costs– Facilitates the monitoring of similar types of expenses

• Cross Charging Allows Indirect Rates to Be Calculated by Employee Division Instead of Contract Division


Typical / Standard Pool Setup

• Company Wide Fringe Benefits Pool– Allocated on total labor dollars

• Labor Overhead– Allocated on Divisional Direct Labor– Including or Excluding Fringe Benefits

• General and Administrative Expense– Allocated on Total Cost Input


Why Restructure?

• New Contract or New Business Function Changes Costs Incurred

• Employees Work at Government Site• Different Employee/Fringe Groups• Acquired Another Company• Company reorganizes or refocuses on other agencies or

industries


When to Restructure

• Only after approval received from Cognizant Audit Agency• Pools Are Based on Fiscal Year Costs

– Pools Can Be Changed at Any Time During the Fiscal Year

– Costs and/or revenue will be recalculated at the new rate for the fiscal year

Tier 1 – Fringe Pools


Fringe Benefits Pool Setup

• Costs Associated With Employees• Normally Allocated on Total Labor Dollars

– May Be Allocated on Total Direct Labor Dollars

• Some Smaller Contractors Choose to Include Fringe Benefits Cost in Overhead Pools– This method ignores the fringes attributable to G&A Labor and

B&P/IR&D Labor

– Has the effect of incrementally lowering stated G&A rate, but raising the stated Overhead rates


Pool Attributes in GCS Premier ® Affecting Fringe Calculation

• Tier 1 Settings– Apply to Tier 2

• Checked-Overhead labor is included in base

– Apply To Tier 3• Checked-G&A labor, B&P labor,

IR&D labor is included in base

– Service Center Fringe Account• Account credited for fringe on

Service Center indirect labor.

• Setup as an “Indirect Expense” account type


Multiple Fringe Pools

• Why?– Employees have different fringe packages

– Statutory Employees have only taxes withheld

– SCA/Davis Bacon employees

– Employees in multiple geographic locations

• Advantages– Consistent with FAR/DCAA rules regarding consistency and

allocability

– Allows for more competitive bidding on contracts


Multiple Fringe Pools (cont’d)

• Setup Issue– How to burden indirect labor with correct fringe benefits and prevent

double-burdening?• Indirect Labor has no labor suffix

• Problem only if both pools must allocate costs to Tier 2 and Tier 3 pools

• Solution to Multiple Fringe Pool Setup Issue– Setup service center(s)

• Ensures Tier 2 and Tier 3 labor is not double burdened

• Indirect Labor burdened with correct pool

Tier 2 – Overhead Pools


Overhead Expenses

• Cost Incurred in the Performance of Contracts• Normally Allocated on Direct Labor Dollars but, May Also

Be Allocated on– Direct Labor $ + Fringe Benefit $

– Labor Hours (Base J in GCS Premier)

– Machine Hours

– Production units

– All ODCs (Base F)

– Specific ODC • Base K - ODC Suffixes W/Allocation Flag = Pool Number


Pool Attributes Affecting Overhead Calculation

• Tier 2 Settings– Include Tier 1 burden

• Reduces overhead rate by increasing base with fringe on DL

– Include Tier 1 __ in this pool• Includes fringe benefits on direct

labor in the overhead pool to create combined Fringe/OH Rate

– Allocate costs to Tier 3: No, Yes, Partial• Partial – Applies OH on

B&P/IR&D Labor only (applicable if employees prepare bids)


Overhead Pool Restructuring Options

• Multiple Overhead Pools– Different Products or Contracts Types

– Multiple Office Locations

– Multiple Cost Centers

– Contracts performed at government site

• Multiple Divisions– Allows for divisional overhead rates.

– Fringe and OH pools may contain divisional or company-wide rates.

• Advantages– Consistent with FAR/DCAA rules regarding consistency and

allocability

– Allows for more competitive bidding on contracts

Tier 3 – G & A Pools


General & Administrative Expense

• Costs incurred in the performance of company business.

• Must be allocated using one of the three DCAA recommended bases– Total Cost Input – Consistent with

performance of company functions

– Value-Added Cost Input – Subcontractor or Material Handling

– Single Element – If element is only the only material cost incurred.

27Copyright © 2010 Deltek, Inc.

Alternate G&A (Value Added) Pool

• Setup for “Pass Through” Costs

• ODC Costs Excluded From G&A Base

• Ability to Setup Two Value-Added Pools Per Division.– Base H – ODC with C Alloc. Flag

– Base I – ODC with D Alloc. Flag

• Set Value Added Flag– A – Include indirect costs in G&A

base

– B – Exclude indirect costs in G&A base


B&P / IR&D Effect on G&A

• Setup in Contract Master File to track costs– Sub-Set of G&A costs

• Fringes Applied to Labor• Overhead Applied to Labor - If Employees Prepare Bids

Conclusion


Conclusion

• Pools Must Be Restructured in Accordance With FAR and CAS Regulations Regarding Allocability, Allowance, and Reasonableness

• Restructuring Must Be Approved by Cognizant Audit Agency• Multiple Pools and Divisions Can Increase Cost Recovery

And Profitability• Service Centers Can Be Used to Create Correct Burdening

of Indirect Labor When Multiple Fringe Pools Exist


Q&A

deltek insight 2010: pool structures for every client: making your indirect costs work for you

Business

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