INDIRECT COST RATES

INDIRECT COST RATES & DEFINITIONS

Indirect rates are unique for each organization, but consistently accumulate organization-wide costs in a pool divided by base with a causal or beneficial basis. Mahnke Consulting helps in evaluating various Indirect Rates, including provisional rates, actual incurred cost (AIC) rates, Indirect Cost Rates (ICR), and historical Incurred Cost Submission (ICS).
One indirect cost rate (ICR) is typically used by educational (FAR 31.3), state and local government (FAR 31.6), and nonprofit (FAR 31.7) organizations under requirements of an OMB Circular. An ICR consultant guides the contractor or, more typically, the grantee to accumulation of one pool of costs incurred for the organization as a whole and allocation among jobs, grants, or contracts. In a for-profit organization, the relationship of direct labor benefitting one particular job determines allocation of labor-related costs (e.g., employer-paid Fringe Benefits, Labor Overhead) costs to that job. If the employer cost of payroll taxes and employee benefits relates to time invested directly on a job, that pool, typically not the General and Administrative (G&A) pool, captures those related costs. If employer costs relate to G&A labor, those allocated costs are also G&A.
Indirect Cost Rates

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Provisional Rates
Guidance considers the Actual Incurred Costs (AIC). Proposals for individual contracts and for Provisional Rates use the same accounts for pools (expenses/nominators) and for bases (divisors/denominators) to calculate projected rates as for submission of actual information, after year-end (the Indirect Cost Submission). At the discretion of the U.S. Government customer, indirect rates might be negotiated early/before subject year – for consistent use on all proposals and billings of cost reimbursements throughout the year. Submission of proposed indirect rate preparation starts with separation of indirect versus direct costs, segregation of unallowable costs (per the applicable OMB Circular or FAR and FAR Supplements), and assessment of pool-to-base matching. Separate pools of indirect costs might include:

  • Facilities
  • Material Overhead
  • Labor Overhead
  • Computer-related
  • General and Administrative

Actual Incurred Cost (AIC) Rates
After the fiscal year end, an Indirect Cost Submission (ICS) of spreadsheets are supported by the general ledger; the general ledger is supported by source documents (such as vendor bills and timesheets). If actual ICS rates are lower than provisional/projected rates, cost reimbursements are adjusted; if actual ICS rates are higher, negotiations with the Contracting Officer might recoup under-invoiced cost reimbursements.

Department of Defense Contracts
For organizations that hold U.S. Government contracts of very large dollar values, the Defense Contract Management Agency (DCMA) or other federal government administrator typically negotiates Provisional Rates, often called forward pricing rates. After year-end, DCAA evaluates negotiated indirect rates contrasted against the ICS actual information. Provisional rates are consistently used in proposals and invoices. For cost-type contracts, AIC are audited after the end of each fiscal year for the contractor; cost-type contracts remain open until differences between provisional and actual indirect rates can be calculated and payment/re-payment settled. The government administrator, not the contractor, determines whether negotiation of projected rates is cost-effective for the government.