What Do You Know… about Indirect Rates?
GovCon Job Cost Accounting requires segregation of direct costs (for one particular Job – which can be a project or a contract) from indirect expenses (which benefit the company as a whole). Both indirect expenses (the Pool) and their related bases (the divisor) proposal and contract Terms and Conditions include compliance with regulations. Each pool is divided by a base to result in a rate. Each base must have a causal or beneficial relationship to that pool. The burden of proof is on the contractor to show that claimed amounts are reasonable and comply with applicable Federal Acquisition Regulations (FAR) and FAR Supplements. Cost proposal, Actual Incurred Costs (AIC), and customer billings all use the same methodology and match supporting documents. Stimulate your mental synopses with your knowledge of GovCon Indirect Rates; then verify your answers at the bottom of this article. What do you know?

1. Standard life insurance premiums are in Fringe Benefits, an indirect pool separate from G&A. (The company calculates G&A using a Total Cost Input base; the Fringe Benefits pool uses a Labor Dollar base.) The scope of one contract includes assembly of detonators to explosives. Add-on life insurance for the employee that tests the bombs is recorded as:
a. Direct
b. Fringe Benefits
c. Unallowable, even when included in the bombs contract
d. Subcontract (Administration) G&A
2. Mailing and shipping of envelopes is consistently in G&A, regardless of the shipper (e.g., USPS, FedEx, UPS). One contract requires shipment of a 200-pound piece of equipment. The cost of that shipment is recorded as:
a. G&A – to maintain consistency
b. Direct
c. Unallowable, even when included in the contract requiring the equipment
d. Subcontract (Administration) G&A
3. Expenses related to the company building are in Facilities, an indirect pool separate from G&A. (The company calculates G&A using a Total Cost Input base; the Facilities pool uses a Square Footage base.) Topping the parking lot with sealant is recorded as:
a. G&A
b. Direct
c. Facilities
d. SG&A
4. Errors and Omissions insurance is G&A. Life insurance on top executives with the company as the beneficiary is G&A. Property insurance on the headquarters building is recorded as:
a. G&A
b. Direct
c. SG&A
d. Facilities
5. For cost proposals, general ledger records, and customer billings – the contractor has two different Overhead rates. The Manufacturing Overhead is separate from the Labor Overhead. The Supervisor schedules which employees will work on which manufacturing projects over the next month. The Supervisor’s labor is recorded as:
a. Labor Overhead
b. Manufacturing Overhead
c. SG&A
d. Facilities
6. The contractor uses its own money to invest in Independent Research and Development (IR&D) of processes it hopes to sell in the future. The labor for IR&D projects is initially recorded as:
a. Labor Overhead
b. A separate indirect account or project for IR&D
c. G&A Labor
d. Unallowable Labor
7. Extraordinary presentation Materials, prototypes, and Travel invested in Bid and Proposal (B&P) efforts are initially recorded as:
a. G&A Other Direct Costs
b. Unallowable Other Direct Costs
c. A separate indirect account or project for B&P
d. Direct to the subsequent award(s)
8. Two employees attend a three-day class required by one particular contract. The training is not likely to benefit any other current or future award. Travel costs are recorded as:
a. G&A
b. Overhead
c. Unallowable
d. Direct – to the extent within the allowances of the Joint Travel Regulations
9. Two employees attend a three-day class for management and administration of the company. Travel costs are recorded as:
a. G&A
b. Overhead
c. Unallowable
d. Direct
10. In order to meet a deadline imposed by the federal government, four professionals work through lunch. As an incentive, the company pays for the lunch, specifically to get the work completed by the deadline. Payment for the lunch is recorded as:
a. G&A
b. Unallowable
c. Direct to the contract with the deadline
d. B&P for the proposal with the deadline
Made you think! If you answered all ten correctly, you’re a GovCon Indirect Rates rock star! If you got at least eight answers correct (and for the right reasons), you’re an asset to future DCAA audits of your employer’s cost proposals, Accounting System, and customer billings. Train others! If your guesses did not measure up, consider asking an outsourced consultant for help implementing compliant Policies and Procedures on GovCon Indirect Rates and Pools. …And well before the next audit! The answers are below.
ANSWERS:
1. a. – The cost is required for the contract and, therefore, allowable. The cost benefits one contract, not the company as a whole.
2. b. – Costs are consistently recorded in the same account and project “in like circumstances.” Because the shipment of heavy equipment that benefits no other projects is not “like” shipping of routine envelopes, the cost is direct.
3. c. – The parking lot is related to the facility. If the company chooses to have a separate Facilities indirect rate, this expense belongs in that pool.
4. d. – If the company chooses to have a Facilities indirect rate, insurance premiums on the facility belong in this pool. If the company has no specific rate fitting this facilities expense, then it belongs in the G&A pool. Because it benefits the company as a whole, it is an indirect expense.
5. a. – The Supervisor’s time is labor. A causal or beneficial relationship exists between the scheduling labor of the Supervisor and company-wide labor dollars. Manufacturing Overhead consists of machine oil, shop rags, and other manufacturing “floor” expenses that benefit multiple projects.
6. b. – To evaluate whether company-paid IR&D projects cost more Net Income (or profit) than anticipated, IR&D is recorded separately. After applicable indirect expenses are absorbed – then the whole allowable “bucket” of IR&D (including absorbed indirect expenses) is merged into the G&A pool. If a contract is (fully) CAS-covered, regulations allow Government agreement on alternative absorption, by contract or Job. This can only be done with the whole “bucket” of IR&D recorded separately.
7. c. – To evaluate whether company-paid Business Development focuses too broadly (or too narrowly) B&P is recorded separately. After applicable indirect expenses are absorbed – then the whole allowable “bucket” of B&P (including absorbed indirect expenses) is merged into the G&A pool. If a contract is (fully) CAS-covered, regulations allow Government agreement on alternative absorption, by contract or Job. This can only be done with the whole “bucket” of B&P recorded separately.
8. d. – Because the class is required for this award – allowable direct costs are included in the cost proposal, the general ledger Cost of Goods and Services Sold for this contract, and billings to the customer.
9. a. – Because the class benefits the company as a whole – allowable G&A expenses are included in the indirect pool for projecting (calculated) the proposal rate, applicable general ledger G&A accounts, and the G&A billed to customers.
10. b. – Regulations (FAR 31.2015-13) call out expenses (losses) on food as specifically unallowable. The contractor is responsible for completing the work by the deadline. Additional expenses to accomplish that goal – even if related to customer procrastination (as opposed to poor planning by the contractor) – are unallowable.