Whether you are new to government contracting and are just setting up your accounting system or are more established and not sure costs are being recorded properly on a consistent basis,  you will need to document your indirect rate structure.  You need to define, in writing, what indirect rates you need (i.e. fringe benefits, operating/overhead, material handling, major subcontract administration, general and administrative, etc.) and their method of allocation.

Fringe Benefits – Fringe benefit expenses are those that are incurred by the company for the benefit of its employees.  They generally apply to all employees, direct and indirect, hourly and salary although separate fringe benefit rates can be developed for special categories of employees who do not receive or desire all benefit expenses incurred such as retirees and part-time employees.

Typical fringe benefit expenses include, but are not limited to: employer paid federal, state and local payroll taxes (FUTA, SUTA, FICA, etc.); worker’s compensation insurance; paid time off (PTO) including vacations, holidays, sick time, jury duty, and etc.; medical, dental and vision insurance; short and long-term disability; pensions; company contributions to 401(k) and 403(c) plans; on-site parking fees; severance and etc.

Operating/Overhead – These expenses are those associated with facilitating direct labor employees in performing their specified jobs.  They can include the costs of support personnel, machinery and equipment utilized, supplies and etc.

Operating/overhead expenses generally include: transportation costs; associated books, manuals and professional memberships and dues; training; computer supplies and support; office supplies; allocable facilities expenses; communications; overtime charges; administration and supervision labor (including associated fringe benefits) and etc.

Two of the most common operating/overhead expense rates are a “client-site” rate and a “company-site” rate to reflect the reduced level of operating/overhead expenses associated with your direct labor employees working out of your client’s facilities.

Material Handling/Major Subcontract Administration – Many contractors think these rates represent the same costs, but that is incorrect.  If you have a significant amount of material costs it may be of benefit to create a material handling expense rate allocating the costs incurred related to the acquisition of the material and the incorporation of these materials in your products and services.  These costs would include such expenses as: purchasing, receiving, inspection, stocking, stockroom and material movement labor (including allocable fringe benefits) and associated allocable facility costs.  These costs would normally be removed from the operating/operating overhead cost pool and allocated over total material purchases.

The major subcontract administration rate applies to those contractual requirements assigned to other contractors.  The expenses include those associated with the selection of the subcontractor; development, negotiation and monitoring of a subcontract document; monitoring of the subcontractors performance and required contractual reporting and compliance.  These expenses are usually part of the general and administrative expense pool and must be excluded from the general and administrative expense rate.

General and Administrative – General and administrative expenses are those associated with the administration and management of all company efforts.  They are not assignable to any one contract or any other final cost objective.

Expenses included in the general and administrative rate include. But are not limited to: executive management (CEO, COO, CFO, CIO, etc.), finance and accounting, marketing, sales and marketing, contracts, information technology, human resources, in-house counsel and all applicable fringe benefits; legal fees, stockholder/investor relations, business licenses and fees, liability insurance and general business insurance; bid and proposal (B&P) and independent research and development (IR&D) expenses and all applicable fringe benefits; travel; allowable professional memberships, dues and subscriptions and etc.

By defining the various expense pools and their allocation bases in writing you ensure the consistent development of your indirect rates for forecasting, budgeting, pricing and billing purposes and facilitate the performance of DCAA audit.