Higher margins and improved profitability are a direct result of the proper calculation of indirect rates and the maximum recovery of all costs incurred. Classification of costs, the identification of correct and allowable allocation methods and accurate mathematical formulas are critical in the proper calculation of indirect rates. This session will focus on the most common cost pools utilized by government contractors and a single rate approach to indirect rates. We’ll describe the composition of each cost pool, explain the acceptable allocation bases, and walk you through a few calculation examples. Every participant receives access to an online indirect rate calculator and downloadable tool.

1. Fundamentals of
Indirect Rates

2. We Know Government
Contracts

3. Who we are
Left Brain Professionals is a boutique accounting firm that serves
government contractors. We specialize in accounting system design
& implementation, audit support, training, and cybersecurity
compliance.

4. Our Services

5. Our Team
Robert E. Jones
Government Contracts &
Accounting Expert
CPA, CPCM, NCMA Fellow
Melissa Metzger
Government Accounting &
Finance Advisor
MAFM, CPA Candidate
Steven Bressler
Government Contract
Associate
steve@LeftBrainPro.commelissa@LeftBrainPro.comrobert@LeftBrainPro.com

6. Learning
Objectives
• List the five basic cost pools
• Describe the composition of
each cost pool
• Identify acceptable allocation
bases and methods
• Execute proper calculation of
indirect rates
• List tips for full cost recovery

7. Cost Pools

8. Five Basic Cost Pools
Cont…
• Direct
• Fringe
• Overhead
• General & Administrative (G&A)
• Unallowable

9. Cost Pool Composition
Direct (aka Costs of Goods Sold – COGS)
Costs directly attributable to final cost objective (contract, job,
project, product, or service).
• Labor
• Material
• Travel
• ODCs
• Subcontractors
Cont…

10. Cost Pool Composition, Continued…
Fringe
Cost of maintaining W-2 employees.
• Employer taxes
• Health insurance
• Retirement
• Paid absences
Cont…

11. Cost Pool Composition, Continued…
Overhead
Cost of supporting customers, products or services.
• General support
• Idle time
• Training
• Manufacturing/service supplies
• Facilities
Cont…

12. Cost Pool Composition, Continued…
General & Administrative (G&A)
Costs of operating the business and costs incurred regardless of
number of customers.
• Accounting
• Business Development
• HR
• IT
Cont…

13. Cost Pool Composition, Continued…
Unallowable
Costs not allowed per terms of the contract or regulations (FAR 31).
Cont…

14. Cost Pool Composition, Continued…
Other Cost Pools
Join us next month as we explore Advanced Indirect Rates!

15. Room Poll
Which of the following is NOT one of the basic cost pools?
A. Overhead
B. Assets
C. Fringe
D. Unallowable

16. Acceptable Allocation
Methods

17. Acceptable Allocation Methods
Direct
Note that direct costs are not
allocated, but are assigned to their
proper final cost objective (contract,
job, project, product, and service).
Cont…

18. Acceptable Allocation Methods, Continued…
Fringe
Total Labor Dollars – Recommended; most common; most fair with least
variances.
Total Labor Hours – Least common; higher risk of over- or under-
absorption of costs.
Direct Labor Dollars – Common in some industries such as
Architect/Engineer (A/E).
Direct Labor Hours – Common in some industries.
Cont…

19. Acceptable Allocation Methods, Continued…
Overhead
Direct Labor Costs– Most common,
especially in service or high labor industry.
Direct Labor Hours – Used when total
hours for the year can be easily estimated.
Direct Material Costs – Useful when
material costs significantly outweigh labor
costs.
Cont…

20. Acceptable Allocation Methods, Continued…
Overhead, Continued…
Total Prime Costs (Direct Labor + Direct Materials) – Reflects value
added to the materials such as some manufacturing environments.
Units of Production – Useful in high volume production environment.
Machine Hours – Useful in highly automated or heavily machined
environments.
Cont…

21. Acceptable Allocation Methods, Continued…
G&A
Total Cost Input (TCI) – Most common; allocation over most other
costs.
Value Added – Less common; used in conjunction with the Material
and Subcontract Handling (M&SH) pool we’ll discuss in Advanced
Indirect Rates.
Cont…

22. Acceptable Allocation Methods, Continued…
Unallowable
Unallowable costs are not allocated, but some (Direct and Overhead)
are included in the base of the G&A calculation.

23. Room Poll
Which of the following is NOT an acceptable allocation
method for overhead?
A. Units of production
B. Direct labor hours
C. Prime costs
D. W-2 employee labor

24. The Math of
Indirect Rates

25. The Math of Indirect Rates
Pool / Base = Rate
Rates are not inherently high or low. The rate is the rate. Get the correct
dollars in the correct pools and bases, then divide. The rate is the rate.

26. Fringe

27. Overhead

28. G&A
Cont…

29. Fringe Based on Hours
Direct Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Materials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fringe 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Retirement 5,555$ Applied Fringe 7,729$ Accounting 11,111$ Charitable Contributions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fringe Costs 44,443$ Facilities 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fringe on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fringe 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fringe Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fringe on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR

30. Overhead Based on Hours
Direct Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Materials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fringe 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Retirement 5,555$ Applied Fringe 7,729$ Accounting 11,111$ Charitable Contributions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fringe Costs 44,443$ Facilities 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fringe on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fringe 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fringe Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fringe on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR

31. G&A With Effect of Hours
Direct Labor 100,000$ Employer Taxes 16,667$ General Support 4,444$ G&A Labor 30,000$ UN Direct Labor 8,999$
Materials 88,888$ Health Insurance 8,888$ Idle Time 20,000$ Applied Fringe 7,729$ UN Overhead Labor 7,999$
Travel 33,333$ Retirement 5,555$ Applied Fringe 7,729$ Accounting 11,111$ Charitable Contributions 1,234$
ODCs 2,222$ Paid Absences 13,333$ Training 6,666$ Business Development 22,222$
Subcontractors 44,444$ Supplies 2,222$ HR 13,333$ Total Unallowable Costs 18,232$
Total Fringe Costs 44,443$ Facilities 8,888$ IT 15,555$
Total Direct Costs 268,887$
Direct Labor 6,000 Total Overhead Costs 49,949$ Total G&A Costs 99,950$
Overhead Labor 2,000
G&A Labor 2,000 Direct Labor 100,000$ Total Direct Costs 268,887$
UN Direct Labor 800 UN Direct Labor 8,999$ Applied Fringe on Dir Labor 23,188$
UN Overhead Labor 700 Applied Fringe 26,279$ Applied OH on Dir Labor 45,485$
UN Direct Labor 8,999$
Total W-2 Labor 11,500 Total Overhead Base 135,278$ Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 4,464$
Fringe Rate 3.86$ Overhead Rate 36.92% UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 364,819$
Direct Labor 6,000
G&A Rate 27.40%
Overhead Rate 8.32$
Total Direct Costs 268,887$
Applied Fringe on Dir Labor 23,188$
Applied OH on Dir Labor 49,949$
UN Direct Labor 8,999$
Applied Fringe on Dir Labor 3,092$
Applied OH on Dir Labor 6,660$
UN Overhead Labor 7,999$
Applied Fr on UN OH Lab 2,705$
Total G&A Base 371,479$
G&A Rate 26.91%
OR
Direct Fringe Overhead G&A Unallowable
OR

32. LBP Indirect Rate Calculator Tool
https://www.leftbrainpro.com/indirect-rate-calculator/

33. Room Poll
Fringe is typically allocated over:
A. All labor (including temporary & contractors)
B. Direct labor
C. W-2 employee labor
D. Direct and indirect labor

34. Full Cost Recovery

35. Full Cost Recovery
1. Review Rates Regularly (Monthly)
• Actual to budget
• Review variances
Cont…
2. Adjust Budget Quarterly
• Adjust spending to match billing rates

36. Full Cost Recovery, Continued…
3. Monitor Over- and Under- Billing
4. Updated Billing Rates
• Annually for new budget
• As needed for significant change in the budget:
• New or lost contracts (direct costs)
• Increased or decreased expenses

37. Fundamentals of Indirect Rates
In conclusion, higher margins and improved profitability are a direct
result of the proper calculation of indirect rates and the maximum
recovery of all costs incurred.

38. Room Poll
How accurate are your indirect rates?
A. Perfect – you won’t find one mistake.
B. Good – we check them regularly.
C. Horrible – we’re losing money!
D. We’ve never calculated our indirect rates.

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