Developing indirect rates is only one piece of the puzzle for government contractors. Managing indirect rates leads to financial and contract success. We find that many contractors only calculate indirect rates at the end of the year and do little to manage rates throughout the year. Several factors affect indirect rates including unplanned expenses, budget errors or oversights, and won or lost contracts. Monitoring and managing indirect rates throughout the years helps contracts avoid significant over- or under-billing at year end. The former results in a large payment due to the Government, and the latter may mean unbilled expenses if the program is out of funds. We'll walk you through our 4-step process to monitor and manage indirect rates. Learning Objectives 1. Identify causes of rate variance. 2. Explain the impact of over- and under-billing costs. 3. Describe the importance of managing indirect rates.

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We Know Government
Contract Accounting

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Managing
Indirect Rates

3. Who We Are
Left Brain Professionals is a boutique accounting firm that serves
government contractors. We specialize in accounting systems and
strategic services.

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Our Practice Areas
ACCOUNTING SYSTEMS
• Accounting System Design &
Implementation
• Monthly Support Packages
STRATEGIC SERVICES
• DCAA Audit Support
• CFO & Controller Services

5. Our Team
Robert E. Jones
Principal GovCon
Accounting Advisor
CPA, CPCM, NCMA Fellow
Steven Bressler
GovCon
Accounting Associate
Steve@LeftBrainPro.com
Robert@LeftBrainPro.com
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Suzanne@LeftBrainPro.com
Suzanne Camden
Sr. GovCon
Accounting Advisor

6. Learning
Objectives
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• Identify causes of rate variance.
• Explain the impact of over- and under-billing
costs.
• Describe the importance of managing
indirect rates.

7. Poll
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Do you have a defined process for managing indirect rates?
A. Yes.
B. No.

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Managing Indirect Rates
Two Goals
1. Maximize profitability
2. Limit over-/under-billing the
government

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Managing Indirect Rates
Maximize Profitability
• Clients call because they're not making enough money
• Maximize profitability by monitoring the budget and
billing rates
Limit Over-/Under-Billing the Government
• More on this later

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Causes of Rate Variances
Fluctuation in Direct Work
Budget Overruns
Labor Efficiency
Unallowable Costs

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Fluctuation in Direct Work
Direct costs are the largest amounts in the bases of Fringe,
OH, and G&A
• Winning an unexpected contract
• Losing an expected contract
• Delays in award
• Stop work orders

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Budget Overruns
Direct budget overruns may result in
unbillable costs (exceeding the cost
ceiling) or reduced profit margins
(fixed price contracts)
Indirect budget overruns may result in
increased indirect rates (underbilling)
or reduced profit margins

13. Poll
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Which of the following is not a cause of direct work fluctuation?
A. Winning unexpected work.
B. Too much indirect work.
C. Delays in award.
D. Losing an expected contract.

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Labor Efficiency
Budgets and rates are built with an assumed labor efficiency
Increased efficiency reduces rates
Decreased efficiency increases rates
⇡ Direct Costs = ⇣ Indirect Rates

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Unallowable Costs
Unallowable costs = Unbillable costs
Unallowable Direct, Fringe, and Overhead costs
Follow same treatment as if allowable
Are in the bases of Fringe, Overhead, & G&A as appropriate
Result in unrecoverable indirect costs

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Over- / Under-Billing
Final rates determined after
submission of incurred cost proposal
• Requires evaluation for adequacy
• Time to review and finalize rates
• May result in audit

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Over- / Under-Billing
Overbilling
Significant overbilling may result in immediate cash payment
Often difficult for small businesses
Underbilling
Underbilling may result in
• Lack of additional funds
• Delays in funding modification

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Process
Monitor Reports
Evaluate Variances
• Identify and understand the root cause
• We find people don't investigate the
variances or cannot adequately explain
the root cause
• If you can't explain the problem, you
can't fix it

19. Poll
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How often do you monitor indirect rates?
A. Rarely.
B. Monthly.
C. Quarterly.
D. Annually.

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Summary Rate Report

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Detailed Rate Report

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Detailed Rate Report

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Rate Variance Report

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Correcting Variances
Adjust Spending Quarterly
Realign line items within a pool
Realign dollars between pools
Goal is to match cost/billing multiplier
regardless of individual rates

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Correcting Variances
Update billing rates
Semi-annually
Winning/losing a major contract

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Adjusting Invoices
Evaluate impact on a contract-by-contract basis
Communicate with contracting officer or customer
1. Recalculate YTD with new rates and issue adjustment on
next or separate invoice
2. Recalculate today forward and apply effective rate on
remaining invoices

27. Poll
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How much help do you need managing rates?
A. A lot.
B. Just a little.
C. None, we’ve got this.

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