Strategic Consulting Solutions, Inc.


Developing Your Indirect Rate Structure

Determining how you should design your indirect rate structure isn’t always easy, but each of these important decisions require a lot of analysis and planning to make the right decision. When developing your indirect rate structure, common questions may include such things as:

  1. Do I need multiple fringe pools?
  2. What about an On-Site vs. Off-Site Overhead or a unique Overhead for a business line?
  3. Is a Handling Pool right for me?

In an effort to help you answer these common indirect rate structure questions, we’ve broken down each topic to provide some insight about fringe pools, overhead, and handling pools. Keep reading to learn more, analyze, and plan for your indirect rate structure system.

Fringe Pools

Normally fringe benefit pools are based on fringe benefits available to the employees; not necessarily the benefits that they elect. So when companies look at their fringe pools, they may consider unique pools such as full-time, part-time, Service Contract Act (SCA), or a union fringe pool. However, we caution companies not to build a pool around a small group of employees. For example, if there are one or two part-time employees, it may create more volatility in both pools by separating full-time and part-time Fringe. Also, depending on the wage base for the SCA employees, the fringe rate for SCA employees may not be significantly different than full-time employees.

However, there may also be times that it’s beneficial to separate or break out the pools. In cases where the solicitation calls for a specific type of employee labor, such as Unions or SCA employees, it’s probably best to separate a pool for those types of employees, as competitors are probably bidding a similar type pool as required by the contract. Further analysis can determine if the fringe rate is significantly different by creating multiple fringe pools. In these cases, it could also be beneficial to determine how sensitive each pool is to small changes in employee elections or when employees, who reach a seniority level, have changes that impact certain benefits.

Overhead Pools

Overhead pools can be broken out by business lines. However, that’s if the costs to support those types of contracts are unique and result in a different rate than if combined. Keep in mind that distinctions exist in the ways the type of work is supported and the costs that are involved.

Companies also often face the decision between Customer-Site vs. Home-Office Overhead. In certain solicitations, making this decision and change may be required, which puts a company in an awkward situation. In these cases, this usually involves creating an intermediate pool to allocate facility-related costs between Home-Office Overhead and General & Administrative (G&A). Doing this allows the contractor to charge the government a lower overhead rate when employees are not using the contractor’s facility, but if a company includes the facility’s costs in G&A, it requires more changes to the accounting procedures.

Handling Pools

Normally, Handling Pools are smaller pools applied to direct costs such as materials and/or subcontractors. The advantage of this type of pool is the ability to apply a lower rate to these costs, rather than using the higher G&A rate. However, there are a few cautions to be aware of.

  1. The first are handling fees. It’s not unusual for pricing sheets in a solicitation to include a line for a handling fee, which often misleads contractors into thinking they must include a handling pool. If that’s the case, and your indirect rate structure does not currently have a handling pool, you may want to put in a zero rate and footnote that your indirect rate structure applies G&A to these types of costs. If you do think it’s advantageous to propose a handling rate, run the numbers on this contract and the impact on existing contracts. Remember, don’t decide to create the pool based on this one solicitation, as the implications can be far reaching.
  1. Secondly, keep in mind that this type of pool generally requires a substantial amount of materials or travel, and a small base will not provide the effect of a lower rate. It also requires that you separate the pool costs of ‘handling’ these types of costs in order to make the pool effective.
  1. Third, you’ll have to keep in mind that this will probably increase your G&A rate. And, you’ll be taking a larger portion of the costs out of your G&A base than your G&A pool in order to create the handling pool.

Conclusion

Changes to your indirect rate structure are not to be taken lightly. If you are under a Disclosure Agreement or have Forward Pricing Rate Agreements, this will require advance approval to make this type of change.

The best advice is to run the numbers for each scenario and determine the impact on all contracts.  Also, try to consider the impact on future contracts. More pools definitely lead to more administrative work, but can also lead to more volatility in smaller companies.

Tags: , , , , , , ,

Comments are closed.