If you decide that you have pricing flexibility on the items being produced in the new facility or you do not want to allocate those new facility costs (e.g. depreciation, rent, etc.) to the items being produced in the original facility then you will probably want to create a second overhead rate applicable to the products produced in the new facility. This is a relatively easy sell to the government because (1) there is a long held presumption that the more overhead rates used, the more precise cost allocations are (2) based on the belief of (1) auditors often encourage contractors to establish indirect rates at different facilities and locations (3) government auditors frequently interpret or at least cite FAR 31.203 and CAS 418 as reasons to resist use of one overhead rate at multiple locations and (4) a new case – AM General, discussed in the last issue of the DIGEST – concluded that two rates used at two facilities are appropriate. One word of caution - though most auditors will not conduct a sensitivity analysis to determine if more "favorable" (i.e. lower) pricing on a relevant contract would occur with a different indirect rate structure, certain aggressive auditors have been known to do so where they assert that more "equitable" pricing would result with a different structure.

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