Overhead Rates. These costs are considered to be in support of direct staff working directly on contracts and hence are normally allocated as a percentage of direct labor costs. Some companies include fringe benefits associated with direct labor in the direct labor base while others do not – the result when they do is to lower overhead rates. Average overhead rates are as follows: (a) on-site direct labor -70% (on-site means performed at company sites) (b) on site direct labor and fringes – 49% (c) off-site direct labor – 38% (offsite is lower because facility related costs are normally borne by the customer at their facilities) and (d) offsite direct labor and fringes – 22%. When companies used multiple overhead rates logic used for them were location (51%), market (15%), labor function (14%), customer (14%) and products versus services (6%).

 

G&A Rates. The survey states that general and administrative rates are typically those incurred at the headquarters and include executives, accounting and finance, legal, contract administration, human resources and sales and marketing.

(Editor’s Note. In our experience, the elements of costs included in G&A pools vary more than the survey implies. G&A costs may include non-overhead indirect costs incurred at a business segment level which usually includes an allocation of headquarters costs while we also find all the categories of overhead costs identified above as part of the G&A pool when a company decides such
categorizations meet their needs.) G&A costs are most often allocated to contracts based on total cost input (direct operating costs, overhead, material, subcontracts) or value added base that generally includes all the above costs except material and/or
subcontracts. Average G&A rates under a total cost input was 11% while those using a value added cost input was 15%. Material handling and subcontract administration costs. 55% of surveyed companies used a material handling or subcontract administration rate as a burden chargeable on material and subcontract costs (a significant increase over prior periods). Average material handling rate was 3%, subcontract administration rate was 5% and combined was 4%.

Special allocations. The FAR and CAS provide authority to negotiate special allocations of indirect costs when an inequitable allocation would result from its normal practices such as when there is an unusual dollar amount of material, subcontracts or equipment that does not commonly occur on its other work. Only 7% used a special allocation.

Billing practices for rate variances. When there are differences between provisional billing rates and actual rates the government generally requires an adjustment on billings be made on cost type contracts. 37% of respondents said actual rates exceeded their provisional rates while 11 % reported the opposite. The remaining 52% stated there was no significant difference. For those reporting actual rates exceeded provisional rates, 37% of the companies did not collect any of the rate variance, 24% collected the entire variance while the remaining 39% collected a portion. Reasons cited for collecting none or only some of the rate variance were contract funding limitations (40%), customer relations (30%) and contractual rate ceilings (30%). 81% of those collecting rate variances waited for final incurred cost audits, contract closeouts or other formal approvals while 19% billed for rate variances when the annual
incurred cost submission was made (The writers of the survey correctly recommend contractors invoice and collect variances as soon as possible given funding risks since the regulations permit rate variances to be billed when actual rates have been submitted to the government on a timely basis.)

Service centers. Certain functions that support the
company are accumulated in separate pools and then
charged to users (e.g. clients, indirect cost pools) on a
pre-established allocation method. The most
frequently used service centers are facilities (used by
45% of the respondents), information technology
(40%) and human resources (25%).

Labor multipliers. Multipliers are fully loaded labor
multipliers used to price out work (see our last issue of
the GCA REPORT). The average labor multiplier was
2.0 for on-site work and 1.7 for off-site work. Almost
all respondents expressed a belief their labor
multipliers were competitive with their industry.
Uncompensated overtime. (Editor’s Note. We have analyzed
this issue in numerous prior issues of the DIGEST – XXX.

 

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