CASE STUDY – INDIRECT RATE ALTERNATIVES AND SHIFTING COSTS FROM G&A TO OVERHEAD

(Editor’s Note. The following article is part of our ongoing practice to provide real life case studies from our consulting engagements that we believe will have relevance to our readers. As usual, we disguise the client name – referring to “Contractor” – and other private information. We were asked to evaluate Contractor’s indirect rate structure with respect to whether it provides the best possible indirect rates for pricing its government work, consider alternatives, conduct a quantitative analysis of viable alternatives and once the best candidate was selected, consider how expenses previously charged to one pool could be charged to another. The following is a summary of our analysis.)

Background Information

Contractor is primarily a professional services company with a small portion of prototype work that has a mix of federal government (80%) and commercial clients. The government work is with several government departments with one large cost type contract having significant subcontract work as well as time and material and fixed price work having little to no subcontract work. Currently, Contractor has three indirect rates: (1) overhead allocated on a direct labor cost base (2) G&A allocated on a value added base consisting of all costs excluding direct material and subcontracts costs (M&S) and a (3) subcontract/material handling rate allocated on a direct subcontract and material cost base. The M&S rate is a little more than 1 percent where Contractor believes it could charge the government a higher rate if its cost structure provided for it but the government would not be happy about an add-on exceeding 10 percent.

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