• Financial and Cost Statistics

Profit. Contrary to common public perceptions, government contracting does not generate abnormally high profits. 37% of survey companies had no profit or profit rates between 1-5% while 76% had either no profit or rates between 1-10%. Only 14% had profit rates over 15%. These figures would be diminished after deducting interest and taxes.

Fringe Benefit Rates. Fringe benefit pools consist of payroll taxes, paid time off, health benefits and retirement benefits (some include bonuses while others do not). Fringe benefit rates as a percentage of total labor averaged 36% when bonuses were included and 33.8% when excluded.

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 - 84% (on-site means performed at company sites) compared to 81% last year (b) on site direct labor and fringes – 51% compared to 48% last year (c) off-site direct labor – 45% (off-site is lower because facility related costs are normally borne by the customer at their facilities) compared to 46% last year and (d) off-site direct labor and fringes – 17% compared to 13% last year. When companies used multiple overhead rates logic used for them were location (36%), labor function (39%), customer (17%) and products versus services (8%).

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 are most often allocated to contracts on total cost input (direct operating costs, overhead, material, subcontracts) or a 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. 25% of surveyed companies used a material handling or subcontract administration rate as a burden chargeable on material and/or subcontract costs. The survey notes that in service industries a handling rate is established in conjunction with use of a value added G&A base to reduce burden applied to pass-through subcontract and material costs. Average material handling rate was 3%, subcontract administration rate was 4% and combined was 3.5%.

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. It’s often a good idea to adopt a special allocation for a contract that has an unusual cost mix rather than change the indirect rate structure to accommodate the contract. Interestingly, only 6% used a special allocation.

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 53% of the respondents), information technology (30%), human resources (28%) and printing/ publications (18%).

Labor multipliers. Multipliers, a term commonly found in the commercial world, are fully loaded labor multipliers used to price out work and are derived by dividing total burdened labor cost by base labor cost. The average labor multiplier was 2.4 for on-site work and 2.0 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 and we suggest using our word search tool at our website to find them. Uncompensated overtime refers to hours worked exceeding the normal 40 hour work week by those salaried employees exempt from the Fair Labor Standards Act.)

64% of respondents said their employees work uncompensated overtime while 36% said no. 65% of the companies use total time reporting while the other 35% report only 40 hours per week. 84% use a rate (or hours) compression method of accounting (e.g. computing an effective hourly rate dividing salary by hours worked) compared to 64% last year while 16% use a “standard/variance method” that charges an hourly standard rate and then credits an indirect cost pool for the difference between labor costs charged to projects and compensation paid to employees compared to 36% last year.

Facilities Costs. 84% or respondents say their facilities costs are between 1-5% of revenue, 13% between 610% of revenue and the balance 11% or higher. As for location at company facilities, 34% reported that less than 20% of the staff are at company sites, 36% have between 20-80% on company sites and 36% report that at least 80% are located at company facilities.

Billings for Rate Variances. On cost reimbursable contracts, contractors bill the government at provisional indirect rates that are subject to adjustment to actual rates at year end when actual rates are determined. The difference between the two is called a rate variance. 50% reported that actual rates were higher than provisional rates (sharply higher than last year), 6% said actual rates were lower (sharply lower than last year) while 44% reported no significant difference. For companies where actual rates exceeded provisional rates, 34% collected all of the variance, 38% collected none and 28% collected some. Reasons cited for collecting either some or none reported insufficient funding (37%), customer relations (29%), capped or ceiling rates were in effect (24%) while 10% reported other reasons. 78% of surveyed companies said they waited for final incurred cost audits, contract closeouts or other formal approvals before billing for the rate variances while 22% billed the rate variances when the annual incurred cost proposals were made.

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