The following is a revised memo we wrote to a client whose primarily labor intensive business is expected to increase substantially where the nature of its new contracts are will likely include a much higher percentage of direct material costs.  The memo includes a sensitivity analysis where we assumed different percentages of direct labor versus materials and ODCs for the company and computed (1) indirect rates for their current indirect rate structure versus rates where a material handling rate was added and (2) the cost recoveries of the two rate alternatives given different percentages of direct labor and materials/ODCs.  Though we will need to follow up after we receive a budget of expected business with cost breakdowns and then conduct a detailed sensitivity analysis of the best recoveries based on the budget, the following is a few ideas we prepared for their consideration before making any decisions.  We thought some of the issues we addressed might be useful for both new contractors deciding on what their indirect cost structure should be as well as veteran contractors who may want to reexamine their current structure and consider alternatives.

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