Price is the primary concern in government contracting accounting. There is a significant gap between a private firm’s accounting and a government contractor in terms of how expenses they separate, classify and report expenses.  

Okay, but what does it all mean? FAR define it as a direct cost, which is “any cost that comes with a specific final cost objective.” The final cost objective is a contract or part of a contract. Under the terms of the layman, a direct cost is defined as supporting one, but only one, contract or aspect of the contract. More specifically, direct costs may include direct labor, materials, and travel expenses.

Furthermore, indirect cost is the expenses that does not fall under single final cost goal; instead, they come with two or more final cost goals. Indirect costs include depreciation, general and administrative (G&A) charges, and supply and subcontracting pressures.

With that determination made, the next step is to classify the cost as either permissible or unallowable. The permissible cost of government service expression is billable— allowable if the rules allow it to be used in the government invoice. The insufficient cost is exactly the opposite; it’s the sort of expense you can’t report to the government.

It is important to note: under FAR 31.201-2, the cost is admissible only if it satisfies all of these requirements: 

• Terms of the contract: the contract that state that a particular expense is not permissible, even if it would be acceptable in normal circumstances. By the way, you’re never going to see a contract that says the opposite;
• Limitations laid out in FAR 31.201: FAR points out a lot of acceptable things and things that are not. Check this with a search engine and print it out, because you’re really going to want to know what’s appropriate.
• Reasonable and allocable: everybody hears the horror stories of the government paying thousands of dollars for a toilet seat. For the record, FAR do not authorize it.  Costs are reasonable because their cost and purpose are what a cautious person dealing with a competitive business pays. As a client, in this situation, the burden of proof is on you.

Important Tip: It is bit complicated, but when everything else fails, try the newspaper test; If you do not have issue with the Washington Post or the New York Times, your cost are acceptable.

And, if you’ve been making good notes, you’ve put two and two together to realize that there’s a simple cost equation for government contractors. All charges are direct allowable and non-allowable, or indirect allowable or indirect non-allowable.

How to handle indirect costs?

It’s simple enough to work out how to assign a particular acceptable expense.For direct cost, connect it to a direct contact; but what about indirect costs, huh? This is the general plan: 

• The pools raise expenses and distribute balance amount to the contracts. 
• Indirect cost pools are assigned to other indirect expense pools or to contracts directly.
• Law doesn’t define the number and size of the pools.

The indirect cost distribution rate or the rate at which indirect costs (charged) to contracts is a critical component of indirect costs control. There are three main concepts: 

• The primary cost objective: a federal deal.
• Indirect pool: a rational classification of indirect costs with a similar relationship to the cost target (numerator).
• Base: an indicator of discretionary action distribute pool costs on the basis of benefits received by a variety of cost objectives/contracts (denominator).

The Frange Profit

An excellent example of a loss pool is a marginal benefit. Factors you can include in the expenditure pool numerator are regulatory costs (FICA, FUTA, SUTA, and employers ‘ compensation); compensated absences (holidays, sick days, service or jury duty); and other incentives such as 401(k) donations, bonuses and health insurance. Note how close these things are in nature.

Core incentives are usually total labor dollars or hours of work. As total labor dollars or hours increase, prices in the expense pool are likely to increase as well. Remember that the fringe does not have to be a separate pool; instead, you may choose to include it in the overhead pool or the General and Administrative (G&A) pool.

At the other hand, you might need more than one swimming pool. Separate margin benefit pools may be necessary if different groups of employees— such as full-time and part-time workers — receive materially different benefits packages.

This blog was written by Linda Rawson, who is the founder of DynaGrace Enterprises (dynagrace.com) and the inventor of WeatherEgg (weatheregg.com). She, along with her daughter, Jennifer Remund make up the mother-daughter duo of 2BizChicks (2Bizchicks.com).  For further information, please connect with Linda on LinkedIn, or contact her at (800) 676-0058 ext 101.

Please reach out to us at GovCon-Biz should you have any questions.