Welcome back for Part II!
Last post we discussed the various type of contracts (Firm Fixed Price, Time & Materials, and Cost Plus Fixed Fee) and started to get into what we call indirect cost “pools” – Fringe, Overhead and General & Administrative. For this post, we will delve a bit further into what makes up the “pools”, how they are approved by the government and how you use the pools to develop the price per hour you can charge to the government.
So what make up these so called “pools”? On this hot summer day as I write this I wish they were cool places to dip your toe. Alas, they are simply categories of expenses….
Imagine that you have three boxes and a huge pile of receipts. Your accountant would prefer you file the expenses into various “types” of expenses or the three boxes rather than the big pile and the government is no different. Each company can decide exactly how to divide their expenses but this is the most common approach:
Direct Labor Rate. This is easy. You take the salary of the person you are proposing and divide by 2,080 (the number of hours in a year). For example, if you pay someone $50,000 per year, their Direct Labor Rate is $24.04.
Indirect Costs. Indirect Costs are anything that you cannot directly charge to the government such as paying for the employee’s health care premiums or items like rent, accountants or paper for the copier. This is the complicated part and I’ll explain a bit more in depth below.
Fee which is your Profit on the task. This is negotiated within your proposal and can be either a fixed number ($1,000) or a percentage of the billed amount (5%).
So… back to the Indirect Costs. Indirect Costs are further broken into sub pools (or categories). The most common approach to this division is:
Fringe Pool – items such as health care, retirement contributions, vacation, sick, and workman’s compensation.
Overhead Pool – items that cannot be billed directly to a contract but can be attributed to the cost of doing business with one or more customers. For example, computers, rent for billable employees, salary paid to an employee between two projects or utility costs for space allocated to billable employees.
Some companies divide their Overhead Pool into two distinct pools: one for Company Site Employees and one Government Site Employees. This is because it obviously costs us more in overhead costs to employee someone who works on our site than on a government site. It doesn’t seem fair to allocate (and thus charge) costs for Company Site employees to clients who are providing those materials such as desks, space to work and computers for us.
General & Administrative — items that attributable to running your business in general. Examples include the salary of the President of your company (unless the President is a billable employee and then you should divide the salary proportionately into the correct pools), rent for the area where administrative personnel work, accountant and lawyer fees.
Once you have divided your costs into their various pools, you can calculate percentage costs for each pool based on the total Direct Labor costs. See the charts below for a very simplified sample budget and the corresponding “Indirect Rates” that were derived.
Now, once you have your budget for the year you can start to calculate what your indirect rates are…
Let’s start with Fringe. Your total cost for Fringe is $97,000 and your total Labor Base is $340,000. To compute your Fringe Rate you divide Fringe by the Labor Base total for a percentage of 28.5%.
The other indirect rates are calculated using the same methodology as you can see below.
Once you have the indirect rates, you can use them to create your Cost Plus Fixed Fee rates that you bill to the government.
Your proposed budget and indirect rates are submitted to the Defense Contracting Auditing Agency (DCAA) at the beginning of the year and are called Provisional Rates. DCAA will either approve or request a change to what you proposed. Once they are approved you can use those indirect rates to bill the government on your CPFF contracts.
Provisional Rate are just that … provisional. They are based off what you propose in your budget. You do your best to stay within the budget but things happen and your actual numbers are sure to not exactly match the budget. At the close out of the contract you will apply your actual indirect rates (based on your actual expenditures) to the direct labor expended and do a reconciliation between what was billed and the actual costs incurred on the contract. At that point, you will either owe the government back some money (if they were lower than budgeted) or you can attempt to collect additional fees from the government (if they were higher than budgeted).
So… that is your quick overview of how to create a government contracting budget and how it is used to create Cost Plus Fixed Fee rates. This is an immensely simplified view to give you a basic understanding. If you have questions or need further explanation please contact us for our business consulting services.
I have been working in the complicated government contracting world for over two decades as a small business owner. In that time, I have been asked many times by other companies how to develop indirect rates for Cost Plus Fixed Fee (CPFF) contracts. This post will give you some idea of how to start the process. I’ll start with reviewing the different types of contracts in this post and then next time we will address budgets and developing your indirect rates.
There are essentially three different types of funding for contracts.
Firm Fixed Price (FFP) — a set price for doing the work regardless of the actual costs incurred. For example, “We will deliver 10 sandwiches for $100.” If it ends up costing us more than $100 to make the sandwiches we still can only bill for $100. If it costs us less than anticipated, we will make a larger profit.
Firm Fixed Price Contracts should be clearly defined tasks as there is no flexibility in the cost structure.
Time and Materials (T&M) — a price based on a Fixed Hourly Rate plus the Actual Cost of Materials. For example, “We will deliver 10 sandwiches. We will bill for $80 worth of materials and it will take us 5 hours at $50/hour.” If we get the materials for less money than anticipated then we bill at the lower cost. However, the labor is a set price per hour even if it costs us more than we proposed. The actual number of hours expended can be charged, however.
Cost Plus Fixed Fee (CPFF) — a price based on the actual cost of doing the project plus a fixed fee. For example, “We will deliver 10 sandwiches and will charge you the cost of materials plus the cost of the labor to make them plus a fixed fee (profit).” If the labor and/or materials are less than we proposed, we charge the government less than proposed. If it is more than we proposed, we technically can charge the government more than we proposed.
Keep in mind that the government will only budget as much as you proposed and thus your chances of being reimbursed for any additional costs are minimal as your customer will not have the funds available.
You can see that a CPFF is the most complicated type of contract as you have to closely monitor your costs to stay within budget. Many government contractors go for years without ever having a CPFF contract but eventually the time comes and then they are scrambling to bring their accounting practices up to speed.
It doesn’t sound all that complicated – calculate what it cost you to do the contract and then charge that to the government. The complexity comes in calculating what makes up your costs. There are three basic parts to the “cost”. They are Direct Labor (the salary paid to the employee), Indirect Costs (the costs of doing business), and Fee (also known as profit).
Indirect costs are typically the most difficult to quantify. Although every contractor can divide the pools differently, they are typically broken down into three categories: Fringe (health care, retirement contributions, vacation, sick, etc), Overhead (computers, rent for space used for billable employees, salary paid to an employee between two billable projects, etc) and General & Adminstrative (accountants, lawyers, rent for space used for administrative functions, etc.).
What makes calculating your costs even more complicated is that the resulting rate you charge on direct labor is a percentage of the Indirect Costs divided by the Direct Labor.
So if your Direct Labor is less than you anticipated then the costs in the Indirect Pool have to be correspondingly less to meet your projected % Rate. Or if your Direct Labor is higher than anticipated, your Indirect Pool costs must also be increased or you will be paying funds back to the government at the end of your fiscal year. To prevent that tragedy, you MUST track both your Direct and Indirect Costs unfailingly so you can make adjustments as needed to your spending.
Be sure to check back here for part 2, where we will review the Indirect Cost Pools a bit more, how to create a budget, what provisional rates are and ultimately what you can charge the government for all your hard work!
During my Tuesday Sunrise videos (I do these Live every Tuesday on Facebook and YouTube), I shared I was feeling the winter blues. There wasn’t anything really “wrong” but I just felt blah and unmotivated. I asked for ideas to help shake the blues and got some good ones! Share other ideas in the comments to help others.
Megan told her heart-wrenching and inspiring story about how and why she formed the “I Am Enough” movement. The movement prompted a book and helped her gain the confidence that she had a story to tell and she could “inspire and help people.”
The steps Megan shared to help us get from struggle to strength were:
There are so many more details to the two items listed above. Be sure to watch the video below to find out more.
Dr. Ali Lankerani, known as the “Parent Whisperer”, and Clinical Neuroscientist and creator of the Amazing Parents Network gave me three key things parents can do to help their pre-teens reach their full potential. The three items are:
Dr. Lankerani began our talk with this great quote, “Parents are trying to do their best and be great role models who lead by example.” Thank you Dr. L for giving us the tools to do just that!
There are so many more details to the three items listed above. Be sure to watch the video below to find out more.
My first attempt at writing a proposal was a disaster. The client wanted our company to win and had tailored the RFP so we would have a great shot at doing so. We bombed it and lost by just a few points despite the client wanting us to win.
What did we do wrong?
Well lots… we didn’t answer the questions in a way that was easy for the evaluators to give us points, we didn’t format the proposal in way so they could prove we had the answers, but more important — we focused on the features of our company rather than the benefits.
Bottom line is that your client wants to know that your solution is going to benefit them and benefit them better than anyone else.
As you write your proposal don’t forget to continually ask, “So what?”
Let me give you an example…
If an RFP is to provide sandwiches for their employees from 12-1 pm every weekday, you need to obviously state that you will do that. But so will every other competitor.
A feature of your company is that you have provided lunch solutions to ten other companies in the past year that are similar in size to this one. You have a history of reliably providing lunch on time and within budget. You have the experience and know-how to do this.
How will this benefit the customer?
Your benefit is that their employees can rely on their lunch being ready so they can get back to work and improve their profitability and that employee morale is high because of the quality lunch so turnover is less and will decrease their recruiting and training costs.
As you work through the features and benefits, think about what keeps your customer awake at night and make sure your features scratches that worry… that is your benefit and that benefit is what will help you win new work.
A few years ago, I was helping someone with their due diligence when they were contemplating purchasing a company. He had hired the best attorneys and accountants to review the books and the contracts of the company and the company had proven to be legally and financially sound. It was fairly certain that the company’s prior success would easily continue under new ownership with little work on the part of the new owner. It was a good deal.
Two nights before closing, he and I were sitting in a conference room going over last-minute details and he looked sick with worry. I turned to him and said, “You don’t want to do this do you?” Before I could get another word out, he nodded, gathered the pile of folders in front of him and as he scurried for the door said, “Nope. I just don’t have the guts for this.”
He had the experience and had certainly done his homework regarding the purchase. What he didn’t have was guts and the ability to take action. He had what I call paralysis by analysis.
Action will get you further than talent or expertise and even hard work.
Now don’t get me wrong. The wrong action can get you in trouble. But I see people all too often do nothing because they think it won’t get them in trouble.
Doing nothing because of fear is an action. And its always the wrong action.
Entrepreneurship is like jumping off a cliff. You don’t know when you jump if you are going to fly or fall to the ground. You don’t know if your new product will be a raging success or the biggest flop ever. I don’t propose you jump off a cliff without putting on a parachute. You MUST do your due diligence and be prepared – but eventually you need to jump and you will never be totally ready to do so. I can guarantee you though, that standing on the cliff holding your research in your hand will never allow you to fly.
Ever feel like you live your life to please your parents, spouse, friends or society? Brianna Bowling interviews Kelly Travis, creator of the She Doesn’t Settle podcast and a health and success coach, as she leads us through steps to live a life that removes excuses and takes action towards YOUR goals.
For those that find value in themselves by being “helpers” in their community, it can be difficult to find a balance between giving and still taking care of ourselves. Kelly recommends evaluating what your core values are to help you decide which activities and goals are important to you. “If you say yes to someone or something else, we are saying no to ourselves. We have to make sense of that and determine if it is worth it. So we have two questions we have to ask ourselves – 1) what am I having to give up in my own life to say yes to this and 2) what am I getting out of this and is it in alignment with where I am trying to go?”
Listen in to get the details on how to avoid the “shiny object syndrome” and the “mean girl” and even practicing “how to say no”.
I spent a recent morning with my husband on the Wicomico River in Southern Maryland (Fun fact… did you know there are TWO Wicomico Rivers in Maryland? The other one is on the Eastern Shore.) Recreational oystering involves using oyster tongs to scrape along the bottom of the river on oyster beds, gathering the oysters, and sorting out the ones large enough for harvest. It is hard, back-breaking work and makes the end result of the tasty, salty oyster even better… of course that is easy for me to say because I am not the one doing the tonging!
An adult oyster can filter as much as 50 gallons of water a day so they are integral to the river’s life. Recreational oystering, by the nature of the difficulty of how the oysters are harvested and by regulation, takes very few oysters from the waters. To help ensure there are oysters for the future, careful measuring and culling of the oysters that still need to grow happens while still out on the boat. Oysters that are too small and empty shells are returned to the water at the oyster bed site so baby oysters, called spat, can grow on the shells.
It takes an oyster 3-5 years to reach regulation size on the oyster bars in the wild. Farm grown oysters grow even faster, in as little as 2 years since they are suspended in the food and sun rich top layer of the river instead of the dark bottom.
Michael Maibach (Founder of Center For the Electoral College) recently explained to me the history of the Electoral College and how it works and if our vote really matters when using an electoral college system.
Michael gave a wonderful history of why the electoral college was formed in the first place. The founding fathers wanted to avoid majority tyranny by the U.S. Congress, balance small and large state interests and have an independent President to lead the nation. The electoral college supports those goals.
I thought I understood the electoral college but I learned quite a bit including:
This is a video every voter should listen to before the election. There are compelling reasons for the electoral college and our founding fathers used their historical knowledge to create a government and election system that still works to this day.