Direct cost rates are rates that can easily be quantified within a contract. They include the cost of materials, wages of workers directly assigned to a project, subcontractors, etc. while indirect rates are rates that cannot be calculated without great effort.
You may need to calculate an indirect rate if you are awarded a federal contract (or grant) in which cost is reimbursed. It is a manner of assuring fair and equitable reimbursing across different businesses and organizations. Indirect rates are used for Incurred Costs Proposals.
Indirect cost rates are also known as indirect rates or Facility and Administrative rates (F&A rates). Though the Federal Acquisition Regulations (FAR) will recognize indirect rates grouped in any logical manner, they usually fall into one of three categories:
- Employee benefits
Costs involved in benefits of the employees, such as health benefits, paid leave, employee pension plans, etc.
- Overhead costs
Costs involved with running the company. Including research and development, shared facility costs, heat and electricity, etc.
- General & Administrative costs (G&A costs)
Costs associated with the management of the business. This includes office space, salaries for management where management overlooks more than one project, salaries of workers that are shared between projects, etc.
If your business needs to know its indirect rate in order to receive a federal grant or contract, the specialist handling your contract should contact the proper organization as it becomes clear that your organization may be receiving the contract or grant. This indirect rate should be valid for one year. After this, a new rate may need to be calculated. It is recommended you contact an accountant with experience with federal contracts to prepare an indirect proposal.
Many factors will affect your indirect rate, some of these are:
- The type of business
- The size of your business
- How old your business is
- Where your business is located
Indirect rates when dealing with the Defense Contract Audit Agency (DCAA)
According to the Federal Acquisition Regulations (FAR), you require to submit your proper Incurred Cost Proposal within have six (6) months of the end of your businessâ€™ fiscal year. If you fail to submit this proposal, the Defense Contract Audit Agency (DCAA) will remind you several times until it becomes due. Once it becomes due, the Defense Contract Audit Agency (DCAA) could decide to make a unilateral recommendation based on historical indirect rates for similar contractors, or other factors. It is in your advantage to avoid this and take the steps necessary before this is to happen.
After an adequate Incurred Cost Proposal has been received, an audit will be performed, the results of which will be discussed with your business.
It is important that the data you submit in your Incurred Cost Proposal is accurate. Mischarging could result in criminal penalties. Consulting an expert with federal contracts who has experience with incurred rates is in your best interest to make sure that your proposal is not only correct, but to your best advantage.