Managing Indirect Costs

Last year at about this same time I wrote a blog about "It's September, do you know where your indirect rates are?".  I think that that message is very pertinent this time of year.  Many companies do not understand the impact of their indirect rates on the work they do for cost reimbursable contracts.  The way this normally works is the government will approve provisional billing rates for the awardee.  This is the rate at which the awardee will bill their indirect costs to the government through the year.  At the end of the year, the government requires that the awardee prepare an incurred cost proposal to show what the actual indirect rates were for the year.  The government will then require that the awardee adjust their billing per the actual rates.  So what this means is if the actual rates are less than the provisional rates, the government will require an adjustment to what they consider an "overpayment".  Most companies are not in a position to give money back to their customers at the end of the year.  For this reason, I think it is extremely important for the company to monitor their actual indirect rates each month through the year.  This becomes a management game to make sure that the rates come out to the provisional rate by the end of the year.  So, many ask, how can this be managed.  There are many ways in a small company to manage this.  For instance, if too much direct work is being applied to the award and not enough effort to indirect efforts, the company may decide to direct an increase in effort by employees on indirect tasks in order to get the correct indirect work done.  This could be accomplished by having a direct employee spend some time writing new proposals to try to secure future work for the company rather than spend so much time on their direct project. 

At ReliAscent we like to calculate actual indirect rates each month and compare them to the provisional rates.  We also like to calculate what we call intermediate billing rates so that we can see what pools of indirect costs are causing problems.  By identifying this, it becomes easier to manage the rates to make sure we come close to the provisional rate by the end of the year. 

So why do I mention this at this time of year?  Well, we are a little over half way through the year so we still have 4 months left in the year to make a significant impact on cost pools.  The longer we wait, the harder it is to cause real impact to the indirect billing rate.  And, you still need to spend direct effort on the projects to make sure that the objectives are met for the cost reimbursable award.  So you can see, there are many variables and factors that go into this "game scenario".  To control it properly, one has to understand the variables, the impact each variable has on the system and the desired output.  Once these factors are known, it makes a seemingly dauntless task easier to manage.  Certainly, experience plays a big factor in managing this game as well.  First time awardees are usually somewhat "lost" at how to play.  Just like watching a teenager pick up a new video game - it looks hopeless until the game player learns the rules, the peculiarities and becomes familiar with the playing field. 

So my main purpose with this blog is to mention the game and if you are not playing it or are not playing it well, it may be time to ask for help.  Right now there is still time to salvage 2013.