If you haven't been monitoring your actual indirect costs thru the year, it is not too late to analyze and make an effort to control this before the end of the year. Why is this important? If you have a cost type contract with the Federal Government you will be required to do an Incurred Cost Report 6 months after the end of your fiscal year per FAR 42.705-1(b)(1)(ii). Assuming many companies have a December 31st year end, this means there are only a couple of months left to affect the final indirect cost rate. The contracting officer will then use the final indirect cost rate to adjust the billing on the contract if it differs from the provisional billing rate that the contractor used through the year. This could result in a loss of revenue that the contractor had received on the contract thru the year. By loss of revenue, it usually means that the government offsets these "over payments" against future invoices to the government or uses this in the calculation of the final contract closeout calculation of the contract.
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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.
Posted by Mike Anderson on Fri, Mar 30, 2012 @ 10:29 AM
Thank you for following our Blog. Please don't hesitate to offer comments on our blog.Over the last year or so the DCAA has focused attention on larger government contractors. Many smaller businesses may feel left out since they have not been visited by the DCAA. More likely, they may feel that everything is "ok" since for most of us "no news is good news". Our Account Managers here have been hearing bits of news from various sources that this might change in 2012. First, the DCAA is apparently going to focus more on completing Incurred Cost Proposal audits in 2012, especially from smaller contractors. The backlog of Incurred Cost audits was estimated to have quadrupled over the last 10 years but even