Decoding Budgeted Indirect Donna Dominguez Aisha Mian November

Decoding Budgeted Indirect Donna Dominguez & Aisha Mian | November 16, 2017 Rates http: //blogs. aronsonllc. com/fedpoint/

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Polling Question • What is the current contract mix at your company? a. b. c. d. Majority Cost Type Majority T&M Majority Fixed Price Mix of all three types above © 2017 | www. aronsonllc. com/blogs | 7

Main Reasons for Budgeted Indirect Rates © 2017 | www. aronsonllc. com/blogs | 10

Reasons to Prepare an Indirect Rate Budget • Contractual requirements (FAR 52. 216 -7(e) & Subpart 42. 7) • Evaluating your business now and future goals • Establishing best practices for budgeting process • Evaluating benefits for other contract types • Using budget rates for proposals © 2017 | www. aronsonllc. com/blogs | 11

Billing © 2017 | www. aronsonllc. com/blogs | 12

Contractual Requirements FAR 52. 216 -7(e) – Allowable Cost & Payment Clause • (e) Billing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized the Contracting Officer representative (the cognizant auditor), subject to cognizant auditor adjustment when the final rates are established. These billing rates – – (1) Shall be the anticipated final rates; and – (2) May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment. © 2017 | www. aronsonllc. com/blogs | 13

Contractual Requirements FAR Subpart 42. 703 -1 – Indirect Rate Policy (a) A single agency (see 42. 705 -1) shall be responsible for establishing final indirect cost rates for each business unit. These rates shall be binding on all agencies and their contracting offices, unless otherwise specifically prohibited by statute. An agency shall not perform an audit of indirect cost rates when the contracting officer determines that the objectives of the audit can reasonably be met by accepting the results of an audit that was conducted by any other department or agency of the Federal Government (10 U. S. C. 2313(d) and 41 U. S. C. 4706(e)). (b) Billing rates and final indirect cost rates shall be used in reimbursing indirect costs under cost-reimbursement contracts and in determining progress payments under fixed-price contracts. © 2017 | www. aronsonllc. com/blogs | 14

Evaluating The Business • Start by looking at how things have been done in the past and assess if any rates have been under utilized • Is it time to implement a new indirect rate structure? • Make sure there is an understanding of where the company is headed. – Will there be any significant changes? • Do you have any CAS covered contracts? © 2017 | www. aronsonllc. com/blogs | 15

Evaluating The Business • Are we anticipating any wins/losses, or re-competes in the next year? What is the probability of those wins/losses and recompetes? • Has my company had any acquisitions or asset purchases in the past year? – How will my contract mix be affected if I revise my rate structure? Overall answers to these questions will help determine the best structure for your company © 2017 | www. aronsonllc. com/blogs | 16

Best Practices for Budgeting Process Bottoms Up Approach • Budget costs at each cost element • Start with current year’s trial balance • Begin with labor • Assess all non-labor direct costs • Assess all other indirect expenses • Ensure unallowable costs have been excluded © 2017 | www. aronsonllc. com/blogs | 17

Best Practices for Budgeting Process Contractor Actions – Internal Process Prepare an Annual Indirect Rate Budget Calculate & Finalize Provisional Indirect Rates Approval by Executive Management © 2017 | www. aronsonllc. com/blogs | 18

Best Practices for Budgeting Process Contractor Actions – External Process Submit Budget Indirect Rate Proposal to ACO/CO or DCAA/Cognizan t Audit Agency Audits/ Negotiation s/ Formal Approvals? © 2017 | www. aronsonllc. com/blogs | Once Rates are Established Begin Billing 19

Monitor Billing Rates to Actual Rates • At the beginning of your fiscal year you will begin using the proposed FY Budget Rates • Monitor actual rates compared to billing rates on a monthly basis • If you materially deviate from the billing rates what do you do? – Try to adjust expenditures internally – Request adjustment if actuals materially deviate from the billing rates © 2017 | www. aronsonllc. com/blogs | 20

Effect & Benefits on Other Contract Types • Establishing annual budgeted indirect rates benefits the profitability and management of Firm Fixed Price (FFP), Labor Hour (LH) and Time & Materials (T&M) contracts. © 2017 | www. aronsonllc. com/blogs | 21

Effect & Benefits on Other Contract Types © 2017 | www. aronsonllc. com/blogs |

Proposals © 2017 | www. aronsonllc. com/blogs | 24

Budgeted Rates for Proposals Helpful Tip – Prepare an annual budget indirect rates that can be used for ALL cost proposals • Impact budget rates only for cost proposals that will significantly impact the rates – Adding new indirect rates (e. g. New Fringe or SM&H) • Self impose ceilings on rates – Keep in mind this affects the profitability on the contract! • What if the contract will trigger CAS coverage? © 2017 | www. aronsonllc. com/blogs | 25

Budgeted Rates for Proposals • Helpful Tip: Remember that having approved provisional billing rates by your ACO (or cognizant audit agency) may help you score more points on the proposal! © 2017 | www. aronsonllc. com/blogs | 26

Adequate Estimating System • Part of having an adequate estimating system is ensuring you have proper processes & procedures for budgeting, planning, and estimating methods in place to help safe guard the expense passed to the Government (DFARS 215 -7002). Ø How can this be accomplished? Establish budget indirect rates annually and apply them consistently to all cost proposals and invoices. Ø Helpful Tip: For cost proposal submission, a contractor can score more points with an estimating system approved by their ACO (or cognizant audit agency)! © 2017 | www. aronsonllc. com/blogs | 27

Year End Reconciliation to Actual Rates • Per FAR 52. 216 -7, you must submit a final indirect cost rate proposal (i. e. Incurred Cost Submission) to the Contracting Officer and audit agency within 6 months of the end of the contractor’s fiscal year • After submission, the ICS is audited • Final Indirect Rates are established – “True Up” invoices are submitted (or refund as required) © 2017 | www. aronsonllc. com/blogs | 28

Conclusion ü Ideally the budget indirect rates will be low enough to be competitive and win new work, yet high enough to recover allowable indirect expenses. ü Sometimes there will be tradeoffs and business decisions that will be necessary. However you can only make intelligent decisions if you know all the facts. “Do not prepare in a vacuum” © 2017 | www. aronsonllc. com/blogs | 29

Questions? © 2017 | www. aronsonllc. com/blogs | 30

Donna M. Dominguez Director, Government Contract Services Group Donna Dominguez is a director in Aronson LLC’s Government Contract Services Group, where she provides a wide range of financial compliance advisory services for government contractors. She is experienced in matters related to Federal Acquisition Regulations (FAR), cost accounting standards (CAS), incurred cost submissions, DCAA/cognizant audit support, provisional billing rates, establishing/revising indirect rate structures and cost proposal support. Donna works with contractors to help them grow their business while keeping their accounting systems adequate in the eyes of the government and their billing systems current and relevant. She is also involved in supporting the government contracting community as a frequent guest speaker on a variety of compliance topics. Donna earned her bachelor’s degree in accounting from the University Maryland has completed additional coursework in contracts administration. She is a contributor to Aronson’s Fed Point blog and has co-authored articles for NCMA Contract Management Magazine. © 2017 | www. aronsonllc. com/blogs | 301. 222. 8232 ddominguez@aronsonllc. co m 31

Aisha N. Mian Managing Consultant, Government Contract Services Group Aisha N. Mian is a managing consultant in Aronson LLC’s Government Contract Services Group. She has more than ten years of experience in the government contracting industry, with expertise in both project control and financial compliance. Her professional skills include contract/project financial analysis and various areas of financial compliance, including preparation of incurred cost submissions; support in evaluating, preparing and advising appropriate indirect rate structures; preparation of disclosure statements; and analysis and impact of cost accounting standards (CAS). She has also worked alongside in-house DCAA auditors supporting audits for incurred cost submissions during her time in the industry. Aisha has been a guest speaker on financial and government contracting topics at the GWSCPA Government Contracting Conference and has hosted Aronson LLC webinars related to government contracting topics. She earned her bachelor’s degree in finance from George Mason University and her MBA from the Robert © 2017 | www. aronsonllc. com | H. Smith School at the University of Maryland College www. aronsonllc. com/blogs | Park. 240. . 364. 2614 amian@aronsonllc. com 32

Contact Donna Dominguez Aisha Mian 301. 222. 8232 240. 364. 2614 ddominguez@aronsonllc. com amian@aronsonllc. com https: //www. linkedin. co m/in/donna-dominguez -664 b 26 b https: //www. linkedin. com/in/aishamian https: //twitter. com/Arons onllc https: //twitter. com/Aronso © 2017 | www. aronsonllc. com/blogs | 33