Indirect Cost Rates

Indirect Cost Rate Definitions
One indirect cost rate (ICR) is typically used by educational (FAR 31.3), state and local government (FAR 31.6), and nonprofit (FAR 31.7) organizations under requirements of an OMB Circular. An indirect cost rate consultant guides the contractor or, more typically, the grantee to accumulation of one pool of costs incurred for the organization as a whole and allocation among jobs, grants, or contracts.

The relationship to direct labor benefitting one particular job determines Overhead costs or General and Administrative (G&A) costs, or the difference between overhead and G&A. If the employer cost of payroll taxes and employee benefits relates to time invested directly on a job, the Overhead vs. G&A captures those related costs. If employer costs relate to G&A labor, those costs are also G&A.

The Incurred Cost Electronically (ICE) submitted model from the Defense Contract Audit Agency (DCAA) attempts to unify component accounts of typical indirect cost rates. Calculating G&A for federal government contracts varies from company to company. For example, a company with some jobs conducted on a Government-owned site and some on a company-owned site might allocate Facilities costs to only those jobs conducted on the company-owned site, and separately from other G&A. DCAA ICE consulting guides the use of that spreadsheet-workbook model, formatted in preparation of audit.

Provisional Rates
ICE proposal preparation starts with separation of indirect versus direct costs, segregation of unallowable costs (per the applicable OMB Circular or FAR and FAR Supplements), and assessment of pool-to-base matching. Which, of the (supplied) pre-designed spreadsheets are used, is dependent upon the causal/beneficial relationship of particular pools and bases. Each tab in the pre-designed workbook explains its purpose, though not all tabs/sheets need be used. Separate pools of indirect costs might include:

Facilities
Material Overhead
Labor Overhead
Computer-related
General and Administrative

Actual Incurred Cost (AIC) Rates
After the fiscal year end, ICE spreadsheets are supported by the general ledger; the general ledger is supported by source documents (such as vendor bills and timesheets). If actual ICE rates are lower than provisional/projected rates, cost reimbursements are adjusted; if actual ICE rates are higher, negotiations with the Contracting Officer might recoup under-invoiced cost reimbursements.

Department of Defense Contracts
For organizations that hold U.S. Government contracts of very large dollar values, the Defense Contract Management Agency (DCMA) or other government administrator typically negotiates Provisional Rates, often called forward pricing rates. DCMA requests that the DCAA evaluate contractor-proposed indirect rates based on the ICE model. Provisional rates are consistently used in proposals and invoices. For cost-type contracts, AIC is audited after the end of each fiscal year for the contractor; cost-type contracts remain open until differences between provisional and actual indirect rates can be calculated and payment/re-payment settled. The government administrator, not the contractor, determines whether negotiation of projected rates is cost-effective for the government. Indirect rates are unique for each organization, but consistently accumulate multiple-contract costs in a pool divided by a causal or beneficial basis.