Need help with basic defintions of direct and indirect.

[Mild53]

My company is a commercial for-profit company that most often works for state government on health care projects. These projects in turn are funded by the Federal government and subject to Federal rules.

For projects in one state we complete detailed cost and budget forms that are structured to meet OMB Circular A-122, which I see is intended for non-profits.

My first question is this.

1) Is there a similar circular to be used by for-profit organizations?

I think this state may be stuck on using A-122 for this assignment, so I will probably have to adjust our for–profit accounting to non-profit rules. This brings my next questions.

2) How do I interpret the description of direct costs from Circular A-122. “Direct costs are those that can be identified specifically with a particular final cost objective, i.e., a particular award, project, service, or other direct activity of an organization” Do direct costs include cots for having a place for employees to work such s rent, utilities, phone, technology?

3) How do I interpret this “Indirect costs are those that have been incurred for common or joint objectives and cannot be readily identified with a particular final cost objective”. I am told that the maximum overhead amount for this project is 10% is this the same as indirect? . What typically counted as in overhead for non-profits?

Thank-you for any assistance you can provide.

[here_2_help]

1. Use the cost principles and procedures found at FAR Part 31.2, which are expressly designed for for-profit organizations. If your customer balks, discuss the cost of implementing N4P rules and who will pay for that impact.

2. In theory, most everything can be a direct cost. In practice, the definition turns on feasibility. What can your accounting system do? In most cases, direct costs include labor, materials, and subcontractor/subconsultant costs, as well as "other direct costs" which you can define (but which may include travel, equipment rental, etc.).

3. Indirect costs are those that benefit multiple projects. Some indirect costs can vary in proportion to the activity being managed (e.g., utilities, telephone, etc.) and some indirect costs do not vary (e.g., corporate management).

4. If you have agreed to a maximum overhead rate of 10% then I interpret that to be a ceiling on the actual rate you can bill to your customer. You still need to account for actual costs, regardless of what percentage (of what base I wonder?) they turn out to be.

Hope this helps.

[Mild53]

Thank-you very much for your assistance.

I will try to get them to apply FAR Part 31.2.

Wish me luck. Unfortunately, the staff in agencies sometimes has no idea what they are asking for.

I am thinking of allocating faciltiy costs (rent, utlitites, telephone, internet, etc) based on a % of Direct labor. We only provide services, so I think it is reasonable to allocate these costs this way. FAR Part 31.2 appears to broad enough to allow this. Have you seen these costs allocated this way?

[Mild53]

Thank-you very much for your assistance.

I will try to get them to apply FAR Part 31.2.

Wish me luck. Unfortunately, the staff in agencies sometimes has no idea what they are asking for.

I am thinking of allocating faciltiy costs (rent, utlitites, telephone, internet, etc) based on a % of Direct labor. We only provide services, so I think it is reasonable to allocate these costs this way. FAR Part 31.2 appears to broad enough to allow this. Have you seen these costs allocated this way?

To clarify I would allocate the facility costs and list them under "direct expense".

[here_2_help]

Mild53 --

An allocated cost really should not be called a "direct expense" -- allocation indicates indirect not direct. (Please excuse me, purists who are thinking "what about a direct allocation?")

It is permissible -- and even common -- to allocate rent, utilities & associated expenses on a base of total labor dollars. Sometimes a base of DIRECT labor dollars is chosen, but that can be problematic if you have a large number of management heads who don't charge direct labor. Those challenges can be overcome but you may want to consider them.

Given your questions, I suggest you hire a government contracts cost accounting consultant to help you set up your cost structure in a manner that is both compliant and consistent with your company's strategic goals.

Hope this helps.

[Retreadfed]

Mild53, from what you described in your initial post, I assume that you are working under a contract awarded as a result of the state receiving a grant from the Federal government. If that is the case, your state contacts may be working under old grants or caught in a time warp. OMB Cir. 122 was superseded in Dec. 2013. See, 2 CFR 200.104.

[Mild53]

Mild53 --

An allocated cost really should not be called a "direct expense" -- allocation indicates indirect not direct. (Please excuse me, purists who are thinking "what about a direct allocation?")

It is permissible -- and even common -- to allocate rent, utilities & associated expenses on a base of total labor dollars. Sometimes a base of DIRECT labor dollars is chosen, but that can be problematic if you have a large number of management heads who don't charge direct labor. Those challenges can be overcome but you may want to consider them.

Given your questions, I suggest you hire a government contracts cost accounting consultant to help you set up your cost structure in a manner that is both compliant and consistent with your company's strategic goals.

Hope this helps.

I agree, a cost accounting consultand who can set our cost stucture is necessary. Where woould you advise that I look for one? Is this a specialty or will most large accounting firms be able to handle this?

[GovCon 3rd Decade]

There are many on LinkedIn, which is where all my clients have found me, but I would assume there might be many on this site as well.

[here_2_help]

Yep. LinkedIn is the right place to look.

H2H