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Indirects for Deposits


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Negotiation going on with a customer.  Situation:

$30,000 cash deposit required for security reasons.  There is $10,000 more work.  Looking for a $40,000 contract, including $30,000 cash deposit.

Strange.  Labor gets loaded with fringes.  Labor & Fringe get loaded with Overhead.  Labor, Fringe, & Overhead get loaded with G&A. etc. etc.

I don't believe a cash deposit can get loaded with anything except possibly interest - and with today's interest rates this won't amount to much.

There are not enough indirect & fee bearing elements to make this contract worthwhile if we can't load the cash deposit with anything except a 5% annualized interest rate.

Floor is open for suggestions, or authoritative FAR excerpts.

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It is worthwhile if we can justify loading a $30,000 deposit with something.  There are multiple jobs attached to this one which also could make it worthwhile.

I will become more clear and simply ask the question:  Can a cash deposit be loaded with indirect or fee?

A cash deposit, after all, is not a cost.  The deposit is required to cover risk.

 

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11 hours ago, Corduroy Frog said:

I will become more clear and simply ask the question:  Can a cash deposit be loaded with indirect or fee?

A cash deposit, after all, is not a cost.  The deposit is required to cover risk.

No.

A cash deposit is an asset -- or perhaps also a liability if it is an advance payment. In either case, it's a balance sheet transaction and not something you will see on an expense ledger (P&L). Because it is not an expense, you cannot burden it.

But, as Neil pointed out, you can ask for an additional profit, if you'd like to.

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Help- If a “deposit” is required for the acquisition of a direct project cost, is it still not an allowable cost?

I ran into a situation recently that tested this. My response would normally be the same as yours that a prepaid deposit is an asset.

Unbeknownst to us, we recently paid a small biz subcontractor - via their monthly invoice under a T&M subk - the cost of a deposit that a hotel required to honor per diem rates for a conference. We didn’t catch it in our review, then passed it along in our invoice to the government. Nobody at the government blinked an eye and our invoice was paid.

It wasn’t until the next month that I noticed it because the cost of the “deposits” were shown as credits to direct cost. So, instead of the small biz recording the deposit to their asset account they billed it as a direct project cost, then had to extend the credit when the hotel gave it back.

This isn’t the same question OP is asking but I think the underlying themes are similar.

Is what the small biz did wrong? Maybe a large business with lots of cash has no problem floating the deposit and only processing travel costs as direct when they are incurred (recording the deposit and the ensuing offset as a separate accounting transaction). But for a small biz to float a hefty deposit may not be reasonable (and probably argued by the small biz as unfair).

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8 hours ago, Michael11 said:

Help- If a “deposit” is required for the acquisition of a direct project cost, is it still not an allowable cost?

I ran into a situation recently that tested this. My response would normally be the same as yours that a prepaid deposit is an asset.

Unbeknownst to us, we recently paid a small biz subcontractor - via their monthly invoice under a T&M subk - the cost of a deposit that a hotel required to honor per diem rates for a conference. We didn’t catch it in our review, then passed it along in our invoice to the government. Nobody at the government blinked an eye and our invoice was paid.

It wasn’t until the next month that I noticed it because the cost of the “deposits” were shown as credits to direct cost. So, instead of the small biz recording the deposit to their asset account they billed it as a direct project cost, then had to extend the credit when the hotel gave it back.

This isn’t the same question OP is asking but I think the underlying themes are similar.

Is what the small biz did wrong? Maybe a large business with lots of cash has no problem floating the deposit and only processing travel costs as direct when they are incurred (recording the deposit and the ensuing offset as a separate accounting transaction). But for a small biz to float a hefty deposit may not be reasonable (and probably argued by the small biz as unfair).

Completely different situation.

In your scenario, a deposit was paid to a hotel to secure a conference room. There are various ways to record that transaction (including on the balance sheet as a pre-payment), but since your subK is a small business, most likely they just booked it to conference expense or something similar. Then they billed you (the prime) for it. You paid the bill, thus recording a cost on your books ("subcontractor cost" or something like that). You had a valid cost that you then asked your government customer to reimburse. And they did!

In the future, the deposit will be refunded (or perhaps used to offset conference expenses). In any case, when that happens your subK will reflect the benefit of that refund/offset on its next invoice to you. The invoice value will be less than it otherwise would be, because of the impact of the deposit. In turn, you will pay the subK less than you otherwise would have, and will ask your government customer to reimburse you for less costs than you otherwise would have billed.

It all washes out.

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Help, I’m reading your man-splanation again, I think you are saying that a deposit as I described can be recorded in one’s accounting system as either an allowable project expense (as the small biz did) or as as a prepaid expense (asset account, not a cost, not billable, will not be indicated to client and will be handled within the accounting department). Both are equally correct for any size business ? 

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13 hours ago, Michael11 said:

Help, I’m reading your man-splanation again, I think you are saying that a deposit as I described can be recorded in one’s accounting system as either an allowable project expense (as the small biz did) or as as a prepaid expense (asset account, not a cost, not billable, will not be indicated to client and will be handled within the accounting department). Both are equally correct for any size business ? 

No. I'm not saying that and please don't tell me I'm "mansplaining" which is not a term of respect.

I'm saying that you don't have a problem with the incorrect accounting by the small business subK, because it washes out over time. Look, sometimes when I stay at a hotel they charge me for the first night on my credit card. It may not even be the correct per-night rate. I could complain but I don't, because when I check out, that first night's charge is credited (erased) and replaced with the per-night charge I agreed to pay times the number of nights I stayed there. The fact that the first night's charge ("deposit") was overstated is irrelevant by the time I check out.

What I'm saying is that, in the circumstances you describe, you are overthinking this. In CF's original post, he had different circumstances that warranted a different answer.

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