Incurred Cost Submission- Treatment of Single Owner LLC costs

[New guy]

I work for an SBA government contractor which is a Single-Owner, LLC  and the Owner takes a monthly draw and year-end bonus. We have 15 salaried employees and the Owner works as a SME on all our contracts. I realize that ordinarily owner’s draw & bonus would not count as an expense but rather a reduction of owner’s equity. My questions are.…In our Incurred Cost Submission, can we include the Owner’s draw and bonus in our Direct Labor base for purposes of calculating indirect rates? Also, can we include the Owner’s bonus in Overhead? We include salaried employee’s bonuses in either Overhead or G&A depending on their function.

[here_2_help]

This is by far not the preferred practice ... but you know that already, right?

I have seen small businesses do what you describe -- count the owner's draw and bonus as labor expense. I've seen them get away with it thru an audit. (FYI: not a DoD contractor.)

You want to treat the draw as direct labor, but how do you apportion the "labor expense" to individual contracts? Did the owner fill out a time card? Doubtful. You don't say whether the company has any cost-type contracts; if it does, I would absolutely not recommend distributing the draw to contracts with zero support for doing so. Even if the company only has FFP contracts, it's hard to imagine compensation costs going to all contracts like peanut butter; in fact, that is almost the definition of G&A expense, isn't it?

I think you will be lucky to count total owner's compensation as an indirect expense in the G&A expense pool. Unless you have support, I don't see how it can be treated as direct labor.

To be clear: I think this is risky business. As I've posted before, I prefer that owners get paid a salary and that the salary be distributed via time card to all cost objectives. But since that's not possible here, I think the best you can hope for it to treat total owner's compensation as being an indirect expense.

Good luck.

 

[New guy]

Thank you for your reply. The owner works on all contracts (cost-type and T&M) and does keep a weekly time card. His cost (recurring monthly draw) is allocated based on the hours spent on each contract consistent with how salaried employees are treated. And similar to salaried employees, we have included his year-end bonus in Overhead. I haven't been able to find much guidance regarding single-owner LLCs filing an ICS, thus the reason for my post.

[Retreadfed]

2 hours ago, New guy said:

I haven't been able to find much guidance regarding single-owner LLCs filing an ICS, thus the reason for my post.

Do any of your cost reimbursement contracts contain FAR 52.216-7?  Similarly, do your T&M contracts contain FAR 52.232-7?

[here_2_help]

3 hours ago, New guy said:

Thank you for your reply. The owner works on all contracts (cost-type and T&M) and does keep a weekly time card. His cost (recurring monthly draw) is allocated based on the hours spent on each contract consistent with how salaried employees are treated. And similar to salaried employees, we have included his year-end bonus in Overhead. I haven't been able to find much guidance regarding single-owner LLCs filing an ICS, thus the reason for my post.

As I posted, I've seen this before and it worked for the non-DoD contractor. The company allocates the draw in accordance with the time card. Does the owner record time for G&A activities (i.e., managing the company?) What about holidays, sick time, vacation time? Because if the other time isn't being recorded, then there may be an argument that the "cost" is actually inflated because some amount of the draw should be going to places other than the contracts being charged.

Yes, you won't find much guidance because (repeating myself) this situation is by far not the preferred practice. The owner is listening to the tax experts but the owner should be listening to the cost accountants. Shrug. You still have to do the best you can do with a sub-optimal situation.

[New guy]

The owner records direct & indirect charges, vacation, holiday, sick, etc. consistent with time-keeping practices for all our employees. I understand it would be preferable for him to be salaried, but given the circumstances I want to ensure we are appropriately allocating his cost in our ICS in accordance with the FAR. I don’t see how our ICS would accurately reflect all allowable costs if it did not include the labor for contracts he directly supports and his indirect activities.  Thank you again for your input.