"Ready State" Reimbursement Checklist for Government Contractors

ERIC POPPY: Hello, and welcome to the Cherry Bekaert GovCon Podcast, where we discuss current Government Contracting trends, compliance matters, and best practices to guide federal contractors forward.

My name is Eric Poppy. I am a Senior Manager in Cherry Bekaert’s Government Contract Services Group.

With me today is Rich Wilkinson, Director of Product Marketing from Unanet. Today, we are starting a new podcast series with Unanet discussing indirect rates and how they are more than just a billing and math exercise when doing work with the federal government.

Rich, thanks for joining me today.

RICH WILKINSON: Thank you for having me, Eric.

ERIC POPPY: Before we dive into indirect rates and start this series, can you give a quick background of your role at Unanet and how indirect rates are part of your daily life?

RICH WILKINSON: I am currently in product marketing, but I have been all the way around the GovCon table. I started as a Contracting Officer with NAVAIR, mostly doing services, some hardware, and R&D.

I spent ten years as a working controller in GovCon. After that, I was with another software company for 15 years.

I joined Unanet just in time for their growth profile to take off. I have been here about five years in roles ranging from product demonstrations to public appearances and speaking engagements.

ERIC POPPY: It sounds like you have seen the entire indirect rate cycle, from the beginning of calculating rates based on budgets all the way to contract closeout, final rates, and submitting that final voucher.

RICH WILKINSON: As a Contracting Officer, I was on the demand side of that rate equation. I wanted all the contractors selling to NAVAIR to develop and support rates for me.

I did not appreciate how difficult that could be at times until I got on the other side of the fence and started having to calculate and use them. It is not just a math exercise; having rates is not the objective. The goal is having something you can use to figure out what your costs are.

ERIC POPPY: That is the bottom line. Once you know those indirect rates, you can apply them to your direct costs to figure out how to price an effort to make a profit.

It helps you estimate an effort to manage it internally and forecast into the future to determine what your revenues will be next month or next year.

Indirect rates are not difficult to calculate, but it does take time once a month to figure out where you are. Whether you are a project manager or a controller, the ultimate question is: "Where am I?"

It is a budgeting and forecasting tool that helps with the bottom line. It shows and helps determine the profitability of your contracts, whether it is a Cost-Plus contract or Fixed-Price and T&M as well.

For this first podcast in the series, our goal is to talk about why GovCon firms need indirect rates. When would you need them, and what type of contracts do they affect?

RICH WILKINSON: Many smaller companies do not start calculating and monitoring their rates until they have a cost-type contract. Once they have a cost-type contract, they need those indirect rates to generate their bills.

They need provisional billing rates. As they develop these, they realize they should have been doing this all along. Pricing, estimating, and figuring out costs should be at the forefront long before obtaining a cost-type contract.

In addition to estimating, forecasting, and pricing, if you have a cost-type contract or a T&M contract where you apply G&A to non-labor costs, you need an approved indirect rate to bill.

To get that indirect rate, you have to submit it for approval. If you are a DoD contractor, that could be the DCAA.

If you are a civilian agency contractor, it could be your cognizant lead Contracting Officer at the agency, whether it is HHS, NIH, DOE, or another entity. Someone has to approve those rates and confirm you can bill those rates for the next year.

You are supposed to have those indirect rates for the next year approved before the year starts, but almost nobody ever does. Contractors are lucky if they have the budget developed by the end of the year.

They then try to get them approved through the DCAA or the Contracting Officer in January in time to bill January costs. Some contractors end up billing last year’s rates for the first few months of the new year before they can get those rates approved.

ERIC POPPY: Sometimes they do not even receive a response; we see that a decent amount as well.

RICH WILKINSON: We used to send those rates to the DCAA and wait weeks or months to hear back. Most of my clients tell me now that if they submit clear and concise rates with reasonable support, they receive a response within 48 hours to a week.

Nine times out of ten, the DCAA says it looks good. I used to experience the DCAA knocking a point or two off my G&A every time I submitted rates, but I have not seen that in several years.

ERIC POPPY: We have not seen that much with our clients either. To develop provisional rates, you typically put together your company budgets before the beginning of the fiscal year.

That is the starting point for rates. A lot of people will use actuals, which should be a consideration, but the budget is a huge piece of developing rates. It helps with the forecasting piece of where you will be in your upcoming year.

RICH WILKINSON: I was talking to a controller recently and asked how he stood against the budget he developed last year. He said they did not really do a budget; they just used last year’s actuals as the provisional rates going forward.

I asked if he really wanted to repeat last year. He realized he should put together a budget that reflects what he wants the next year to be, not what the last year was.

Indirect rates need to reflect what you want your budget to be, what you want to win, what you want to spend, and what investments you want to make in training or equipment.

The indirect rates themselves are not particularly complicated. It is a fraction: take your indirect cost over the allocation base to get a percentage.

Figuring out what those costs are is a bit of a black art, and it needs to be done before the year starts. Getting those rates approved for next year is just the first step; then you actually have to do the work to make it happen.

ERIC POPPY: We are going to save the monitoring piece for the next podcast in this series.

Rich, I want to thank you for your time today giving an overview of indirect rates and the starting point for the provisional piece. I look forward to talking to you about monitoring the rates in the next one.

RICH WILKINSON: My pleasure, Eric. See you on the other side.