Indirect Rates – Monitoring and Best Practices in Calculating Your Rates: Part Two

ERIC POPPE: Hello, welcome to Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward. My name is Eric Poppe. I'm a senior manager with Cherry Bekaert's Government Contract Services Group.

ERIC POPPE: And today with me is Rich Wilkinson, Director of Product Marketing at Unanet. This is our second podcast in a series on indirect rates, how they affect GovCons, and why it's more than just a math exercise. Rich, thanks for joining me.

RICH WILKINSON: My pleasure, Eric.

ERIC POPPE: Before we jump into rates again—last episode we talked about rates at a high level and why they matter for government contractors—today we're going to jump into monitoring and why it's a great tool for project management. Can you give a little background about yourself and your role at Unanet?

RICH WILKINSON: Sure. I've been all the way around the GovCon table. I was a contracting officer for eight years, then I spent ten years as a working controller. I've been in the software industry for more than 25 years, supporting government contractors with accounting systems and similar software. I've developed rates, used rates, been on the buying side and tried to negotiate them down. It's always a thorny issue we all struggle with.

ERIC POPPE: Definitely true. Calculating your rates through that rate cycle—from using budgets for your provisionals, monitoring actuals through the year, comparing that to your budget build, and closing out incurred cost submissions—there are a lot of checkpoints through the year. You have to get into a cadence with the monitoring exercise. Can you talk about how important that is and some best practices for calculating rates?

RICH WILKINSON: If you go through the pre-award survey, SF-1408, one of DCAA's questions is whether you can calculate your rates and how often you do it. They want you to say you do it every month. When I was a working controller, I calculated them every month, but I have to confess I didn't look at them closely for the first three months because everything fluctuates early in the year.

RICH WILKINSON: Fringe is often out of control the first month or two because of the way payroll taxes are processed. Around March I would start paying attention and ask myself, am I on track? Whether you're a project manager or a controller, the major question is always, where am I? If I was off course—too high or too low—that was the problem, usually too high. Then I had to decide whether to cut spending to get rates back where they needed to be or change the budget. That decision might happen in March, June, or July, but at some point in the year you look at your rates and realize a particular indirect rate isn't where you want it to be.

ERIC POPPE: From that tracking standpoint, you shouldn't be alarmed by early-year fluctuations. But as you track throughout the year you should pay attention to what's happening in those pools and bases. If there's a change in your business mid-year—say you win a large award—how does a company go about tracking budgets and actual events and how those impact rates?

RICH WILKINSON: Hopefully your ERP gives you tools to put the budget into the system, track it, and show budget versus actuals when you calculate rates. When you see a rate that isn't where you think it ought to be, the first question is whether it's a one-time aberration or a trend. If March is a little high, April higher, May higher, and June higher still, you have a trend.

RICH WILKINSON: You need to know what cost element is driving it. Is it rent, equipment, people, or a misestimated leave accrual? If it's not something you can fix, you need to ask whether you should revise your indirect rates. If there's any money at risk, the answer is yes. You can revise provisional rates as often as needed. If you did it every month you'd irritate DCAA, but some companies revise quarterly and adjust provisional rates if they're even a little out.

ERIC POPPE: A lot of companies, especially smaller firms new to government contracting or primarily commercial firms that just won their first cost-plus contract, see submitting provisional rates or resubmitting as a boogeyman. They worry about upsetting the government, but you could be leaving money on the table. From an audit and financial risk standpoint, large variances can impact financial statements and require adjustments. Realistically—

RICH WILKINSON: There are people in the government I really don't want irritated with me, but they're in the program office or contracting office, not at DCAA. I have respect for DCAA and admire their work, but having an auditor irritated doesn't keep me up at night. If I need to revise provisional rates, I'll do it because there's cash at risk. I can use that cash better than having it sit on the balance sheet as a rate variance.

ERIC POPPE: So when you find a variance and submit for new provisional rates, what should you do with that variance and when should you bill it?

RICH WILKINSON: Instantly. If DCAA approved revised provisional rates this afternoon, I'd get them into my June billings if possible. If the bills had already gone out, I'd get it into July billings and bill the differential. A good ERP will do that for you—you change your rates and tell it to produce a rate differential billing. Our system does it; other GovCon ERP systems do it as well. It would be foolish not to bill. That money doesn't do any good sitting on the balance sheet uncollected or unbilled. I'd rather have it in the bank or pay down a line of credit.

RICH WILKINSON: If rates need revising again in September or October, do it again and produce another differential billing. Many contracts, especially delivery orders, run through 30 September. If you have a rate variance in August and don't revise and bill it, the program manager might spend that money by 30 September. When you later revise your rates, there may be nothing left to bill against.

ERIC POPPE: That brings up a question we get a lot at Cherry Bekaert from clients. If you win a new contract and have to bring on 50 or 100 new FTEs, incurring new overhead and IT costs, should you price that proposal using revised rates or your current provisional rates? You should take potential new awards into account when estimating and pricing, but you can't affect the denominator until the new work actually occurs. How should companies handle that?

RICH WILKINSON: There's one thing you should do and one thing you shouldn't. You should calculate an impacted rate statement with your actuals in one column and another column showing what the new contract will do—increases in the pool and increases in the base. Then calculate what your rates will look like after you win the job. If it drops your overhead four, five, or six points, you want to use that lower overhead in your proposal to be competitive.

RICH WILKINSON: What you should not do is submit a revised provisional rate statement before you win the work. Hold that until you actually win and those people start coming on board and you see the rates fall. Then revise the provisional rates.

ERIC POPPE: Then you start the cycle over again with monitoring and adjustments. We'll end here as a segue to our next episode, where we'll talk about closing out the year and monitoring variances as you close out and their impact. Rich, thanks again for joining me on this second episode on indirect rates.

RICH WILKINSON: My pleasure. I'll see you on the other side. Have a great day.