Indirect Rates – More than Just a Math Exercise: Part One

HOST: Hello and 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 in Cherry Bekaert's Government Contract Services Group, and with me today is Rich Wilkinson, Director of Product Marketing from Unanet. 

Today we are starting a new podcast series with Unanet talking about indirect rates and how they are more than just a billing and math exercise when you are doing work with the federal government. Rich, thanks for joining me today.

RICH WILKINSON: Well, thank you for having me, Eric.

HOST: 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: Sure. I'm currently in product marketing. I've been all the way around the GovCon table.

I started out as a Contracting Officer with NAVAIR, mostly doing services, some hardware, and R&D. Then I spent 10 years as a working controller in GovCon.

After that, I was with another software company for 15 years. I got to Unanet just in time for their growth profile to really take off.

I've done a lot of things while I've been here for about five years, from product demonstrations to public appearances and speaking engagements, to this new product marketing role.

HOST: It sounds like you have seen the entire indirect rate cycle, from the beginning of calculating your rates based off budgets to contract closeout, final rates, and submitting that final voucher.

RICH WILKINSON: I have to admit, as a Contracting Officer, I was on the demand side of that rate equation. I wanted all the contractors that were trying to sell to NAVAIR to develop rates and support them for me.

I didn't 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. You're right; it's not just a math exercise.

Just having rates isn't the objective. It's having something you can use to figure out what your costs are.

HOST: That's the bottom line. It is about what my costs are.

Once you know what those indirect rates are, you can apply those to your direct costs to figure out what to price an effort at in order to make a profit.

RICH WILKINSON: Exactly. How do I estimate that effort in order to manage it internally?

How do I forecast that effort into the future to figure out what my revenues are going to be next month or next year based on indirect rates?

The indirect rates themselves aren't difficult to calculate, but it does take a little time once a month to figure out where you are. Whether you're a project manager or a controller, that's the ultimate question: where am I?

HOST: Very good point. It definitely is more than just a math exercise; it's a budgeting tool and a forecasting tool that helps with that bottom line.

It is something that really helps to determine the profitability of your contracts. It doesn't matter if it's a Cost-Plus contract where you really see these requirements, as it can apply to fixed-price and T&M as well.

For this first podcast of this series on indirect rates, the goal was to talk about why GovCon firms need indirect rates. Do you want to talk for a moment about when you would need them, why you would need them, and what type of contracts they really affect?

RICH WILKINSON: A lot of smaller companies, especially, don't really get into calculating, monitoring, and tracking their rates until they have a cost-type contract.

Once they have a cost-type contract, they need those indirect rates to do their bills. They need provisional billing rates.

As they develop indirect rates, they realize they should have been doing this all along. Pricing, estimating, and figuring out what your costs are should have been at the forefront long before they got a cost-type contract.

In addition to estimating, forecasting, and pricing, if you have a cost-type contract or even a T&M, if you're going to apply G&A to your non-labor cost, you need an approved indirect rate to do those bills.

To get that indirect rate, you have to submit it to someone and have them put a stamp of approval on it. If you're a DoD contractor, that could be DCAA.

If you're a civilian agency contractor, it could be your cognizant Lead Contracting Officer at the agency, whether it's HHS, NIH, or DOE.

Somebody's going to have to put a stamp of approval on those rates and say, "Yeah, this looks pretty good. You can bill this rate for next year." That's really the next question after why I need them: when do I need them?

HOST: You're supposed to have those indirect rates for next year approved before the year starts. Almost nobody ever does.

They're lucky if they have the budget developed by the end of the year. Then they try to get them through DCAA, the Contracting Officer, or whoever is going to approve them in January in time to bill those 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.

RICH WILKINSON: Very true. Sometimes they don't even receive a response; we see that a decent amount as well.

We used to send those rates to DCAA and wait weeks or months to hear back. Most of my clients tell me now that if they submit clear, concise rates with reasonable support, they get a response back in 48 hours to a week at most.

Nine times out of 10, DCAA is saying, "Yeah, this looks pretty good." I used to routinely experience DCAA knocking a point or two off my G&A every time I submitted rates, and I haven't seen that in several years now.

HOST: We haven't seen that much with our clients either. To develop the provisional rates, you typically put together your company budgets before the beginning of the fiscal year.

That budget is the starting point for rates. A lot of people will use actuals, which definitely should be a consideration and a tool for the calculation.

However, that budget is a huge piece of developing the rates because it helps with the forecasting of what you will be in your upcoming year.

RICH WILKINSON: Exactly. I was talking to a controller just the other day and I asked how he stood against the budget he developed last year.

He said, "We really didn't do a budget last year. We just took last year's actuals and submitted those as the provisional rates going forward."

I asked if he really wanted to repeat last year. He thought about it and said, "I really ought to put together a budget that reflects what I want next year to be, not what last year was."

The indirect rates need to reflect what you want your budget to be next year: what you want to win, what you want to spend, and what investments you want to make, whether it's training or equipment.

Indirect rates themselves aren't particularly complicated; it's just a fraction. You take your indirect cost over the allocation base and you get a percentage.

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

HOST: Very true. Then you get to the monitoring piece, which we're going to save for the next podcast in this series.

Rich, I really want to thank you for your time today giving an overview of indirect rates and that 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.