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Mastering Your Cost Accounting for Competitive Pricing on Government Contracts

Winning government contracts requires a unique blend of expertise, responsiveness, and competitive pricing. But how do you ensure your pricing strategy reflects your true costs while remaining attractive to government agencies?

Understanding the relationship between business expenses and indirect rates for U.S. Government proposals is central when developing competitive Fully Burdened Labor Rates (FBLRs).  By consistently allocating expenses to the correct cost pools and regularly reviewing accounting data, including rectifying any posting errors, business owners can generate management reports that contribute to informed decision-making and pricing strategies.

Cost Allocation  The proper and consistent allocation of expenses segregated by job, project, or contract is center stage in the development of indirect rates.  This ensures accurate cost-tracking and allocation, which is essential for determining indirect rates. It's essential to collaborate with your accountant and accounting team to establish Standard Operating Procedures (SOPs) for accurate and consistent allocation of costs and expenses to the appropriate cost pools.  Write the SOPs with detailed guidelines on how to categorize expenses, document all transactions, conduct regular reviews for accuracy, correct errors, and ensure compliance with DCAA requirements.

Calculating Indirect Rates  In order to navigate the complexities of developing indirect rates recognized by the Defense Contract Audit Agency (DCAA), start by understanding the cost pools and the allocation base used to calculate the rates. We suggest focusing on the following Cost Pools: Fringe, Overhead Government Site (O/H - OnSite), Overhead Contractor Site (O/H - OffSite), General and Administrative (G&A), and Fee. The Allocation Basis for calculating indirect rates is Direct Labor. 

Fringe Rate Calculation:  Divide the 12 month total of Fringe Costs (Fringe Pool) by the same 12 month total of Direct Labor (Allocation Basis).

The Fringe Pool expenses include paid leave, payroll taxes, workers compensation, health insurance, life insurance, long-term and short-term disability, tuition or certification reimbursements,  and reimbursements for uniforms, safety and protective equipment.  Include both the administrative staff and direct labor staff expenses in the Fringe Pool.


O/H – Gov’t Site Calculation:  12 Month Total of O/H Costs (O/H OnSite Pool) divided by the same 12 Month Total of Direct Labor (Allocation Base) = O/H Gov’t Site Indirect Rate.

A simple way to determine what expenses are Overhead, is to ask yourself this question:  “If I didn’t have this contract, would I have this expense?”  The idea being, that Overhead Costs are directly related to a specific job, project, or contract.  One common example of O/H cost is the supervision of the FTEs and their work on a contract.  If a project or program manager is not specifically identified in the CLIN structure of Schedule B, it is a direct and necessary O/H expense.  Additionally, if that project manager is not allowed work space at the Government Site, then the cost of the office space is also O/H expense.

G&A Rate Calculation:  Divide the 12 month total of G&A expenses (G&A Cost Pool) by the same 12 month total of Direct Labor (Allocation Basis)

DCAAM 7641.90 gives examples of G&A Expenses as the cost of activities that are necessary to the overall operation of the business as a whole and includes top management  functions for executive control and direction, human resources, accounting, finance, public relations, contract administration, legal and the expense of an office and all related office expenses including lease, taxes, insurance, office supplies, etc.

For more support developing indirect rates, we recommend the use of the Incurred Cost Electronically (ICE) Model, available for download at DCAA.mil, the download includes a demo, the Excel Model, and the manual.

Competitive Pricing is a blend of knowing the costs of your specific suite of services and how to project or budget forward pricing.

Forward pricing is developed with the likelihood of winning identified opportunities/contracts in the future (usually the next 12 months) and understanding the costs associated with those contracts.  The first step is to estimate the Direct Labor cost of each contract your business intends to win.

Next, you can decide if the current G&A staff and office space are adequate to take on more work or if you will need to increase the staff.   Here, it is important to know the capacity of the human resources and accounting staff.

Take a look at the anticipated Fringe expenses will be, for example, are these exempt professionals that do or don’t need health insurance or are they Service Contract Act (SCA) Labor Categories with a heavy Health and Welfare (H&W) cost burden.

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