by TJ Paulsen
Government contractors that perform work for the Federal Government under Cost Plus Contracts are required to estimate their indirect cost rates by which allowable indirect costs are allocated to the product or service provided. These are typically Fringe, Overhead, and General and Administrative (G&A) costs, but may also include others. The estimated indirect rates are submitted to the Government Contracting Officer and, if approved, will be used as “provisional” rates during the year.
To calculate the provisional indirect rates that will be applied over the year, companies must first build a corporate-wide budget that segregates Direct Costs and Indirect Costs. The allocable Indirect Costs are grouped into pools and divided by the appropriate bases to obtain the rates (Pool / Base = Rate).
Microsoft Forecaster, a module of Microsoft Dynamics SL, can be configured to be a very useful tool not only to build the budget, but to also calculate the provisional indirect rates, and, if desired, perform the actual allocations in the budget.
Calculating Indirect Rates
The indirect rates are calculated in Forecaster by designing a report to create the pools and bases then using a calculation to obtain the rate. To accomplish this, rollups will need to be setup for both accounts and subaccounts, then, most likely, linked together in the line set to build the pools (see example below). A calculation is used to total the pool expenses. A similar approach is done for the bases. Once you have the calculated pools and bases, a simple calculation is all that’s needed to divide the pool total by the base total to obtain the rate. Print the report after the budget is completed and you’ll have the rates and the supporting calculations to be used for your costing.
Allocating Indirect Rates
If there is a desire to actually post the allocations in the budget, it can be done using the Allocations component of Forecaster. Setting up the allocation process in Forecaster is simple once the Indirect Rates report is built, as a step-by-step wizard guides you through the process. Allocations can be based on either plugging in the pre-calculated rates from the report, or using the features built into the allocator to calculate the rates (using the same pools and bases) and allocating the amounts independent of running the report. The wizard will walk you through the components defined in the allocation, including Allocate From (the Pool), Allocate To, Contra, and Basis.
Government Contractors will find Forecaster to be an excellent tool not just for budgeting expenses but also as a way to calculate provisional indirect cost rates and allocate budgeted expenses. I welcome your comments and questions.