Facilities Service Center for Federal Contractors

At a glance

• The Main Takeaway: Understand the impact on facilities costs on your indirect rates
• The Impact on your Business: Allows for more precise budgeting and pricing
• Next Steps: Learn how the calculations work and if they are right for you

The Full Story:

Why consider an intermediate facilities pool?

Many federal contractors categorize indirect expenses into three standard groups: Fringe Benefits, Overhead and General Administrative (G&A) costs. However, facilities and IT expenses are often a significant component of indirect cost, yet they don’t fit neatly into a single category. These “common costs” support direct and indirect efforts and frequently fall into the G&A expense section, unduly inflating the rate.

Common facilities costs include rent to provide working space for both direct employees and your back-office team. Related working space costs can also encompass a myriad of other support items such as office supplies, labor for a receptionist or IT team, and FSO officer, along with their applicable expenses like bonuses and training costs, utilities, repairs, cleaning services, postage, property tax, copiers, equipment depreciation and more.

It is impractical, if not impossible, to allocate each of these individual expenses accurately to the cost objectives they benefit. The Defense Contract Audit Agency (DCAA) also recognizes the time-saving value of aggregating homogenous costs into an intermediate pool and then allocating them to direct and indirect areas based on a causal beneficial relationship.

How does it work?

1. Group accounts with similar numbering or prefacing the account name with “SVC or FAC/IT.” 

2. Determine an acceptable basis for allocation aligning with your business model. Common bases for facilities are square footage used, headcount, labor hours, or labor dollars. If your activities are static and people and spaces are dedicated to specific activities, then square footage or headcount may be acceptable. However, a labor hours allocation may provide a more accurate reflection. If you are a smaller, more agile company, and your team regularly divides their time between client contracts, business development, and administrative duties. If you undergo indirect rates audits, the labor hours are easy for auditors to verify.

3. Allocate fringe costs to any dedicated facilities personnel for personnel charging labor time to this pool. (Fringe always follows labor!)

4. Fully allocate costs each month. Use the numbers for that month using a headcount or square foot method. If using labor hours or labor dollars, use the cumulative year-to-date total.

5. Create a ratio. To illustrate, if your total cost is $100,000, including any fringe allocation, and if using labor hours as a measure, take the timesheet data and summarize total YTD hours worked as follows:

Direct Hours                             15,000
Overhead Hours                        3,000
Subtotal                                                       18,000               90% of facilities get charged to OH
G&A & B&P Hours                                    2,000              10% of facilities get charged to G&A
                                                                           20,000

6. A journal entry should be created to move the costs as follows:

• Debit Overhead Costs – Facilities Allocation In               $90,000
• Debit G&A Cost – Facilities Allocation In                         $10,000
• Credit Facilities Allocation Out                                        ($100,000)

Your net facilities cost should now be zero each month.

7. Now you can calculate your indirect rates for Overhead and G&A.

Impact on Indirect Rates:       

While refining your indirect costs does not change your bottom line, it does impact your indirect rates. If all your expenses were previously in the G&A pool, then your overhead rate increases and your G&A rate decreases, which is often a desirable outcome. It is very important to consider potential impacts on your customers and any contract limitations. If you have cost-reimbursable contracts and have already submitted budgeted rates, changes may need to be deferred until the following year. You also need to consider if your employees are performing their work at a government site. Does this methodology accurately reflect where the cost should fall? Adopting a facilities pool should be well thought out, and implementation should only occur at the beginning of your fiscal year.

Most ERP systems designed for federal contractors can incorporate this calculation, but you should reach out to your accounting advisor for assistance with planning and configuration.

Aprio advisors are here to assist you.

Related Resources:

Unique Considerations for Joint Venture Multiple Award Schedule Contracts

Top Five Failures in GSA Office of Inspector General (OIG) Audits #1, The Price Reductions Clause

Taking Credit Where Its Due: The Importance of Contracts for Claiming the R&D Credit