General Guidance on Calculating Indirect Costs The National Endowment for the Humanities

The most common problem involved the lack of documentation of salary costs. Many organizations used timesheets as documentation for payroll expenses, but the timesheets only reflected the number of hours each employee worked, and not the allocation of those hours across various funding sources. Time sheets serve as the base for allocating salaries and wages and must reflect the distribution of labor costs among multiple funding sources. Hours charged to funding sources on timesheets must match the way in which those hours were charged to the organization’s funding sources or those expenses can be disallowed.

But if your business expenses are greater than your revenues, you won’t stay afloat. Administration costs include general administrative expenses that are not specific to the project but serve the entire organization. Examples include general administration and general expenses such as the director’s office, legal, accounting, and administrative personnel. Assume that you are the executive director of a small nonprofit organization that has recently received funding to add an after-school activity program for troubled teens to the counseling services that you already provide.

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This includes things like rent for your business space, transportation, gas, insurance, and office equipment. Direct costs like your raw materials and labor are not included in your overhead. Whether your company is small start-up, privately held or a publicly traded company understanding your indirect cost actual indirect cost rate formula structures is critical to long-term financial success. One of the most important areas of compliance is the design, structuring, implementation, and maintenance of a firm’s indirect cost rate structure. A correctly designed and implemented indirect rate structure can give a company a strategic advantage.

After direct costs have been determined and charged directly to the contract a company needs to determine its indirect costs. Indirect costs are any remaining cost not directly identified with a single final cost objective, but identified with at least one intermediate cost objective or two or more final cost objectives. Several years ago, the Office of Inspector General (OIG) of the Department of Labor reviewed the cost allocation practices of federally funded organizations and found a number of common problems.

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A firm needs to understand the major drivers of fringe, G&A, overhead costs and how to correctly allocate them into indirect cost pools. To begin our discussion on how to calculate an indirect rate, let’s start by reviewing the definition of direct vs indirect costs. A direct cost is one that you incur when doing work for a client—any client, whether it’s a federal agency from which you have an SBIR or STTR award, or work for a private client. This reflects the cost of the time that you and your employees have agreed to spend doing work for your client.

• You see that the overhead cost pool is made up of the total in all the overhead accounts.
• The Agreement Officer (AO) decides any dispute between the organization as defined in 2 CFR 200.86, and USAID arising under an assistance award.
• The table below lists common shared costs and some typical cost bases that are used to allocate them.
• Obviously, this would not be cost effective or practical but it would certainly provide each funding source an accurate accounting of the cost of these expenses for each one.
• 10% De minimisThe 10% De minimis rate may be elected by an organization that has never received a negotiated indirect cost rate.
• (2) In the current contracting environment, it is vitally important to design the most competitive indirect cost rate structure that helps ensure winning the contract.
• You can power down equipment when you aren’t using it, purchase energy-conserving equipment, or switch utility providers.

“Indirect Cost Proposal Checklist for Subsequent NICRAs” of this guide for the required documentation. A one-time extension of a currently negotiated rate may be approved for up to a 4-year period. For example, if a company had repairs done for $1150 but the budget amount was $800, the company had a cost variance of $350. By lowering the proportion of overhead, a business can gain a competitive advantage by increasing the profit margin or pricing its products more competitively. Under this method, budgeted overheads are divided by the sale price of units of production. Indirect materials are those that aren’t directly used in producing your product or service.

Overhead, Special Cost and Closeout Branch

A few of the abovementioned expenses are not included in the Total cost calculation because they are direct costs. Those excluded costs in the above cases comprise raw material costs and labor wages. Let’s say that you want to find your overhead rate using your direct labor expenses.

Once indirect rate pools have been created, each one must be appointed an allocation base so that an indirect rate may be calculated. An allocation base should result in an intelligent, consistent and reasonable allocation of costs to contracts. For example, total labor cost is an appropriate allocation base for a fringe rate pool because of the clear relationship between the two. The contractor needs to select an allocation base that is common to all cost objectives to which the grouping is to be allocated. The base period for allocating indirect costs is the cost accounting time period during which such costs are incurred and accumulated for allocation to work performed in that period.

If you want to measure your indirect costs against direct labor, you would take your indirect cost total and divide it by your direct labor cost. The overhead rate or the overhead percentage is the amount your business spends on making a product or providing services to its customers. To calculate the overhead rate, divide the indirect costs by the direct costs and multiply by 100. Furthermore, recognizing the costs is crucial to exclude them from short-term pricing decisions where the management aims to set prices based on variable production costs. Examples of the fixed nature of indirect costs are building temporary roads, labor transportation to the working site, etc.

M/OAA/CAS/OCC provides support and guidance to Agreement Officers (AO) and Agreement Officer’s Representatives (AOR) at Missions regarding the negotiation of NICRAs as requested. If the foreign entity has an award issued from Washington, M/OAA/CAS/OCC will negotiate and issue the issuance of a NICRA. Once a NICRA is issued, either by a Mission or M/OAA/CAS/OCC, this NICRA will apply to all Federal awards. This means that for every dollar of direct labor, Joe’s manufacturing company incurs $1.21 in overhead costs. While both the overhead rate and direct costs can impact final product cost, along with your balance sheet and income statement, they are two different things. Understanding how to calculate your overhead costs can help you create efficient strategies for your business.