Federal Pricing Group helps clients evaluate their accounting system and establish, or adjust, an indirect rate structure for Cost-Reimbursable work with the Federal government in Northern Virginia (NOVA). We apply decades of experience to assist with creating, compiling, and validating budgets that will be used as the basis of the indirect rate calculations.
What goes into an indirect rate and how is it calculated? As shown in the equation below, an indirect rate is obtained by dividing an indirect cost pool by the appropriate allocation base. The numerator of the equation, Indirect Cost Pools, are costs grouped together based on their similar beneficial or causal relationship to a particular cost objective. For example, Fringe Benefits are pooled based on their beneficial relationship to labor costs. Engineering overhead costs are grouped together based on their beneficial relationship to the Engineering function1. As a rule, companies should have enough indirect cost pools so that each are grouped logically based on the reasons they are being incurred. When determining which indirect costs belongs in which pool, the key question is, “What portion of the company benefits from this expense?”
Indirect Rate % = Indirect Cost Pool/ Allocation Base
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