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Companies, contractors, and organizations (hereafter referred to as “company” or “companies”) doing business with the Federal Government are required to differentiate between direct and indirect costs. Direct costs are those costs which can be directly attributed to a specific contract, task, grant, or other agreement. Indirect costs are those costs necessary for the operations of a company which cannot be directly attributed to a specific contract, task, grant, or other agreement. Indirect costs are “pooled” together and allocated to direct costs via indirect rates.
What are Indirect Rates?
Indirect costs are defined in the Federal Acquisition Regulations (FAR) in section 31.203. All indirect costs are grouped in homogenous pools in a company’s accounting system. These costs are often grouped into pools such as Fringe Benefits (Fringe), Overhead (OH), and General & Administrative (G&A). There is no required structure of the pools required by the FAR, only that a company is consistent in the allocation of costs to the pools. So, if your company has different indirect pools and/or different naming conventions, that is perfectly acceptable.
Companies can also have intermediate pools which collect costs during an accounting period and then at the end of that period, allocate those costs to direct cost objectives and indirect pools. These intermediate pools are not necessarily indirect pools. As noted at the beginning of this paragraph, the cost allocation of an intermediate pool can be made to both direct and indirect cost objectives. This is more common as companies grow larger.
At the end of an accounting period, after all transactions are entered and any intermediate pools have been allocated, the company can calculate its indirect rates. An indirect rate is calculated as the indirect pool divided by the indirect base. Each company can determine its own indirect base for each indirect pool. As with most accounting regulations from the FAR and the Cost Accounting Standards (CAS), the key is to be consistent with the costs in each base. The percentage calculated by dividing the indirect pool with the indirect base is the indirect rate.
For example, a common indirect base for the OH indirect pool is Direct Labor and Direct Fringe. Therefore, the Overhead Pool divided by Direct Labor and Direct Fringe equals the OH rate.
What Is a Negotiated Indirect Cost Rate Agreement (NICRA)?
A NICRA is a negotiated agreement between a company and its cognizant auditor, documenting the government’s acceptance of the company’s estimated indirect rates for the next five fiscal years. The NICRA establishes the indirect rates a company may use on proposals for work with the Federal Government. Once established with one agency, this NICRA is accepted across all other agencies within the Federal Government.
A NICRA may be renegotiated each year to cover the next five fiscal years. But a NICRA must be renegotiated at least every two years.
Some agencies use an agreement called a Forward Pricing Rate Agreement (FPRA) instead of the term NICRA. For all intents and purposes, these two agreements serve the same purpose, especially for proposals.
What are the Benefits of an Established NICRA for Proposals?
There are two primary benefits for a company to have an established NICRA for proposals:
Should My Company Pursue a NICRA?
The short answer is yes, when your company can submit a NICRA proposal to your cognizant audit agency. In our opinion, the act of submitting a NICRA proposal established significant credibility with Government evaluators. We believe that being ready before the Government requests a NICRA exercise establishes the professional and competent nature of your accounting system.
However, there is no guarantee the audit agency will engage in a negotiation with your company. Companies cannot request an audit, only Government Contracting Officers and Grant Officers may request an audit.
What if Our Cognizant Auditor is not Authorized to Engage in a NICRA Negotiation?
If one of your COs or GOs does not request the NICRA activity, your company may engage a qualified CPA firm to perform the function. This will not result in a Government-approved NICRA. It will however accomplish two things. First, your company will have supporting documentation for your proposed indirect rates. Second, your company will have successfully complied all required information to successfully receive a NICRA when the cognizant auditor is authorized to proceed.
Various Types/Uses for a NICRA
To learn more about NICRA and get a better understanding of indirect cost rates, visit the McKelvey Group today. Our experts will be happy to help you with the information you need.