When, if ever, is fringe overhead an applicable base cost for regular overhead? Using the scenario example, why would the $200 in fringe overhead costs be applied to the 50% regular overhead rate? This is applying overhead to overhead. Is this acceptable? My thoughts are that only the $1,000 in direct labor should be applied to the regular overhead, which would compute to $500 in regular overhead costs, not $600. Please provide guidance and clarification. Thanks.
The simple answer to your question is: Fringe expenses can be included in the base when they are determined by the contractor to be direct costs. The appearance of your question’s background, leads me to believe that that is exactly what is occurring in this case. A direct cost is any cost that is specifically identified with one final cost objective. The cost does not have to be a “touch” cost, such as direct labor, in order for it to be classified as a direct cost. In your case, since fringe would be added to the hourly labor rate to give a direct labor rate it would be included in the base for calculating overhead rates.
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The problem is that, depending on the company, fringe expenses can be allocated as either indirect or direct costs. Note: I intentionally do not call them fringe overheads. They are simply expenses that get allocated as either direct or indirect costs and, if they get allocated as indirect costs, they get further sub-allocated as either an overhead or a G&A expense. One company may allocate fringe expenses as an indirect cost in the overhead pool (where they will be included in the rate build), while another company allocates them as directs (where they will show up in the base and the overhead rate will be applied to them). This is perfectly alright as long as each company follows its written practices as specified in their Disclosure Statement.
Your question background specifically states that the rate pool excludes the fringe expenses. That is good because if the rate pool included the fringe expense, you are correct in that that fringe expense could not then be used in the base and then have the rate applied to it. That would constitute “double counting” and would be a fairly blatant violation of Cost Accounting Standard (CAS) 402. However, that does not appear to be what is happening in your case.
Suggestions: First, it would be prudent to review the contractor’s Disclosure Statement with respect to the treatment of fringe expenses. Second, I believe that it would be valuable for you to thoroughly review FAR Part 31 and Cost Accounting Standards 402 and 418. Third, we would enjoy having you attend a DAU offering of CON 232 (Overhead Management of Defense Contracts) where we get the opportunity to explore the make-up of the components of contractor overhead and G&A rates in great detail. Finally, since this is a DCMA issue, it is most strongly recommended that you contact your legal consul for more information and their interpretation of this issue.