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    What is the Excel formula for calculating OH, Profit and Direct Labor Rates?


         In the case of OH, Profit and direct labor, rates are calculated by using a simple ratio.  Profit, for instance, is calculated by dividing the Government's negotiation objective for profit (dollars) by the Government's negotiation objective for total cost (also dollars) to calculate the profit rate.  For example, if the Government's negotiation objective for profit is $500,000.00 and the negotiation objective for cost is $5,000,000, then the profit rate would equal 10% (e.g. $500,000/$5,000,000 X 100 = 10%).  FAR 15.404-4 requires Agency's to use a structured approach to develop their objective for negotiating profit whenever cost analysis is accomplished.  DD Form 1547 Weighted Guidelines (WGL) is DoD's structured approach (per DFARS 215.404-4).  I e-mailed an electronic version of the WGL form to you directly for your review.

             An indirect cost rate is also calculated by using a simple ratio (e.g. Indirect Cost Pool/Allocation Base = Indirect Cost Rate or Pool/Base = Rate).  A cost pool is simply the company's estimated indirect costs it expects to incur in support of work that is of a similar nature which will need to be performed to complete their contracts over the next year.  Examples of indirect cost pools include the company's various overheads (e.g. a Manufacturing Overhead or an Engineering Overhead) and G&A expense.  Since an indirect cost supports more than one contract, an IDC rate is used to allocate or spread these costs to each of their contracts based on the benefit received by each of those contracts from the indirect expense pool.  The rate efficiently allocates the indirect costs because it is based on the relationship of the indirect expense to the direct cost the indirect expense supports..  For example, companies commonly calculate the Manufacturing Overhead Cost Rate by dividing the estimated manufacturing indirect expenses (in other words, Cost Pool) by the estimated manufacturing direct labor costs (Allocation Base) (e.g. Manufacturing Indirect Cost Pool/Manufacturing Direct Labor Dollars).  I've e-mailed a slide with some other examples of indirect cost pools and associated allocation bases as well as a couple of slides that further explain how an indirect rate works.

             A direct labor rate is calculated simply by dividing the estimated total labor cost by the total direct labor hours.  For example, if the rate is for a Machinist Level I, the company would calculate the aggregate wages plus taxes and fringe benefits the company will pay for this labor category over the next year.  This dollar value goes in the numerator and then the company estimates the total Machinist I hours needed to perform their contracts over the next year, and that dollar value would go into the denominator.

             It would also be a good idea to consult with your cognizant DCMA and DCAA office as they are the subject matter experts in DoD for negotiating direct and indirect rates.


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