For projects, especially of Cost Plus contract types, you can use the indirect cost pools to calculate indirect rates for billing your clients, especially the government. The indirect costs are expenses that cannot be directly charged to the clients, such as overheads and administrative expenses like office rent, healthcare premiums, accountant fee, etc. These indirect costs can be allocated to indirect cost pools or categories such as fringe pool, overhead pool and G&A (General & Administrative) pool. Each pool has its total cost and the sum of all such costs is the total Labor Base cost. Check the Core Help for details.
To calculate your indirect rates:
Total Pool Costs / Total Labor Base Cost x 100
Example: If your pool costs are: Fringe = $97,000, Overhead = $56,300, G&A = $77,600, and Total Labor Base costs = $340,000, then your indirect or derived rates are:
Fringe = 97,000 / 340, 000 x 100 = 28.5%
Overhead = 56,000 / 340,000 x 100 = 16.6%
G&A = 77,600 / 340,000 x 100 = 22.8%
After calculating the indirect rates, also called Derived Rates, you can use them to calculate the rates to be billed to your clients. To do that, you need to know your direct labor rate, indirect cost rates, and profit or fixed fee.
Direct Labor Rate = Salary / Total Hours in a Year
Example: If the annual salary of an employee is $50,000, then the direct labor rate is
= 50,000 / 2080 = $24.04
Fixed Fee Rate = (Direct Labor Rate + Derived Rate of Cost Pool 1) + (Derived Rate of Cost Pool 2) + (Derived Rate of Cost Pool 3) + Fixed Fee Rate
Example: For an employee with a salary of $50,000 per year and direct labor rate of $24.04,
Fringe @ 28.5% = 28.5% x $24.04 = $6.85
Direct Labor Rate + Fringe Rate = $24.04 + $6.85 = $30.89 = Subtotal 1
Overhead @ 16.6% = 16.6% x 30.89 = $5.13
Subtotal 1 + Overhead Rate = $30.89 + 5.13 = $36.02 = Subtotal 2
G&A @ 22.8% = 22.8% x 36.02 = $8.21
Subtotal 2 + G&A Rate = $36.02 + 8.21 = $44.23 = Subtotal 3
Fixed Fee @ 5% = 5% x 44.23 = $2.21
Subtotal 3 + Fixed Fee = $44.23 + 2.21 = $46.44 = Total Hourly Rate
Thus, Fixed Fee Rate = Direct Labor Rate + Fringe Rate + Overhead Rate + G&A Rate + Fixed Fee = $24.04 + 6.85 + 5.13 + 8.21 + 2.21 = $46.44
This is the rate that should be billed to the client.