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 Base Labor. Check CORE Help Center for details.
To calculate your indirect/derived rates:
Total Pool Costs / Total Base Labor Cost x 100
Example: If your pool costs or amount 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 rates, and profit or fixed fee.
Direct Labor Rate = Yearly Salary / Total Hours in a Year
Example: For an employee with a salary of $50,000 per year, the direct labor rate is
= 50,000 / 2080 = $24.04
Fixed Fee = Direct Labor Rate + (Derived Rate of Cost Pool 1) + (Derived Rate of Cost Pool 2) + (Derived Rate of Cost Pool 3) + Fixed Fee Rate
For an employee with a salary of $50,000 per year and direct labor rate of $24.04, indirect rates are
Fringe Rate @ 28.5% x $24.04 = $6.85
Direct Labor Rate + Fringe Rate = $24.04 + $6.85 = $30.89 = Subtotal 1
Overhead Rate @ 16.6% x $30.89 = $5.13
Subtotal 1 + Overhead Rate = $30.89 + $5.13 = $36.02 = Subtotal 2
G&A Rate @ 22.8% x $36.02 = $8.21
Subtotal 2 + G&A Rate = $36.02 + $8.21 = $44.23 = Subtotal 3
Fixed Fee Rate @ 5% = 5% x $44.23 = $2.21
Subtotal 3 + Fixed Fee Rate = $44.23 + $2.21 = $46.44 = Total Hourly Rate
Thus, Fixed Fee = Direct Labor Rate + Fringe Rate + Overhead Rate + G&A Rate + Fixed Fee Rate = $24.04 + 6.85 + 5.13 + 8.21 + 2.21 = $46.44
This is the total hourly rate that should be billed to the client.
Note: You can run the Cost Rate Multiplier report in CORE to see the calculation of indirect rates based on cost pools.