Professional architectural, engineering, railroad, and utility companies who perform work for government agencies are generally required to have an independently audited overhead rate. You calculate this rate by dividing total allowable indirect expenses over direct labor but getting to this step and optimizing this result involves some effort.
It might seem as you're jumping through hoops to satisfy a regulatory body, but that's only partially true. If you're working in this space, your livelihood and success depend on your ability to be fully reimbursed for your eligible costs and make the right decisions on future contracts. These are just a few of the reasons why understanding and optimizing your overhead rate are vital.
A FAR compliant accounting system is a common prerequisite for becoming a pre-qualified consultant for a state transportation department.
Your accounting system must, among other functions, properly segregate direct and indirect costs in accordance with the Cost Accounting Standards (CAS) of Federal Acquisition Regulation(FAR) Part 31 for you to work government contracts.
If you do not have a FAR compliant accounting system, you could fail to get or keep pre-qualified consultant status and perhaps miss opportunities to bid on transportation contracts all together.
Technically known as a firm's "indirect cost rate," the more familiarly known "overhead rate" is the percentage of general expenses that consultants can bill to contracting government agencies. More specifically, it is the ratio of allowable indirect costs to total allocable direct labor costs.
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