STUDENT 1 (Jena):

According to DCAA Audit and Government Contract Consulting (2016), “Overhead is defined as those indirect support costs incurred to support operations or direct production. These are cost directly related to project but cannot be identified to one project or contract” (para. 4). Overhead accounting is essential for budgeting and determining how much a company should charge for their products and services to ensure profit gain. Contractor’s estimating systems are used as the baseline for the cost/price proposal. However, there are unallowable overhead costs that must maintained in a separate unallowable cost pool. Contractors are responsible for recording all cost accordingly and to update and maintain records as supporting documentation to all costs inquired over the course of a contract. Unallowable costs according to Garett & Betty (2010) are, “cost which under the provisions of any pertinent law regulation, or contract, and cannot be included in prices, cost reimbursements, or settles under a government contract to which it is allocable.” It is essential that contracts separate unallowable costs from any billing for the government. Cost allocability refers to the allowable costs to the government and how they are assigned.

I looked around and was unable to locate an article about a currently situation where there was a problem in this area of interest. However, I was able to locate some examples of scenarios that could be considered either allowable or unallowable costs. When working with the government not all costs are treated the same. All costs are regulated by the Federal Acquisition Regulations (FAR) which handles the allocation of direct or indirect costs as well as overhead, general and administrative costs. The government has set rules and guidelines of thing that are deemed as reimbursable costs. According to Loftus (2019), “and unallowable costs will not be reimbursed by the federal government and should not appear on a bill to a government agency. Some are expressly unallowable under the FAR including: entertainment, donations, interest, bad debt, fines, and penalties. Excessive or unreasonable costs are also unallowable” (para. 3).

References

DCAA Audit and Government Contract Consulting. (2016). Indirect Cost Explained. DCAA Audit and Government Contract Consulting. http://www.dcaaconsulting.com/indirect-cost-explained/.

Garrett, G. A., & Beatty, F. J. (2010, 08). GOVERNMENT CONTRACT COST ACCOUNTING PRINCIPLES (PART 2 of 3). Contract Management, 50, 38-42,44,46-50. https://search-proquest-com.ezproxy2.apus.edu/docview/763235262?accountid=8289

Government Contract Associates . (2020). Non-allocable “Commercial” Costs. https://www.govcontractassoc.com/non-allocable-commercial-costs/.

Loftus, P. (2019). Accounting 101 for Government Contractors: Allowable vs. Unallowable Costs. 2019 : Articles : Resources : CLA (CliftonLarsonAllen). https://www.claconnect.com/resources/articles/2019/accounting-101-for-government-contractors-allowable-vs-unallowable-costs.

STUDENT 2 (Amy):

In our readings this week, we find that overhead expenses can be categorized as allowable and unallowable. Making the determination of what costs or expenses fit where can be quite difficult. Not all overhead expenses are allowed to be included when calculating the cost of a contract. The Federal Acquisition Regulations (FAR) provides the guidelines for what overhead charges can and cannot be covered in federal government contracts (Purdy, 2009). For instance, when the hourly rate is being calculated, not only are the employees’ salaries contributing to the final number, but also the costs for allowable overhead expenses topped with enough money for the contract company to make a profit (Purdy, 2009).

In an article found in the library, there are discussions about what overhead costs can and cannot be charged if a contract is terminated by the government. I found this interesting because we typically view contracts in the beginning stages and not from the vantage point of the government pulling the plug. In the article, there is the discussion of whether a contractor should be compensated for “unabsorbed overhead” when the government decides to end a contract early for convenience (Trueger, 1973). If a contract is determined to be unproductive, inconvenient, or it has defaulted, the government usually has a clause in the contract stating termination can occur. If a contract is deemed inconvenient and the government pulls the plug, this can leave the contractor in a bad spot with regards to ongoing overhead costs that do not automatically go away just because the government no longer wants to proceed with the contract. Some examples of those overhead expenses are “maintenance, repair, housing, rent, and other related costs, e.g., property taxes, insurance, and depreciation” (Trueger, 1973). The point of the article is that if overhead charges are still continuing after the termination of the inconvenient contract, the overhead charges that would have been directly charged to that contract if the government had not cancelled should be paid for by the government.

References

Purdy, M. (2009, April 19). Allowable vs. Unallowable Overhead Expenses. Retrieved from Public Contracting Blog Spot: http://publiccontracting.blogspot.com/2009/04/allo…

Trueger, P. M. (1973). Contract Termination and Unabsorbed Overhead. Management Accounting, 54(8), 38. Retrieved from https://search-proquest-com.ezproxy2.apus.edu/docv…

STUDENT 3 (Nick):

For this week’s assignment, we are tasked with identifying an article that address, the elements of cost in overhead. After conducting a search with the university’s library, I found an article about “The Theory of Indirect Costs” by David A Norfleet. As we learned in week 1, overhead, is synonymous with indirect costs and encompasses a vast array of costs into a single pool. The article discusses how the “US federal government sets the rules and defines the standards for all contractors with government contracts through the US Federal Acquisition Regulations” (Norfleet, 2007), but that doesn’t necessarily mean that the rules are followed accordingly based on the FAR standards. Construction contracts are so vastly different that the method utilized varies based on contract and the contractor may or may not utilize the strictest sense of the FAR but rather rely upon the construction industries practices.

This variance has led the author to want to address the construction aspect as an industry, rather than government and non-government, to create the same type of definitions and methods to reduce the conflicts in dealing with indirect costs, their development and their application.

In the article, overhead is broken down into five specific categories that the author feels it should encompass, labor overhead, specialized labor overheads, fringe benefits, field office overhead and home office overhead. The reason being, is that overhead is such a broad term that can pool together several expense pools, but in actuality can be broken down to specifically identify category for transparency.

The breakdown of the overhead costs is an interesting take as it provides the best transparency, which one would think the government would want, however, based on the information presented in the FAR, having a broad overhead category is within the scope of the FAR. By instituting a specialized overhead categories, the government would actually be benefitting as they would be able to more accurately track what those overhead costs are and how they directly relate to the construction project.

References

Norfleet, D. A. (2007). The Theory of Indirect Cost. AACE International Transactions, ES121-ES126.