Wednesday, October 17, 2012

What You Need to Know to Claim Cost of Money - Part 4

We are progressing through a series of blog posts on the subject of cost of money. Today we are going to identify for you the eight building blocks needed to propose and claim cost of money (FCCOM). Many contractors do not avail themselves of this additional source of revenue. Some may think its too complicated. Others, not worth the effort. Still others, unaware of the provision. While it may be a bit complicated, it is, at its essence, no more difficult than many other analytic task performed every day. And, its also possible to "outsource" the process, as we discussed in our first posting in this series. Here then are the eight building block necessary for FCCOM.

1. FCCOM Rate: The FCCOM rate is a treasury rate that is adjusted every six months. The semi-annual base rates are at For future estimates, the FCCOM rate is the most current rate (1.75 percent) however, an exception exists for the costs in the first fiscal year when the blended rate for that year is already known.  For historical purposes (i.e., completing DCAA’s Incurred Cost Electronically {ICE}), the FCCOM rate is (i) the average of the two half year rates for contractors using a calendar year, or (ii) a weighted rate for contractors whose fiscal years are not calendar years. Note, a “major fluctuation” in asset value may require further refinement to ensure fairness. 

2. Net Book Value (NBV): This is the asset’s cost less book depreciation (or amortization). Book (not tax) depreciation should be used.  For most contractors, the average of the NBV at the start and end of the fiscal year is applicable; however, a weighted value is applicable when a “major fluctuation” in asset values occur (i.e., significant asset purchases).  Estimated future costs should use estimated future NBV.  Expensed assets have no NBV and goodwill is not includable.  See FAR 31.205-52 if the NBV includes the purchase method of accounting for a business combination.

3. Type of Asset: The FCCOM computations segregate assets into Land, Building, and Equipment. Note that FCCOM applies to all capital assets even though land is not typically depreciated and intangibles is not clearly listed.  Also note that the Government (i.e., Defense) has varied the profit rates for these asset types in an effort to “encourage” business investments.

4. What Indirect Expense Pool Benefits From the Asset: FCCOM computations segregate assets by indirect rate pools. Typically, depreciation or amortization by pool will provide that information. The value of the land (a non-depreciable asset) will need to be considered separately.

5. Total Applicable Indirect Allocation Bases: The FCCOM rates use the total indirect bases as the divisor. 

6. Proposed Allocation Bases on Government Contracts:  The FCCOM costs charged to the Government contracts is based on the FCCOM rates multiplied by the Government contracts’ indirect bases.This is just like the other Overhead costs.  FCCOM is just separately identified.  Note that the Government (i.e., Defense) often does not pay profit on FCCOM; although the pre-negotiation position of the Government excludes FCCOM from the base in computing profit, the negotiated base may include FCCOM.

7. Type of Ownership of Assets: The FCCOM computations segregate how assets are owned into Recorded, Leased, and Corporate/Group (Corporate). Leased assets are your capital leases and operating leases (i.e., related-party) that cost of ownership is being used on instead of lease rates.  Corporate assets are recorded or leased assets allocated from Corporate.  Recorded assets are the remaining assets on your books.

8. Extent Assets Are Distributed: FCCOM computations segregate distributed from undistributed assets. Distributed assets are those assets allocated using “any reasonable basis” that are solely applicable to a single indirect expense pool (i.e, Overhead).   Undistributed assets are all the rest, which are usually expensed via service centers.  Undistributed assets are either (i) allocated to the applicable indirect expense pool based on how depreciation would have been allocated (the “regular” method), or (ii) included as part of G&A (the “alternative” method; this requires Government agreement that it is immaterial or approximates the “regular” method).

Next: Final Comments

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