To work for government organizations, firms in architecture, engineering, railroads, and utilities must have independent overhead rates audited. This rate is calculated by subtracting the total permissible indirect costs from the direct labor; however, getting to this point and achieving the best outcome takes some work. In such cases, you should seek the help of a qualified Southwest Florida accountant.
Although it could appear that you are making extra efforts to appease a regulatory authority, this is only partially accurate. Your ability to be completely reimbursed for your eligible charges and make wise selections on future contracts are essential to your success and capacity to support yourself if you work in this field. These are only a few critical factors that make it crucial to comprehend and reduce your overhead rate.
Step 1: Develop a Love for GAAP (Generally Accepted Accounting Standards)
For Federal, State, and local government organizations, the accrual basis of accounting and some disclosures must follow GAAP to calculate and disclose overhead rates in full.
Step 2: Deal with Transaction Timing and Ratio Oddity
Your ability to adjust your transaction timing to your overhead rate will be significantly impacted. Why? Working with any state transportation department in the US will teach you that the billings to the state for the following year are produced using the overhead rate for the current year.
Having this knowledge gives you some control back. You can decide when you make purchases and pay for specific expenses as a business owner. Additionally, you determine when to assign your overhead team assignments, research projects, proposal projects, marketing initiatives, and other similar tasks.
Step 3: Take into account the effects of the after-overhead rate
Like how you handle income taxes, you should consider how your firm will be affected by after-overhead rate changes as you refine your optimization. Since you are merely receiving reimbursement for your overhead and are not expected to generate a profit from it, “maximizing” your overhead may not make sense. The objective should be to optimize it, including all permissible overhead and excluding any components that shouldn’t be.
The amount provided in contracts will either be inflated or understated depending on whether your overhead rate increases or decreases from the previous year’s results. Management should estimate the FAR overhead rate by comprehending how it connects to the total firm overhead rate, even if your company cannot segregate all disallowances throughout the year.