Any contract with a federal agency is subject to special accounting rules. These rules are applied to ensure fairness, efficiency and taxpayer confidence. They also encourage competitive bidding on government contracts. In this article, we discuss how to maintain compliance with these rules, focusing specifically on fringe benefits rates.
FAR Guidelines for Accounting Systems
The Federal Acquisition Regulation (FAR) outlines how government contractors should report financial transactions for their contracts. According to the FAR, the main focus in accounting for the related project costs is how they are allocated. The accounting system should be set up to determine the proper category for the costs and whether they are direct (per FAR 31.202, costs that are incurred specific to the contract) or indirect (per FAR 31.203, not directly identifiable but still impacting the final project costs).
Indirect costs are split into pools, which are allocated to the contract. There are three major pools – fringe benefits, overhead and general and administrative costs. The number of indirect cost pools are determined by the contractor – not by the FAR. Fewer pools will make it easier to monitor the rates, but more pools will allow for greater financial accuracy. During any fiscal year, all indirect costs must be fully allocated to all direct costs.
Why It’s Important to Know Your Fringe Benefits Rate
The contract will dictate the applicable rates each labor category is paid (divided into base rate and a fringe benefits rate), so knowing your fringe benefits rate will assist in bidding for the job. If the fringe benefits are not properly analyzed and applied to the contract prior to the start, it’s possible that you won’t see profits on the job. On top of this, you might also run the risk of the costs being considered unallowable, and therefore unrecoverable.
The McNamara-O’Hare Service Contract Act of 1965, now called the Service Contract Labor Standard, outlines the minimum hourly wage and benefits requirements for service contracts (29 CFR Part 4 Section 171). The prevailing wage rate is the combined hourly rate and fringe rate.
Fringe Benefits in Context
Generally, fringe benefits are items that supplement an employee’s salary. They are legally enforceable obligations of the employer that are communicated in writing to the employee and have a definite formula that determines the amount per employee. They are considered allowable per regulations from the IRS and the Employee Retirement Income Security Act of 1974 (ERISA). Typical examples of fringe benefits include health insurance, retirement and holiday or leave pay – essentially, the costs for employing your workforce.
In a government accounting context, these benefits fall into one of three categories: fixed costs, average costs or collectively bargained. It’s important to track your benefits costs routinely in order to know your accurate rate. Keep in mind that your benefits may be assessed and paid monthly or annually, but for government rate purposes, they must be converted to an hourly rate. Recordkeeping must show these payments as segregated benefits rather than part of wages. This applies to exempt employees, too.
In order to be competitive and successful in the government contracts arena, it’s essential to factor your fringe benefits rates into your accounting system. If you have any questions about fringe benefits rates or general questions about your government contracting business, reach out to our government contractor experts today.