Sunday, April 19, 2009

Allowable vs. Unallowable Overhead Expenses

Part of the negotiation process with consultants, particularly architects and engineers, is to establish a billable hourly rate (also known as a "fully loaded" or fully burdened" rate) for each employee or classification of employee.

The billable hourly rate consists of the direct salary rate actually paid to the employee, plus a calculated and agreed upon "multiplier" to cover the consultant's allowable overhead expenses and a reasonable percentage for profit.

Not all overhead expenses should be included in the multiplier and the challenge is to determine which ones are appropriate versus which ones are not. The most common standard in use is that from the federal government, as provided in the Federal Acquisition Regulations (FAR). These regulations of allowable versus unallowable overhead expenses may be found in CFR Title 48, Federal Acquisition Regulations System (FARs), Part 31 "Contract Principles and Procedures, Sub-Part 31.2, "Contracts with Commercial Organizations."

Click here to go directly to these FARs and the list and description of allowable vs. unallowable overhead expenses.

The percentage of profit that is appropriate will be dependent partially on the project. Higher risk projects generally warrant a higher profit percentage to be earned by the consultant.

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