How to Prepare a Cost Budget
If you have not started, now is the time to prepare your direct and indirect costs budgets for next year. Budgets are of vital importance to government contractors. First, your budget provides the basis for determining the pricing on cost proposals. This budget will be the document that government auditors and pricing specialists will want to see for justification for the indirect rates bid in your cost proposals. It allows you to determine whether you will make money on the contract. Second, the budget will provide a yardstick to use in assessing your financial performance. Finally, if you are submitting provisional rate requests to DCAA or your cognizant agency; this budget is the basis for that request.
To prepare a cost budget, you will do the following steps.
- Estimate your expected volume of business for the coming year.
- Estimate your direct costs given the volume of business expected.
- Estimate the indirect costs in each indirect cost pool.
- Calculate the indirect rates for the coming year.
- Compare the budgeted indirect rates with historical indirect rates. If there are any substantial variances, analyze and be able to explain them. There could be errors.
- When you are satisfied with your costs and indirect rates, publish this budget as you baseline for costing out cost proposal for the coming year.
Three things to remember when preparing a cost budget:
- Your budget should be in the same format as you chart of accounts.
- Be fairly conservative when estimating your expected volume of business for the coming year. You don’t want you budget indirect rates to be lower than you can perform.
- Periodically compare your actual indirect rates to your budgeted and contracted rates. Make adjustments to your costs where possible to stay within your budgeted rates.
Visit our events page for more on government accounting training.
KDuncan & Company is dedicated to providing knowledge and support for small government contractors about concerns regarding government contracting. For questions on areas such as as cost proposals, accounting systems, DCAA compliance, and incurred cost audits, reach out to KDuncan & Company.
