By: Margaret M. Cassidy & Andrew Swick
The first stage of the FY2027 Appropriations process has essentially wrapped, with congressional member’s offices now processing request submissions from constituents and stakeholders before moving them to subcommittee staff for bill drafting and markup.
Coming out of this, it is helpful to reflect on some key takeaways and lessons we observed in the process.
BOTTOM LINE
When requesting funding through appropriations, the amount requested should reflect the total cost of executing the project, which includes direct costs, indirect costs, and profit. Working with a government relations professional to develop a compelling justification for the project, along with a supporting funding amount, gives the best chance of receiving requested funding.
Overview – Seeking Funding
At the start of each year’s appropriations process, government relations professionals work with stakeholders to submit appropriations requests such as for research and development funding which are essentially requests that Congress draft legislation to fund specific projects.
Effective government relations professionals develop formal appropriations request submissions that include supporting documentation and white papers to present to a members’ staff. These submissions include justification for the funding, the amount of funding requested along with a program title, why the agency should fund the appropriation, and other details about the budget activity and program.
Congress appropriates lump sums, expressed in specific line items in a budget and regulations require that funded budget items account for the full cost of the program, which is generally the contractor’s total cost for performance, including profit.
Understating a funding request by failing to include indirect costs or profit may result in a funding shortfall. The shortfall may imperil continued performance of the program because funds are not available to continue to pay for performance.
What To Include in a Funding Request
Given appropriations laws, DoD regulations and FAR/DFAR funding requests should include amounts for:
01. Direct Costs: Costs that will be incurred specifically for performing the contract. That is the cost, with reasonable accuracy, can be traced to the work on the contract that will be performed such as:
- Direct labor – the employees working directly on the contract
- Materials needed to perform the contract
- Subcontractor costs
- Travel for the contract
02. Indirect Costs: Costs that are not incurred directly as a result of contract performance and instead are costs incurred to operate the business. Indirect costs are a contractor’s overhead or general and administrative costs that are incurred regardless of contract performance. Generally, these costs are applied to the cost of performance by developing an indirect rate. The indirect rate is built up by:
- Identifying all indirect costs
- Applying those costs to the direct cost base as a percentage of a direct cost base
A government contract accounting firm should support this calculation unless internal accounting professionals have knowledge and experience with government accounting requirements. This calculation generally need not be done before submitting an appropriations request, and the calculation can be a good faith effort by an internal accounting/finance team. However, it should be done before a contract is awarded.
Generally, indirect cost rates for a business are in the range of 25%-45% of a business’ direct costs to perform a contract, so be sure to get these costs included.
03. Profit: Profit Is the amount of funding requested over and above the total of the direct and indirect costs. Generally, profit is the financial return that a contractor should receive based on its investments in performing a contract considering the risks the contractor faces in performance. In determining profit, contractors have a lot of flexibility, for example more risk should equate to more profit. However, if ultimately awarded a cost reimbursement contract or a contract type other than firm fixed fee, generally, a contractor may have to negotiate its “fee”, that is profit with the government.
FAR/DFARS
FAR/DFAR do not have any legal requirement or directive on what must be included in a funding request. However, these regulations do define how a federal government contractor must develop its costs and profit when selling to the federal government. The applicable FAR/DFARS financial, accounting and cost requirements will be driven by the type of contract a business is awarded such as firm fixed price or cost reimbursement.
High value cost reimbursement-type contracts generally require compliance with the Cost Accounting Standards (CAS) in addition to FAR/DFARS accounting mandates. CAS requires granular adherence to rigorous accounting requirements that are costly to implement and burdensome to maintain. Those new to federal government contracting may avoid these requirements because they may be considered a non-traditional defense contractor. (Here is our definition of a non-traditional defense contractor.)
Firm fixed price contracts still require that a contractor or subcontractor exclude certain costs, called unallowable costs, but do not mandate accounting and financial requirements with the granularity that CAS requires.
DoD Appropriation Laws and Regulations
DoD only gets to make purchases only when Congress has appropriated funds for it to do so as required by the statute that governs how the armed services are operated and Office of Management and Budget requirements. Appropriations are laws that Congress passes and that DoD then must follow regardless of what DoD is purchasing whether its research, development, testing or evaluation work; software, weapons systems, or munitions, for example.
For research, development, testing and evaluation (RDT&E), DoD has a Financial Management Regulation that defines what DoD must include in a funding request for an RDT&E DoD budget justification. (DoD Financial Management Regulation 7000.14-R, Volume 2B, Chapter 5). Although not applicable to private parties going to Congress for funding, it is prudent to be aware of these requirements and line up funding requests to these requirements to better a chance of success.
This regulation makes clear that funding requests must include direct costs, indirect costs and profit. The regulation explicitly lists overhead as a required cost category along with other cost categories such as engineering costs, program management costs, labor costs and travel. Additionally, these DoD regulations have a requirement for “full funding” requests which means that when DoD submits its funding requests to Congress for a program it must include the amount for the entire program.
So, when building up a request for RDT&E funding, include all costs and profit should be considered and included.
This regulation also directs that DoD submit justifications for the project and for the budget.
Working with an experienced government relations professional will assure that funding requests are developed with the type of justifications for the project that give the project the best chance of success.
