STUDENT1 (Perez):

Understanding the difference between direct and indirect cost is imperative. The benefits to understanding the differences leads to amore proficient way of running a business. Investors look for proficiency when looking to invest in a company and that is the cue to ensure you know what you are doing. Now, making calculations on direct and indirect cost can be tricky if the business does not classify the cost accurately. According to Ethan Speilman (2018) when expenses are classified into their category which is also known overhead rate which basically helps the company determine how much to divide funds among programs and departments. So from the get go if the expense classification is inaccurate funding may be allocated incorrectly and hinder either operations. Direct cost can be easily traced but if not accurate documented can make financial errors while miscalculating allocated cost as well could be detrimental to your business. Imagine not calculating the cost for certain pieces of equipment or utilities that are needed to run the business and when tax time comes you can get penalized or lose financial benefits due inaccurate classification. In some cases, you can even owe money to the IRS or get into a bind due to fraud even though they may not be the case. The bottom line is a business needs to classify their direct and indirect cost accurately to minimize financial loss and avoid IRS penalties.

Miscalculating cost poses risks that could affect decision making problems that will most likely affect your business and stakeholders. Imagine if the numbers were off for profit which profit shows how well a business is doing and if the numbers were actually higher than reported but due to miscalculations the value of the company is not accurate. The errors will sacrifice a company’s credibility. I mean calculation need to eb accurate because if they are off, it becomes a major risk that can actually lead into recession. Risk can be in form of trust, stakeholders, investors, credibility, and even the business alone are at risks if the money is not managed right. According to Thomas Metcalf (2020) miscalculations can range from minor risks to detrimental problems and business owners need to ensure accounting principles are manage accurately to avoid risks that can cost.

Ricardo

Metcalf, T. (2020, May 23). What Are the Dangers of Inaccurate Financial Reporting? Retrieved from SmallBusiness.Chron: https://smallbusiness.chron.com/dangers-inaccurate…

Spielman, E. (2018, April 20). Direct Costs vs. Indirect Costs: Understanding Each. Retrieved from Business News Daily: https://www.businessnewsdaily.com/5498-direct-cost…

STUDENT 2 (Derek):

The first question is, what are some of the current issues or problems with the process of making such calculations?

The price or costs associated with many defense contracts are based on the contractor’s cost rather than the cost determined in a competitive marketplace. This is because the contractors that comprise the defense industrial base collude to establish an oligopoly market structure. This situation makes determining a fair and reasonable price challenging when a commercial market does not exist for a specific item or when market price data is not readily available. In some cases, some defense contractors have an explicit monopoly, such as Huntington Ingalls Industries, which is the only defense contractor that exists in the production of US aircraft carriers. The commercial marketplace is presumed to be a competitive environment and should drive a fair and reasonable price, which is why the FAR and CAS are so specific and restrictive as to which types of costs are allocable and allowable.

The second question is how these calculations are used with regard to risk?

The continuum of risk in contracting is determined by the requiring activity and market or technology sector they decide to engage with. Well developed requirements with performance objectives that are measurable and attainable along with requirements that are well understood by the market place tend to be low in risk for the government. The risk associated with the contractor in these situations has more to di with their efficiency and effectiveness in controlling their costs. On the other end of the spectrum, when requirements are for developmental or even experimental technologies, the ability of the government to establish attainable or measurable goals becomes more ambiguous. This shifts the risk into the court of the government. FAR subpart 39.102 Management of risk involved in acquiring IT technology best explains the risk associated in determining costs for higher risk acquisitions. “Types of risk may include schedule risk, risk of technical obsolescence, cost risk, risk implicit in a particular contract type, technical feasibility, dependencies between a new project and other projects or systems, the number of simultaneous high-risk projects to be monitored, funding availability, and program management risk” (FAR, 2020).

Cash, J. D. (2001, October). Indirect-Cost Management Guide: Navigating the Sea of Overhead. Retrieved May 26, 2020, from https://apps.dtic.mil/docs/citations/ADA606321

OSD AT&L, D. (2018, January). Department of Defense Guidebook for

STUDENT 3 (Jena):

Good Afternoon Class,

The Federal Acquisition Regulations (FAR) states: “ no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included is any indirect-cost pool to be allocated to that or any other final cost objective.” Current issues or problems associated with making these calculation include double counting or double charging. According to Oyer (2012), “all costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives” (pg. 70). Issues can arise when costs are not allocated correctly. Direct costs of the contract shall be charged directly to the contract.” Direct costs are cost that linked directly to a project whether that be direct material, direct labor or other direct costs. Indirect costs are those which are not as easily identifiable and cannot be directly linked to the project. Costs that are very similar in nature need to remain constant and charge either to direct or indirect costs. The concept of indirect and direct costs aid in safeguarding costs allocations.

Government contractors need to ensure they maintain an adequate estimating system to mitigate the risks of providing an inadequate cost estimates. Risks to the government for inadequate cost estimation could result in the Government paying unnecessary high prices for contract performance. FAR 15.404-1(2) (g) states, “Unbalanced pricing exists when, despite an acceptable total evaluated price, the price of one or more line items is significantly over or understated as indicated by the application of cost or price analysis techniques.” As contractors one of your main purposes to ensure you’re getting the American tax payer’s the best “bang for their buck.”