To follow up on our discussion yesterday about the markups, overhead, and G&A.
In 2017, we had 13.422M in subcontractor revenue we billed as the prime against 12.254M in direct costs for a gross profit of 1.167M or 8.7%.
In 2017 G&A expenses made up 10.97% against the direct costs and associated fringe benefits (allocation method referred to as Total Cost Input (TCI)).
When the G&A costs are allocated against the subcontractor costs the net profit disappears on the subcontracts. The 1.167M drops to a loss of -177k, the 8.7% gross profit is reduced to a loss of -1.32% on the net profit.
The natural question that arises in cost allocation is what happens if we do not allocate the G&A to the subcontractors. This is a common demand from program managers and government contracting officers.
G&A simply cannot disappear, it has to has to go somewhere. The next common method of allocation most contractors often think of is to burden Direct Labor and its associated fringe with the G&A.
While in 2017, using the approved TCI method above that resulted in a financial loss on our use of subcontractors, the same TCI method resulted in a profit on direct labor. We had a 24.69% net income on Direct Labor and associated fringe. There was 4.638M in direct labor revenue against 3.148M in direct labor costs to include fringe for a gross profit of 1.491M. When the G&A is allocated utilizing the TCI method the net profit is 1.145M or 24.69% profit.
At first glance you may wonder why there is a difference in profitability. The difference occurs due to differences in revenue (billing) not costs. We have overall higher billing on our labor costs as compared to our minimal and unprofitable markup on subcontractor costs.
If you shift the G&A from subcontractors to direct labor you get back the 1.167M in profits on the subcontractors but the profit on direct labor vanishes and moves to the negative, a loss of -7.85% is created for negative -364k from the positive 1.145M.
Again, the G&A costs must go somewhere, and the government is perfectly willing to negotiate us into bankruptcy.
Despite the objections from the programs and contract people, Total Cost Input is the regulatory defined de facto method of cost allocation. Changing allocation method does not eliminate costs, it only moves them somewhere else. Again, the costs have to go somewhere.