Md. Code Regs. 21.05.03.04

Current through Register Vol. 51, No. 22, November 1, 2024

Section 21.05.03.04 - Negotiated Overhead Rates

A. Scope. This regulation sets forth the policies and procedures governing the establishment of overhead rates by negotiation (including determination or settlement) for use in cost-reimbursement type contracts.

B. Definitions. For purposes of this regulation, the following terms shall have the meanings indicated:

(1) "Billing overhead rate" means a tentative percentage or dollar factor which is acceptable to the procurement officer and is established for interim reimbursement purposes.

(2) "Negotiated final overhead rate" means a percentage or dollar factor which expresses the ratio or ratios mutually agreed upon by the procurement officer and the contractor after the close of the contractor's fiscal year, unless the parties mutually agree to a different period, of allowable indirect expense incurred for direct labor, manufacturing cost, cost of sales, or other appropriate allocation or distribution base.

(3) "Overhead or indirect costs" means the general group of indirect expenses such as those generated in manufacturing departments, engineering departments, tooling departments, general and administrative departments, and, if applicable, indirect costs accumulated by cost centers within these general groups.

(4) "Provisional overhead rate" means a tentative percentage or dollar factor mutually agreed upon by the procurement officer and the contractor that is negotiated for interim reimbursement pending final settlement of the actual allowable overhead.

C. General. The negotiation, determination, or settlement of the reimbursable amount of overhead under cost-reimbursement type contracts is accomplished after the fact on an individual contract basis and is based upon an audit of actual costs incurred during the period involved. However, if a contractor performs work in the same time period under several contracts for one or more procurement activities, it may be desirable and appropriate, when mutually agreed to by the agencies and the contractor, to negotiate uniform overhead rates for application to all the contracts. Nothing contained in this section shall prevent any procurement agency from establishing a maximum overhead rate.

D. Applicability.

(1) A billing overhead rate or negotiated (provisional and final) overhead rate may be used in every cost-reimbursement type contract when its use:

(a) Is appropriate; and

(b) Will accomplish one or more of the purposes enumerated in this section.

(2) A billing or provisional overhead rate may be used for interim reimbursement only after the procurement officer is satisfied either on the basis of a recent review, as a result of previous audits or past experience with the particular contractor, or similar reliable data or experience obtained from other State or federal sources and included in the contract file, that:

(a) The contractor's accounting system (including items treated as indirect costs and the method of distributing them) conforms to generally accepted accounting principles; and

(b) The contractor's financial management policies and procedures, including contract financial controls, are adequate for the timely reporting of potential cost overruns and underruns to the contractor's management and to the State.

(3) If consistent with §D(2), above, a billing or provisional overhead rate or rates may be established, taking into consideration the prior year's experience, adjusted to eliminate nonrecurring costs and to reflect any new or changed conditions which may be applicable to the future. The rate or rates shall be applied to an appropriate base or bases for computation of the interim payments. The elements of indirect cost and the base or bases used in computing interim payments may not be construed as indicating the elements of expense to be distributed or the base or bases of distribution to be employed in the determination or settlement of actual allowable overhead. When the negotiated final overhead rate is determined or settled, any interim payments shall be adjusted accordingly.

E. Procedure.

(1) The procedure for the establishment of overhead rates generally consists of a review of the contractor's overhead rate proposal and the related advisory audit report, conduct of a negotiation conference, preparation of a negotiation report or summary, and execution of contract amendments or supplemental agreements.

(2) The determination of the necessity and extent of an advisory audit report, and the extent of the use of the report, is solely the responsibility of the procurement officer.

(3) The procurement officer shall arrange for appropriate legal, pricing, technical, or other specialist personnel to assist him in the conducting the negotiation conference.

(4) After the completion of the negotiation conference, the procurement officer shall prepare a report or summary of the conference for the contract file.

F. Limitation on Overhead Cost.

(1) Ceilings on overhead rates, beyond which the contractor shall absorb costs, may be desirable in cases of cost-sharing, new companies, recent rapid changes in rates, enhancing contractor's competitive position, or other benefits to the State.

(2) If overhead rates resulting from an audit are less than the negotiated ceiling rates, reimbursement shall be made at the lower rates.

Md. Code Regs. 21.05.03.04