Two Ways to Estimate Indirect Costs of a Project - dummies

# Two Ways to Estimate Indirect Costs of a Project

Project managers can choose from two approaches when estimating the indirect costs associated with an activity: The first approach defines two different indirect rates; it’s more accurate but requires more detailed record keeping, so it’s also more costly. The second defines a single rate for all indirect costs.

Option 1: Use one rate for overhead costs and another rate for general and administrative costs.

• Your finance department determines the overhead rate by calculating the ratio of all projected overhead costs to all projected direct salaries.

• Your finance department determines the general-and-administrative-cost rate by calculating the ratio of all projected general and administrative costs to the sum of all projected direct salaries, overhead costs, and other direct costs.

• You determine overhead costs of an activity by multiplying its direct salaries by the overhead rate.

• You determine general and administrative costs of an activity by multiplying the sum of its direct salaries, overhead costs, and other direct costs by the general-and-administrative-cost rate.

Option 2: Use one indirect-cost rate for all overhead and general and administrative costs.

• Your finance department determines the combined indirect-cost rate by calculating the ratio of all projected overhead costs to all projected direct salaries.

• You determine an activity’s indirect costs by multiplying its direct salaries by the indirect-cost rate.

Some organizations develop weighted labor rates, which combine hourly salary and associated indirect costs. As an example, suppose your salary is \$30 per hour and your organization’s indirect-cost rate is 50 percent. Your weighted labor rate is \$45 per hour (\$30 + 0.5 × \$30).