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).
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