CERM-FP

Engineer Pamphlet

37-1-4

Department of the Army

U.S. Army Corps of Engineers

Washington, DC 20314-1000

EP 37-1-4

10 April 1992

Financial Administration

COST OF DOING BUSINESS

Distribution Restriction Statement

Approved for public release; distribution is 

unlimited.
DEPARTMENT OF THE ARMY EP 37-1-4

U. S. Army Corps of Engineers

CERM-FP Washington, D.C. 20314-1000

Pamphlet

No. 37-1-4 10 April 1992

Financial Administration

COST OF DOING BUSINESS

1. Purpose. This pamphlet explains the unique manner in which

Corps District and Operating Division Offices are funded and the

basic concept upon which the method is based. This pamphlet also

explains the various types of casts charged to a project and the

manner in which these costs are derived.

2. Applicability. This pamphlet applies to HQUSACE/OCE

elements, major subordinate commands, districts, laboratories,

and field operating activities (FOA) who do or anticipate doing

business with Federal and non-Federal Agencies.

3. Funding of Corps District and Operating Division Offices.

Unlike other elements of the Department of the Army and the

Federal Government at large, Corps Districts and Operating

Division Offices are primarily funded on a project-by-project

basis. With the exception of funds provided by reimbursable

orders and funds to accomplish specific missions such as master

planning, the only funds these offices receive are those

appropriated by Congress for accomplishment of specific projects.

4. Basic Operating Concept. The manner in which Corps District

and Operating Division Offices are funded by Congress dictates

that these offices operate on a cost distribution concept. Under

this concept, general and/or administrative expenses associated

with the day-to-day operation of these offices are equitably

distributed to all direct funded and reimbursable projects

thereby rendering the offices self-sustaining. While this

concept was foreign to the Department of Defense community at

large until recently, it has been widely employed in the private

sector for many years. Project costs accumulated under this

concept are all inclusive and portray the true cost of a given

project.

5. Types of Costs Charged to Direct Funded and Reimbursable

Projects. Project costs fall into two basic categories: direct

costs and distributive costs.

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This pamphlet supersedes EP 37-1 -4, 30 June 1987
EP 37-1-4

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a. Direct Costs. Direct costs are those costs which can be

identified to a specific project at the time they are incurred.

Direct costs benefit a specific project exclusively and include

the cost of contracts, equipment, in-house labor, travel, etc.,

directly related to the accomplishment of the project.

b. Distributive Costs. Distributive costs are those costs

which cannot be identified to a specific project as they are

incurred. Distributive costs include two cost categories

commonly referred to as departmental overhead costs and general

and administrative overhead costs.

(1) Departmental Overhead. Departmental overhead costs are

those costs incurred within the technical divisions (Engineering,

Construction, Operations, etc.) of Corps Districts and Operating

Divisions which either cannot be identified or are not readily

chargeable to a specific project. This distributive cost

category includes, but is not limited to, the labor of section,

branch and division chiefs and their administrative staffs

(secretaries, clerks, typists, etc.) not readily chargeable to a

specific project. It also includes the labor of technical

personnel associated with training, answering Congressional

inquiries, attendance at meetings, conferences and hearings,

staff visits, report preparation, management and manpower

surveys, preparation of state pamphlets, revision of regulations,

etc. As appropriate, administrative expenses (training,

communications, furniture, equipment, supplies, etc.) incurred by

the technical divisions are also included in this category.

(2) General and Administrative Overhead Costs. General and

administrative overhead costs include all administrative and/or

support costs incurred in the day-to-day operation of Corps

Districts and Operating Divisions. This distributive, cost

category includes all labor expended by personnel assigned to

administrative functions (personnel, legal, procurement and

supply, resource management, administrative services, etc.) and

various other administrative and support costs (office rental,

equipment, office supplies, etc.) incurred by administrative

offices. General and administrative overhead costs are

continuously reviewed to ensure that they are fair, reasonable

and necessary to effective operations.

6. Accumulation of Distributive Costs. Departmental overhead

and general and administrative overhead costs are recorded and

accumulated in organizational cost accounts at the time they are 
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incurred. Separate accounts are established and maintained for

each organizational element within the District or Operating

Division. Accumulated costs remain in these accounts until they

are ultimately distributed to the various projects in which the

District or Operating Division is actively involved.

7. Distribution Rates. Departmental overhead and general and

administrative overhead costs accumulated in organizational cost

accounts are distributed to projects through the use of

predetermined rates established by the applicable commander at

the beginning of each fiscal year. The rates are computed by

using standardized formulas and methodologies. The formulas and

methodologies currently in use were implemented Corps-wide after

intense testing and evaluation of numerous alternative methods

and formulas and are considered to be the most accurate and

equitable means of ensuring that indirect costs are distributed

to “customers” in a fair and equitable manner. The rates

established at the beginning of the fiscal year are periodically

reviewed and adjusted to ensure that all incurred costs are

recovered without incurring a significant "profit or loss" for

the fiscal year.

8. Cost Distributions. Once determined, current departmental

and general and administrative overhead rates are programmed into

the applicable Finance and Accounting Data Base. Thereafter,

indirect costs are automatically distributed to a given project

based on the direct labor charged to the project. Hence,

distributive costs charged to each project are directly

proportionate to the amount of effort (direct labor of technical

personnel) involved in accomplishment of a particular project.

While the manner in which the departmental overhead and general

and administrative costs are distributed to projects is

essentially the same, there is one major difference in the actual

distribution of the two categories of distributive costs.

a. Since only those projects being performed, in whole or

in part, within a given technical division benefit from the

indirect costs incurred within that division, departmental

overhead costs are only distributed to those projects in which

the technical division is actively involved. Accordingly,

departmental overhead costs incurred within engineering divisions

are distributed to projects which involve direct labor of

engineering division personnel, departmental overhead costs

incurred within construction divisions are only distributed to

projects which involve direct labor of construction division

personnel, etc.
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b. General and administrative overhead costs on the other

hand benefit all projects in which a District or Operating

Division Office is actively involved and are therefore

distributed to all projects regardless of the particular

technical division(s) actually involved in project execution.

9. Variations in Rates Between Corps Activities. Even though

all overhead rates are computed using standardized formulas and

methodologies, rates vary widely between Corps activities. These

variations are the result of many independent factors over which

a particular District or Operating Division has little control.

Geographic location, composition of the work force, overall

workload, and prevailing economic climate are but a few of the

many factors which impact on the Overhead Rates of a given Corps

District or Operating Division. Obviously, it costs more to

operate an office in a high cost area such as New York City than

it does to operate a similar office in Vicksburg, MS or to

operate an office staffed by senior level employees than it does

to operate an office staffed by junior level employees. Hence,

rate variations between Corps activities are unavoidable.

10. Major Exception - Projects Subject to Uniform Military

Construction Supervision and Administration (S&A) Rates. The

basic business concepts discussed above apply to all services

provided by the Corps except supervision and administration of

military construction projects subject to the uniform rates

procedure. Under this procedure, all direct and distributive

construction supervision and administration costs related to

uniform rate projects on which a given Corps District or

Operating Division is working are collected into consolidated S&A

accounts. Costs are charged from the appropriate consolidated

account to the individual projects at the appropriate Corps-wide

uniform rate based on work placed. At the end of each month, the

“loss or gain” in the accounts, i.e., the difference between

costs incurred and costs applied at the uniform rates, is

transferred to (or from) central accounts maintained by HQUSACE.

The business goal is to operate the central accounts on a “breakeven” basis.

11. True Cost of Doing Business. The Corps of Engineers

approach to cost accounting is to identify and charge costs

directly to the benefiting project whenever practical. Those

costs which cannot be readily identified to a specific project
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are distributed based on direct labor charges. This concept of

cost accounting allows us to determine the true cost of doing

business for ourselves and for others.

FOR THE COMMANDER:

Colonel, Corps or Engineers

Chief of Staff