Factors Used In Calculating Facilities Capital Cost Of Money

Accurately calculate your Facilities Capital Cost of Money (FCOM) for government contracts. This tool helps contractors and financial professionals determine the imputed cost of using facilities capital, a critical component in cost-reimbursement contracts under the Federal Acquisition Regulation (FAR).

Calculate Your Facilities Capital Cost of Money

What is Facilities Capital Cost of Money?

The Facilities Capital Cost of Money (FCOM) is an imputed cost recognized by the U.S. government in cost-reimbursement contracts. Unlike actual interest expenses, FCOM is a theoretical cost that acknowledges the capital tied up in a contractor’s facilities and equipment used for government work. It’s designed to compensate contractors for the use of their own capital, which could otherwise be invested elsewhere, thereby encouraging investment in efficient facilities.

This concept is primarily governed by the Federal Acquisition Regulation (FAR) Part 31, specifically FAR 31.205-10, which outlines its allowability and calculation. It’s a crucial element for government contractors as it directly impacts the total allowable costs and, consequently, the reimbursement received for performing government contracts.

Who Should Use This Facilities Capital Cost of Money Calculator?

• Government Contractors: To accurately bid on cost-reimbursement contracts and ensure proper recovery of capital costs.
• Financial Analysts: For evaluating the profitability and cost structure of government contracting divisions.
• Auditors: To verify the compliance of FCOM calculations with FAR requirements.
• Contracting Officers: To understand and assess contractor proposals and cost submissions.

Common Misconceptions About Facilities Capital Cost of Money

Despite its importance, FCOM is often misunderstood:

• It is NOT actual interest expense: FCOM is an imputed cost, meaning it’s a theoretical charge for the use of capital, not a payment to a lender. Actual interest on borrowed money is generally unallowable under FAR.
• It is NOT the Weighted Average Cost of Capital (WACC): While both relate to capital costs, FCOM uses a specific government-prescribed rate (typically a Treasury rate) applied to facilities capital, whereas WACC uses a company’s overall cost of debt and equity.
• It does NOT require a cash outlay: Since it’s an imputed cost, FCOM does not involve a direct cash payment by the contractor. It’s a non-cash expense for accounting purposes that increases the total allowable cost.

Facilities Capital Cost of Money Formula and Mathematical Explanation

The calculation of Facilities Capital Cost of Money is straightforward once the key components are identified. The core idea is to apply a government-specified cost of money rate to the allowable portion of a contractor’s facilities capital employed in government work.

Step-by-Step Derivation

1. Determine Total Facilities Capital Employed (FCE): This is the sum of the average net book value of tangible and intangible capital assets used in performing government contracts.
2. Calculate Allowable Facilities Capital Employed (AFCE): Not all capital assets may be allowable for FCOM calculation. This step involves applying an allowability percentage to the Total Facilities Capital Employed.
3. Apply the Cost of Money Rate: The government publishes a specific rate (often based on U.S. Treasury rates) that must be used. This rate is applied to the Allowable Facilities Capital Employed to arrive at the Facilities Capital Cost of Money.

The Formula

The primary formula for Facilities Capital Cost of Money is:

FCOM = Allowable Facilities Capital Employed × (Cost of Money Rate / 100)

Where:

Allowable Facilities Capital Employed = (Average Net Book Value of Tangible Capital Assets + Average Net Book Value of Intangible Capital Assets) × (Allowable Percentage / 100)

Variable Explanations

Variable	Meaning	Unit	Typical Range
FCOM	Facilities Capital Cost of Money	Dollars ($)	Varies widely (thousands to millions)
Tangible Capital Assets (TCA)	Average net book value of physical assets (e.g., land, buildings, machinery)	Dollars ($)	$100,000 – $100,000,000+
Intangible Capital Assets (ICA)	Average net book value of non-physical assets (e.g., capitalized software, patents)	Dollars ($)	$0 – $50,000,000+
Cost of Money Rate	Government-prescribed rate for capital usage (e.g., Treasury rate)	Percentage (%)	1.0% – 5.0%
Allowable Percentage	Portion of capital assets deemed allowable for FCOM calculation by FAR	Percentage (%)	0% – 100%

Practical Examples of Facilities Capital Cost of Money

Understanding Facilities Capital Cost of Money through practical examples helps illustrate its application in real-world government contracting scenarios.

Example 1: Small Contractor with Standard Assets

A small defense contractor, “AeroTech Solutions,” has the following average net book values for assets dedicated to government contracts:

• Average Net Book Value of Tangible Capital Assets: $2,500,000
• Average Net Book Value of Intangible Capital Assets: $150,000
• Current Cost of Money Rate (published by Treasury): 2.15%
• Allowable Facilities Capital Employed Percentage: 100% (all assets are allowable)

Calculation:

1. Total Facilities Capital Employed = $2,500,000 + $150,000 = $2,650,000
2. Allowable Facilities Capital Employed = $2,650,000 × (100 / 100) = $2,650,000
3. Facilities Capital Cost of Money = $2,650,000 × (2.15 / 100) = $56,975.00

Interpretation: AeroTech Solutions can include $56,975.00 as an allowable imputed cost in their government contract proposals and cost submissions for the period, compensating them for the capital tied up in their facilities.

Example 2: Larger Contractor with Partially Allowable Assets

A larger aerospace firm, “Global Dynamics,” has significant facilities, but some assets are used for commercial work or are deemed unallowable by FAR. Their figures are:

• Average Net Book Value of Tangible Capital Assets: $50,000,000
• Average Net Book Value of Intangible Capital Assets: $5,000,000
• Current Cost of Money Rate: 2.80%
• Allowable Facilities Capital Employed Percentage: 85% (due to mixed-use assets and FAR restrictions)

Calculation:

1. Total Facilities Capital Employed = $50,000,000 + $5,000,000 = $55,000,000
2. Allowable Facilities Capital Employed = $55,000,000 × (85 / 100) = $46,750,000
3. Facilities Capital Cost of Money = $46,750,000 × (2.80 / 100) = $1,309,000.00

Interpretation: Global Dynamics can claim $1,309,000.00 as Facilities Capital Cost of Money. The 85% allowability factor significantly impacts the final FCOM, highlighting the importance of proper asset allocation and FAR compliance.

How to Use This Facilities Capital Cost of Money Calculator

Our Facilities Capital Cost of Money calculator is designed for ease of use, providing quick and accurate results. Follow these steps to determine your FCOM:

1. Enter Average Net Book Value of Tangible Capital Assets: Input the dollar amount representing the average net book value of your physical assets (e.g., buildings, machinery, equipment) used for government contracts. Ensure this is the net book value (cost less accumulated depreciation).
2. Enter Average Net Book Value of Intangible Capital Assets: Input the dollar amount for your intangible assets (e.g., capitalized software, patents) that are allowable and used for government contracts.
3. Enter Cost of Money Rate (%): Input the current government-prescribed cost of money rate. This is typically a percentage (e.g., 2.5 for 2.5%). Refer to official government sources (like OMB or DCAA guidance) for the most up-to-date rate.
4. Enter Allowable Facilities Capital Employed Percentage (%): Input the percentage of your total facilities capital employed that is considered allowable under FAR. If all assets are fully allowable, enter 100. If a portion is unallowable (e.g., used for commercial work, or specifically excluded by FAR), enter the appropriate lower percentage.
5. Click “Calculate Facilities Capital Cost of Money”: The calculator will instantly display your results.
6. Review Results:
   • Facilities Capital Cost of Money: This is your primary result, highlighted in green, showing the total imputed cost in dollars.
   • Total Facilities Capital Employed: An intermediate value showing the sum of your tangible and intangible assets.
   • Allowable Facilities Capital Employed: An intermediate value showing the portion of your total capital that is allowable after applying the percentage.
7. Use the “Reset” Button: To clear all inputs and start over with default values.
8. Use the “Copy Results” Button: To easily copy all calculated values and key assumptions to your clipboard for reporting or documentation.

Decision-Making Guidance

The calculated Facilities Capital Cost of Money is a critical figure for:

• Proposal Preparation: Incorporate this cost into your indirect cost pools or directly into contract proposals.
• Cost Accounting Standards (CAS) Compliance: Ensure your accounting practices align with CAS and FAR requirements for FCOM.
• Strategic Investment Decisions: Understanding FCOM can influence decisions on capital expenditures, as it directly impacts the recovery of capital costs on government contracts.

Key Factors That Affect Facilities Capital Cost of Money Results

Several critical factors influence the calculation and allowability of Facilities Capital Cost of Money. Understanding these can help contractors optimize their cost recovery and ensure compliance.

1. Average Net Book Value of Capital Assets: This is the most significant driver. Higher average net book values for both tangible and intangible assets directly lead to a higher Facilities Capital Cost of Money. Proper depreciation methods and asset capitalization policies are crucial here.
2. Cost of Money Rate: The rate prescribed by the government (typically a Treasury rate) fluctuates. Changes in this rate directly impact the FCOM. Contractors must use the rate applicable to the period for which costs are being claimed.
3. Allowability of Assets (FAR Compliance): The Federal Acquisition Regulation (FAR) dictates which assets and how much of their value are allowable for FCOM. Assets not used for government work, or those specifically deemed unallowable (e.g., idle facilities beyond a certain period), will reduce the “Allowable Facilities Capital Employed Percentage” and thus the FCOM.
4. Capitalization Policies: A contractor’s internal policies on what constitutes a capital asset versus an expense, and how depreciation is calculated, directly affect the net book value of assets. These policies must be consistent and compliant with Generally Accepted Accounting Principles (GAAP) and Cost Accounting Standards (CAS).
5. Asset Utilization: How assets are utilized (e.g., solely for government contracts, mixed-use, or idle) impacts their allowability percentage. Assets primarily used for commercial purposes will have a lower or zero allowability for government FCOM.
6. Inflation and Economic Conditions: While not directly in the formula, inflation can indirectly affect FCOM. High inflation might lead to higher replacement costs for assets, potentially increasing future net book values. Economic conditions also influence the Treasury rates, thereby affecting the Cost of Money Rate.
7. Depreciation Methods: The depreciation method chosen (e.g., straight-line, declining balance) impacts the average net book value over an asset’s life. Consistent application of an acceptable depreciation method is vital for accurate FCOM calculation.

Frequently Asked Questions (FAQ) about Facilities Capital Cost of Money

Q: What is the primary purpose of Facilities Capital Cost of Money?

A: The primary purpose of Facilities Capital Cost of Money is to provide an imputed cost to government contractors for the use of their own capital tied up in facilities and equipment dedicated to government contracts. This encourages investment in efficient facilities without requiring actual interest payments.

Q: How is the Cost of Money Rate determined for Facilities Capital Cost of Money?

A: The Cost of Money Rate for Facilities Capital Cost of Money is typically determined by the U.S. Treasury and published by government agencies like the Office of Management and Budget (OMB) or the Defense Contract Audit Agency (DCAA). It’s often based on the 6-month Treasury bill rate.

Q: Is Facilities Capital Cost of Money an actual cash expense?

A: No, Facilities Capital Cost of Money is an imputed, non-cash expense. It represents a theoretical cost of using capital and does not involve an actual cash outlay by the contractor. It is an allowable cost for reimbursement purposes, but not a cash payment.

Q: Why is Facilities Capital Cost of Money important for government contractors?

A: For government contractors, Facilities Capital Cost of Money is important because it allows them to recover a portion of the cost associated with their capital investments. Including FCOM in cost proposals ensures a more complete recovery of costs and can improve profitability on cost-reimbursement contracts.

Q: What types of assets are included in Facilities Capital Employed?

A: Facilities Capital Employed generally includes the average net book value of tangible capital assets (e.g., land, buildings, machinery, equipment) and intangible capital assets (e.g., capitalized software, patents) that are used for government contract performance and are allowable under FAR.

Q: Can Facilities Capital Cost of Money be disallowed?

A: Yes, Facilities Capital Cost of Money can be disallowed if the underlying assets are not used for government contract performance, are deemed unallowable by FAR, or if the calculation does not comply with FAR and Cost Accounting Standards (CAS) requirements.

Q: How does Facilities Capital Cost of Money differ from Weighted Average Cost of Capital (WACC)?

A: Facilities Capital Cost of Money is a specific imputed cost for government contracts using a government-prescribed rate on allowable facilities capital. WACC is a broader financial metric representing a company’s overall average cost of financing, considering both debt and equity, and is used for general investment analysis.

Q: How often does the Cost of Money Rate change?

A: The Cost of Money Rate for Facilities Capital Cost of Money is typically updated periodically, often quarterly or semi-annually, based on changes in the underlying Treasury rates. Contractors must ensure they use the correct rate for the relevant accounting period.