Cost of Money

Lord_Ashtar · March 23, 2006, 9:06pm

In building one of my reports for the DCAA today it occured to me that I have no idea what Cost of Money is. Can anyone here give me an elementary education on this?

aktep · March 23, 2006, 9:53pm

Google turned up:

http://www.lectlaw.com/def/c187.htm:

COST OF MONEY - An imputed cost determined by applying a cost-of-money rate to facilities capital employed in contract performance, or to an investment in tangible and intangible assets while they are being constructed, fabricated or developed for the contractor’s own use. Although technically not a recovery of interest, cost of money is intended to compensate a contractor for the capital cost of employing certain facilities in the performance of contracts, and therefore has many of the characteristics of a reimbursement for interest. A cost of money provision is allowable only if the contractor’s capital investment is accounted for in accordance with the relevant Cost Accounting Standards and is specifically identified or proposed in the contractor’s cost proposal for a given contract.

Which I read as a way of paying a contractor for interest he could have earned on certain capital if he wasn’t forced to use it as part of the contract.

nivlac · March 23, 2006, 10:38pm

More precisely, it’s called the weighted average cost of capital (WACC). Think of it as a firm’s overall required rate of return, and is used to decide if projects (which will cost money) can be economically justified.

Lord_Ashtar · March 24, 2006, 4:56pm

I found the same article when I was Googling it, but your explanation ties it all together. Thanks.