Indirect rate structure: fringe, overhead, and G&A
Indirect rates decide what a contract actually costs you and what you are allowed to bill. Two contractors with identical direct costs can price the same job ten points apart because their pool structures differ.
The standard three-tier structure
| Tier | Pool contains | Base is |
|---|---|---|
| Fringe | Payroll taxes, health and welfare, retirement match, paid leave, workers compensation. | Total labor dollars — direct and indirect. |
| Overhead | Costs of performing contracts that are not traceable to one contract: program management, technical supervision, facilities used for contract work, project tooling. | Direct labor plus fringe on direct labor. |
| G&A | Running the company: executive, accounting, HR, legal, business development, bid and proposal, IR&D, corporate facilities. | Total cost input, or value-added cost input. |
The tiers stack. Fringe burdens labor, overhead burdens labor plus its fringe, and G&A burdens everything below it.
Direct labor 100,000
+ Fringe @ 30% of labor 30,000
-------
Labor + fringe 130,000
+ Overhead @ 35% of labor+fringe 45,500
+ Direct travel / ODC 20,000
+ Subcontracts 50,000
-------
Total cost input 245,500
+ G&A @ 12% of TCI 29,460
-------
Total cost 274,960
+ Fee @ 8% 21,997
-------
Price 296,957
Total cost input vs. value-added
The G&A base is the most consequential structural choice a contractor makes.
- Total cost input puts every direct cost in the base, including subcontracts and materials. It produces a lower G&A rate, and it recovers G&A on pass-through dollars.
- Value-added excludes subcontracts and material from the base. It produces a higher G&A rate applied to a smaller base.
Which one favors you depends on your mix. A company that is largely labor with little subcontracting is close to indifferent. A company with heavy subcontract pass-through recovers materially more G&A on a total cost input base — but prices less competitively on subcontract-heavy bids, because the customer sees G&A stacked on dollars you are only passing along.
If G&A effort genuinely does not scale with subcontract dollars, a total cost input base is harder to defend. Pick the one that matches how the company actually consumes G&A effort, and expect to live with it — changing a base is a change in cost accounting practice.
Building the rates
- Forecast each pool for the fiscal year from the budget, with unallowable costs stripped out of the pool.
- Forecast each base from the contract backlog plus expected new work. Include unallowable direct cost in the base — out of the pool, still in the base.
- Divide. Sanity-check against the prior two years' actual rates.
- Recompute actual rates every month at close and compare to the provisional rates you are billing at.
- Act on variance before it accumulates. A rate three points off in March is a conversation. In December it is a repayment.
When to add pools
More pools mean more precision and more work. Consider splitting when a real difference exists in how cost is consumed:
- Site vs. offsite overhead when work performed at a government facility genuinely consumes less of your facilities cost than work in your office. This is the most common second overhead pool and it usually makes companies more competitive on site-based bids.
- Material handling as a separate rate on material and subcontract dollars, often paired with a value-added G&A base.
- Separate fringe pools for materially different employee populations — full-time versus part-time or contingent staff.
Do not add pools to game a rate. Add them when the underlying cost behavior is genuinely different, and document why.
Frequently asked
What is a normal indirect rate for a government contractor?
There is no benchmark that means much, because the number depends entirely on how the pools and bases are defined. A 40% overhead rate on one structure and a 25% rate on another can describe identical companies. Compare wrap rates — fully burdened cost per direct labor dollar — not individual rates.
Should we use a total cost input or value-added G&A base?
It depends on subcontract and material intensity, and on whether G&A effort genuinely scales with those dollars. Total cost input recovers more G&A on pass-through work; value-added prices better on subcontract-heavy bids. Model both against your actual mix before deciding.
How often should indirect rates be recalculated?
Actual rates should come out of every monthly close. The provisional rates you bill at get set annually and revised during the year when actuals diverge materially.
Can we change our rate structure?
Yes, but a change in pools or bases is a change in cost accounting practice. Make it at a fiscal year boundary, document the reason, and be ready to explain the effect on existing contracts. Under CAS coverage the requirements are more formal.
Related
Provisional billing rates
How provisional rates get set under FAR 42.704, why they need monitoring every month, and how contractors end up owing money back at year end.
Read →Direct vs. indirect costs in a GovCon business
How to decide whether a cost is direct, indirect, or unallowable — and why consistency matters more than the individual call.
Read →The incurred cost submission
Who has to file, the six-month deadline under FAR 52.216-7, the ICE model schedules, and the deficiencies that get submissions returned.
Read →