Indirect Rate Structures: Fringe, Overhead, G&A

Direct vs. Indirect Costs

Direct costs tie to a specific contract - an engineer dedicated 100% to Project Alpha. Indirect costs benefit multiple contracts and must be pooled and allocated using a fair, consistent base.

Formula: Indirect Rate = Indirect Cost Pool ÷ Allocation Base.

The Three-Tier Structure

Fringe: employer payroll taxes, health insurance, 401(k), PTO. Base is total labor dollars. Typical range: 25-45%.

Overhead: program managers across multiple contracts, engineering software, facility costs. Base is direct labor plus applied fringe. Many firms run separate Client-Site and Company-Site rates so government-facility work isn't burdened with office overhead.

G&A: CEO, accounting, HR, legal, B&P. Base is typically Total Cost Input. Typical range: 8-20%.

Unallowable Costs (FAR Part 31)

Alcohol, entertainment, lobbying, interest, bad debts, certain advertising - strictly excluded from the numerator. Including a luxury client dinner in G&A overcharges the government on every contract: that's a False Claims Act problem.

Unallowable labor must stay in the allocation base so it absorbs its fair share of indirect burden.

Provisional vs. Actual Rates

You bill on provisional rates submitted at the start of the year. At year-end you calculate actuals in the Incurred Cost Submission (ICS) and true up with the government - you either get paid more or refund the difference.

Monitor actuals monthly against provisionals. Large variances mean rate adjustments or spending changes mid-year, not a year-end surprise.

Uncompensated Overtime

All hours worked by salaried employees must be recorded, whether compensated or not. UCOT dilutes effective hourly rates and artificially deflates indirect rates - DCAA scrutinizes patterns that suggest a contractor is using UCOT to win unsustainable bids.

Strategic Management

Too high and you lose bids; too low and you bleed cash. Build a client-site overhead rate for government-facility work, keep G&A lean, and use industry benchmarks (PSC, NDIA surveys) to stress-test rates before proposal submission.

Want help putting this into practice?

Need help structuring or defending your indirect rates? Desra Group operates the financial back office for growing defense contractors.