Indirect Cost Rates Guide 2025: Understanding Overhead and G&A for Government Contractors
Learn how indirect cost rates work for government contractors. Understand overhead, G&A, fringe rates, and how to establish compliant indirect rate structures.
Quick Answer: What Are Indirect Cost Rates?
Indirect cost rates are percentages applied to direct costs to recover expenses that cannot be charged directly to specific contracts. The three main rates are Fringe, Overhead, and G&A. These rates are critical for cost-type contracts and must comply with FAR Part 31 cost principles.
What Are Indirect Costs?
Indirect costs are expenses that benefit multiple contracts or the business as a whole, rather than a specific contract. They are recovered through rates applied to direct costs.
Direct vs. Indirect Costs
Direct Costs
- • Labor hours on specific contract
- • Materials for specific project
- • Travel for specific contract
- • Subcontractor costs
Indirect Costs
- • Employee benefits (fringe)
- • Rent and utilities
- • Administrative salaries
- • Corporate insurance
Types of Indirect Rates
Fringe Rate
Employee benefits applied to direct labor:
- →Health insurance
- →Retirement contributions (401k match)
- →Payroll taxes (employer portion)
- →PTO and holiday pay
Typical range: 25-45%
Overhead Rate
Indirect costs supporting direct work:
- →Indirect labor (supervisors, support staff)
- →Facilities costs (rent, utilities)
- →Equipment and supplies
- →Training and professional development
Typical range: 50-150%
G&A (General and Administrative) Rate
Corporate-level expenses:
- →Executive salaries
- →Accounting and legal
- →Corporate insurance
- →Business development
Typical range: 8-25%
Calculating Indirect Rates
Basic Formula
Indirect Rate = (Indirect Cost Pool / Allocation Base) x 100
Common Allocation Bases
| Rate Type | Common Base |
|---|---|
| Fringe | Direct labor dollars |
| Overhead | Direct labor dollars (with or without fringe) |
| G&A | Total cost input (all costs before G&A) |
Example Calculation
Company with annual costs:
- • Direct labor: $500,000
- • Fringe costs: $150,000
- • Overhead costs: $400,000
Fringe Rate = $150,000 / $500,000 = 30%
Overhead Rate = $400,000 / $500,000 = 80%
Establishing Your Rates
Steps to Establish Rates
Set Up Cost Accounting System
Track direct and indirect costs separately with proper allocation
Develop Cost Pools
Group similar indirect costs into pools (fringe, overhead, G&A)
Select Allocation Bases
Choose appropriate bases that reflect cost causation
Calculate Provisional Rates
Use budgeted costs to establish billing rates
Provisional vs. Final Rates
Provisional (billing) rates are used during contract performance. Final rates are determined after fiscal year end based on actual costs. Cost-type contracts are settled to final rates, which may result in adjustments up or down.
DCAA Compliance
FAR 31 Cost Principles
Costs must be:
- ✓Allowable: Not specifically prohibited by FAR or contract
- ✓Allocable: Benefits the contract being charged
- ✓Reasonable: Prudent businessperson would incur
Unallowable Costs (Examples)
Common Mistakes
Mixing Allowable and Unallowable
Failure to segregate unallowable costs leads to billing them to the government. This is a compliance violation and can result in penalties.
Inconsistent Treatment
Costs must be treated consistently—if rent is overhead one year, it should not become G&A the next year without proper accounting change notice.
Late Incurred Cost Submissions
The incurred cost submission (ICS) is due 6 months after fiscal year end. Late submissions delay rate settlement and can affect future contracts.
Frequently Asked Questions
Do I need indirect rates for fixed-price contracts?
You still need to understand your costs to price profitably, but you do not bill indirect rates separately. For cost-type and T&M contracts, properly developed rates are required.
How often are rates audited?
DCAA audits depend on contract volume and risk. Larger contractors face more scrutiny. All cost-type contracts are subject to final rate determination, which may involve audit.
Can I change my rate structure?
Yes, but you must notify the government of accounting changes. Significant changes require a Cost Accounting Standards (CAS) disclosure statement update if applicable.
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