As a government contractor, you are required to properly segregate and track your costs in accordance with the standards defined in the Federal Acquisition Regulation (FAR). One of the biggest challenges for government contractors is properly allocating indirect costs into the right cost pools.
Indirect costs, which are costs that cannot be directly allocated to a specific contract, can be grouped into one or more cost pools. These cost pools might include fringe benefits, overhead, or general and administrative (G&A) costs.
Some examples of fringe benefit costs include payroll taxes (i.e., Social Security, Medicare, state and federal unemployment taxes), paid leave (i.e., vacation, holiday leave, jury duty, other leave), and other benefits (health and dental insurance, 401(k), etc.).
Deciding whether a cost should be included in the overhead cost pool or the G&A cost pool can be challenging, as the standards give some latitude when it comes to the definitions of each pool. Here are some examples that will help provide clarity when deciding how to allocate different types of costs.
What Costs Should Be Categorized as Overhead Costs?
Overhead costs are attributable to labor but not directly attributable to a contract. For example, the wages of a supervisor, who oversees employees working on many contracts but does not directly contribute to the contracts, would be considered overhead costs. Overhead costs also include costs related to the ultimate completion of a direct contract, such as supplies purchased and used on multiple contracts.
In addition, overhead costs could consist of overhead salaries, applicable fringe benefits on those salaries, insurance, supplies, printing costs, temporary staff, training and education, office rent, local travel, meals, and repair and maintenance. All costs that contribute to the ultimate completion of the contract but cannot be expressly allocated to one particular contract can be classified as overhead costs.
Overhead pools can be further broken down into onsite and offsite overhead pools. The term “onsite” refers to work that is performed directly at a government’s facility. In this instance, the offsite overhead pool might include costs for facilities and/or depreciation of office equipment used for contracts, whereas onsite might not include these costs.
What Should be Included in G&A Costs?
G&A costs are all other costs necessary to run the business, such as business insurance and accounting costs.
G&A pools include independent research and development (IR&D) salaries and applicable fringe benefits, bid and proposal (B&P) labor and applicable fringe benefits, applied overhead, other IR&D and B&P costs, accounting, board expenses, depreciation, dues and subscriptions, office rent, office supplies, meetings, business development activities, state and local taxes, and business insurance.
Overhead and G&A costs can also be shared. Facilities expenses, such as rent and utilities, are prime examples of costs that can be proportionately shared between the two cost pools. These types of costs should be split using a reasonable basis of allocation. For example, a facilities expense could be allocated using square footage of the office. Let’s say that 1,000 square-feet of a 4,000 square-foot office is occupied by accounting personnel and marketing staff, and the other 3,000 square-feet is occupied by project managers and staff that works on contracts. In this example, 25% of the facilities cost would be allocated to G&A costs, and the remaining 75% would be allocated to overhead costs.
Further, shared costs can be allocated using a percentage of total labor hours. In another example, let’s say an owner or partner spends 50% of their time overseeing staff and the other 50% performing administrative duties for the business. This individual’s salary should be split evenly between the overhead and G&A cost pools.
So, Now What?
Determining how to properly segregate costs between the different indirect cost pools can be complex. For more information on the most common mistakes in reporting indirect costs and best practices for how to correct them, check out this article. If you have questions about indirect cost pools or general questions about your government contracting business, reach out to our government contractor experts today.
About our authors
RALLY KAMENOVA
Rally is a Managing Director on the firm's Accounting Services team. She has nearly 20 years of experience serving a variety of industries, such as not-for-profit, small businesses and government contractors. She specializes in providing any and all internal accounting department functions to an array of not-for-profit clients.
Andy Powell
Andy, CPA, is a partner with over 30 years of experience in accounting and audit services. He has extensive experience providing CFO, assurance and management consulting services to government contractors and a wide variety of not-for-profit organizations, including associations and public charities. In addition, Andy has experience with indirect cost rate determination, the DCAA audit process and compliance under the FAR.
