Indirect cost rates
I am often asked about indirect costs and how to calculate indirect cost rates that are DCAA compliant or compliant with FAR 31.2. Indirect costs is a highly complex and often heavily debated subject with auditors. It is probably the most contentious subject under accounting for government contracts.
I hope to answer those questions on this page.
For starters, please fine below tables of indirect cost rate calculations for a typical business using the three rate system, Fringe, Overhead and G&A. Keep in mind the number and structure of indirect rates can vary from contractor to contractor depending on specific circumstances. The tables below are not reflective of any contractor or client. They are simplified illustrations to show the concept of compliant indirect rate calculations. Actual indirect rate computations will vary and will include many more accounts and may be a bit more complex. The tables below are illustrations only, the figures are ficticious. The rate calculations are both DCAA and FAR compliant.
Table 1 – Fringe Rate Calculation Example (Illustrative Purposes Only)
| Fringe Pool: | Amount | Allocation |
|---|---|---|
| Payroll Taxes | $20,000 | — |
| Compensated Absences | $15,000 | — |
| Employee Benefits | $25,000 | — |
| Other | — | — |
| Total Fringe Pool | $60,000 | — |
| Allocation Base: | ||
| Direct Labor | $80,000 | $33,103 |
| OH Labor | $15,000 | $6,207 |
| G&A Labor | $30,000 | $12,414 |
| IR&D / B&P Labor | $15,000 | $6,207 |
| Other Labor | $5,000 | $2,069 |
| Total Allocation Base | $145,000 | $60,000 |
| Rate | 41.38% | |
Table 2 – Overhead Rate (Illustrative Purposes Only)
| Overhead Pool | Amount | Allocation |
|---|---|---|
| Overhead Labor | $15,000 | — |
| Rent | $30,000 | — |
| Depreciation | $25,000 | — |
| Supplies | $10,000 | — |
| Other | $5,000 | — |
| Less: Unallowable Costs | ($207) | — |
| Fringe Allocated to OH Labor (Fringe Rate * OH Labor) | $6,207 | — |
| Total Overhead Pool | $91,000 | — |
| Allocation Base: | ||
| Direct Labor | $80,000 | $54,202 |
| B&P / IR&D | $15,000 | $10,163 |
| Fringe Applicable to Direct Labor | $33,103 | $22,429 |
| Fringe Applicable to IR&D / B&P Labor | $6,207 | $4,205 |
| Total Allocation Base | $134,310 | $91,000 |
| Rate | 67.75% | |
Table 3 – General And Administrative (G&A) (Illustrative Purposes Only)
| G&A Pool | Amount | Allocation |
|---|---|---|
| G&A Labor | $30,000 | — |
| Rent | $10,000 | — |
| Professional Services | $25,000 | — |
| Business Development | $15,000 | — |
| Travel | $25,000 | — |
| Other | $5,000 | — |
| Less: Unallowable Costs | ($5,000) | — |
| Fringe Allocated to G&A Labor (Fringe Rate * G&A Labor) | $12,414 | — |
| IR&D / B&P Labor | $15,000 | — |
| Fringe Allocated to IR&D / B&P Labor | $6,207 | — |
| Overhead Allocated to IR&D / B&P Labor | $10,163 | — |
| Total G&A | $148,784 | — |
| Allocation Base: | ||
| Direct Labor | $80,000 | $17,251 |
| Direct Materials | $400,000 | $86,259 |
| ODC | $100,000 | $21,565 |
| Fringe Applicable to Direct Labor | $33,103 | $7,139 |
| OH Applicable to Direct Labor | $54,202 | $11,689 |
| OH Applicable to Fringe | $22,428 | $4,837 |
| Unallowable OH Costs | $207 | $45 |
| Total Allocation Base | $689,940 | $148,784 |
| Rate | 21.56% | |