Cost Pool

A cost pool is a designated grouping of indirect costs that share a common relationship to the work being performed, accumulated together so they can be allocated to government contracts and projects through a single, consistent allocation base.

What is a Cost Pool?

FAR Part 31 and Cost Accounting Standards require contractors to allocate indirect costs in a way that is logical, consistent, and auditable. A cost pool fulfills this requirement by collecting costs that benefit a similar set of activities, making allocation proportional and defensible.

The most common cost pools in government contracting are: the fringe benefits pool (payroll taxes, health insurance, paid leave), the overhead pool (costs that benefit a particular operational unit such as division management and facilities), and the G&A pool (costs that benefit the entire company such as executive salaries, accounting, and legal). Some contractors add a materials handling pool or a subcontract administration pool depending on their business mix.

Each pool has an allocation base, a measurable driver used to spread pool costs across contracts. Total direct labor dollars is the most common base for overhead pools. Total cost input (all direct costs plus overhead) is common for G&A. The indirect rate structure ties pools and bases together into a coherent billing framework that flows through provisional billing rates and is settled annually at the final billing rate stage.

Why cost pools matter for government contractors

Improperly structured cost pools, mixing overhead costs with G&A, or including unallowable costs within a pool, are among the most common DCAA audit findings. A deficient pool structure can result in disallowed costs, repayments to the government, and adverse accounting system determinations that restrict a contractor's ability to win cost-type work.

Example

An engineering services firm establishes three pools. The fringe pool holds $800K in benefits allocated on $4M in direct labor (20% rate). The overhead pool holds $600K in divisional overhead allocated on $4M in direct labor (15% rate). The G&A pool holds $400K in corporate expenses allocated on $5.4M in total cost input (approximately 7.4%). When billing a DoD cost-plus contract, the contractor applies all three rates to arrive at fully burdened allowable costs.

Frequently Asked Questions

What costs are typically excluded from indirect cost pools?

Unallowable costs under FAR 31.205 must be excluded from all indirect cost pools. These include entertainment, certain advertising, alcohol, fines and penalties, executive compensation above statutory limits, and costs related to legal proceedings in certain circumstances. Including unallowable costs in pools inflates government billings and triggers DCAA findings.

Can a small business use a simplified two-pool structure?

Yes. Many small businesses operate with just a fringe pool and a G&A pool, skipping a separate overhead pool. This approach is acceptable to DCAA as long as the pools are consistently applied and all allocations are defensible. As the contractor grows and diversifies, adding an overhead pool often becomes necessary to allocate costs more precisely.

How does DCAA evaluate whether a cost pool is properly structured?

DCAA reviews whether costs in each pool share a beneficial or causal relationship, whether the allocation base is the most logical driver for distributing those costs, and whether the pool structure is consistently applied year over year. Inconsistency between how costs are estimated in proposals and how they are billed is a major red flag.

What is a base of allocation and how does it differ from a cost pool?

The cost pool is the collection of indirect costs; the base of allocation is the measure used to distribute those pooled costs across contracts. For example, a $500K overhead pool divided by $2.5M in direct labor hours produces a $0.20 per-hour overhead rate. The pool and the base work together to produce the rate.