Indirect Rate Structure

An indirect rate structure is the framework a government contractor uses to group overhead and administrative costs into pools and then allocate those costs to contracts and projects using a consistent, auditable methodology under FAR Part 31 and Cost Accounting Standards.

What is an Indirect Rate Structure?

When a contractor performs work on multiple federal contracts, it incurs costs that support all contracts collectively, rent, HR salaries, IT infrastructure, executive compensation. These are indirect costs. Rather than billing each cost directly to a single contract, the contractor groups them into cost pools and allocates a proportional share to each contract using a measurable base.

Common indirect rate pools include fringe benefits (allocated on total labor dollars), overhead (allocated on direct labor dollars for a specific business unit), and G&A (general and administrative, allocated on total cost input or total cost of sales). A contractor's rate structure may have two to six pools depending on its size and the diversity of its business.

Each rate is expressed as a percentage: if overhead costs are $1M and the direct labor base is $5M, the overhead rate is 20%. These rates feed into cost proposals, provisional billing rates, and ultimately final billing rates. The rate structure must be disclosed in a Disclosure Statement if the contractor is subject to CAS coverage, ensuring consistency between estimating, billing, and reporting practices.

Why indirect rate structure matters for government contractors

The rate structure directly shapes a contractor's price competitiveness on cost-type work and its profitability on fixed-price proposals. Contractors with lean, well-organized rate structures can bid more aggressively. Conversely, poorly segregated cost pools with unallowable costs included create DCAA audit findings and potential repayment demands. See the blog on government contract pricing strategies for a broader view of cost-based pricing approaches.

Example

A professional services firm establishes three pools: Fringe (35% of direct labor), Overhead (22% of direct labor), and G&A (12% of total cost input). When pricing a $2M direct labor task order, the firm adds $700K in fringe, $440K in overhead, and applies G&A to the combined total, producing a fully burdened cost that is then marked up by the negotiated fee. The contracting officer compares this structure against DCAA-audited historical rates before approving the contract ceiling.

Frequently Asked Questions

How many indirect rate pools should a government contractor have?

Most small businesses start with two pools (fringe and G&A) and add overhead pools as they grow into distinct business units. More pools provide greater precision in cost allocation but also increase accounting complexity. CAS-covered contractors are required to allocate costs to pools that share a logical relationship with the allocation base.

What is the difference between overhead and G&A?

Overhead covers costs that benefit a specific segment of the business (e.g., a division's management, facilities, and support staff). G&A covers costs that benefit the entire company (CEO salary, legal, finance, corporate IT). Overhead rates typically apply to direct labor hours or dollars; G&A rates typically apply to total cost input.

Can indirect rates change mid-year?

Provisional rates can be revised by agreement between the contractor and the ACO if circumstances change materially. Unilateral rate changes mid-year require DCAA review and ACO approval. Contractors should track actual-versus-budget variances monthly to identify rate drift early.

What is Cost Accounting Standards (CAS) coverage and how does it affect indirect rates?

CAS is a set of 19 accounting standards that govern cost measurement, assignment, and allocation for large government contractors. CAS-covered contractors must disclose their accounting practices in a Disclosure Statement and maintain consistency between those practices and how they price and bill contracts.