Indirect Rates for Government Contractors: Fringe, Overhead, G&A and DCAA-Compliant Accounting

Winning government work at a profit starts with knowing your indirect rates. Your fringe, overhead and G&A rates drive your wrap rate, which determines how competitive your price is and whether you recover all your costs. This guide explains how indirect rates work and what a DCAA-compliant accounting system requires.

Direct vs. Indirect Costs

Direct costs can be traced to a specific contract, such as labor on the project, materials and travel for that work. Indirect costs benefit multiple contracts or the business as a whole, such as benefits, rent and executive salaries. Indirect costs are grouped into cost pools and allocated to contracts using an allocation base.

The Three Most Common Indirect Rates

• Fringe rate: fringe benefit costs (payroll taxes, health insurance, paid leave, retirement) divided by total labor dollars.
• Overhead rate: costs supporting direct work (facilities, supervision, equipment, project support staff) divided by direct labor, often including fringe on direct labor.
• General and administrative (G&A) rate: costs of running the company (executive management, accounting, HR, business development) divided by total cost input or value-added cost input.

How to Calculate a Wrap Rate

The wrap rate shows the fully burdened cost of one dollar of direct labor. A simple example:

• Direct labor: $50.00 per hour
• Fringe at 30%: $50.00 x 1.30 = $65.00
• Overhead at 40% of direct labor: $65.00 + $20.00 = $85.00
• G&A at 12%: $85.00 x 1.12 = $95.20
• Wrap rate before fee: $95.20 / $50.00 = 1.90

Add profit or fee on top to get the billing rate. Rate structures differ by company, so build your model around your own cost pools.

What Makes an Accounting System DCAA-Compliant?

For cost-reimbursement and certain other contracts, the government must determine your accounting system is adequate. The SF 1408 pre-award survey checklist is commonly used. Key requirements include:

• Segregation of direct and indirect costs
• Identification and accumulation of costs by contract
• Exclusion of unallowable costs under FAR Part 31 (for example, entertainment, alcohol, most lobbying and bad debts)
• Timekeeping that records hours daily by charge code, with employee and supervisor approval
• Monthly closing of books and a logical, consistent method for allocating indirect costs
• Ability to support interim billings and final indirect cost rate proposals

Tips for Competitive, Compliant Rates

• Benchmark your wrap rate against competitors in your market.
• Choose a cost pool structure that fits your business model, and apply it consistently.
• Use provisional billing rates and true them up at year end.
• Submit your incurred cost proposal on time (generally within six months after fiscal year end) for flexibly priced contracts.
• Invest in government contract accounting software before you win a cost-type contract.

Frequently Asked Questions

What is a good wrap rate for a government contractor?

It varies by industry and company size. Professional services firms with lean structures often have lower rates than firms with heavy facilities and management costs.

Do I need a DCAA-compliant system for a fixed-price contract?

Usually not for firm-fixed-price awards, but you will need one for cost-reimbursement and time-and-materials work with certain requirements.

What is a forward pricing rate agreement?

An agreement with the government on rates to use when pricing future proposals, common for larger contractors.

How do you structure your cost pools? Share your approach below.