Building labor rates: fringe, overhead and G&A

A loaded hourly rate is the direct wage plus a share of everything else the company spends to deliver the work. Time-and-materials contracts make the parts explicit: they pay for direct labor hours at fixed hourly rates that include wages, overhead, general and administrative expenses and profit 1.

Direct costs of the contract shall be charged directly to the contract 2. An indirect cost is any cost not directly identified with a single final cost objective, but identified with two or more final cost objectives or with at least one intermediate cost objective 3. Indirect costs are accumulated by logical cost groupings with due consideration of the reasons for incurring them 4.

Common practice, not a FAR rule: many small contractors use three indirect pools. Fringe holds benefits and payroll taxes on labor; overhead holds the costs of supporting the people who do the work; general and administrative (G&A) holds the costs of running the company as a whole. Your accountant may group costs differently. What an auditor looks for is a logical grouping, applied the same way every time.

Check 1

Under FAR 31.202, how are direct costs of the contract charged?Directly to the contractThrough the G&A poolOnly at contract closeoutSplit evenly across every contract

A worked build-up

Worked example. Contractor L pays an analyst $40.00 an hour. Its fringe rate is 30% of direct labor, its overhead rate is 20% of direct labor plus fringe, its G&A rate is 10% of total cost input, and it adds 8% profit. Fringe: $40.00 × 0.30 = $12.00, for $52.00. Overhead: $52.00 × 0.20 = $10.40, for $62.40. G&A: $62.40 × 0.10 = $6.24, for $68.64. Profit: $68.64 × 0.08 = $5.49, for a loaded rate of $74.13 an hour.

Practice: build the rate in the same order, and against the same bases, that your books use to allocate costs. A rate built one way and billed another is the first thing an auditor will find.

What an auditor asks

A cost is allowable only when the cost complies with all of the requirements FAR 31.201-2 lists 5. A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business 6. A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship 7.

Some costs never belong in a rate. Costs of amusement, diversions, social activities and any directly associated costs, such as tickets to shows or sports events, meals, lodging, rentals, transportation and gratuities, are unallowable 8. Costs that are expressly unallowable or mutually agreed to be unallowable, including directly associated costs, shall be identified and excluded from any billing, claim or proposal 9.

Worked example. Contractor L finds its staff holiday outing booked to the overhead account. It moves the cost to an unallowable account so it never enters the overhead rate, and writes down the rule it now follows.

Check 2

Which test decides whether a cost is allocable under FAR 31.201-4?It is assignable or chargeable to cost objectives on the basis of relative benefits received or other equitable relationshipIt was paid within 30 daysThe contracting officer approved it in advanceIt is lower than a competitor's cost

Check 3

Contractor L's overhead pool includes sports tickets for staff. What should happen to that cost?Exclude it from the rate: entertainment costs are unallowableKeep it in overhead; morale is a business expenseMove it into G&A instead

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Building labor rates: fringe, overhead and G&A

By the end you can

A worked build-up

What an auditor asks

Building labor rates: fringe, overhead and G&A

By the end you can

A worked build-up

What an auditor asks