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  
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


OH Applicable to Fringe    22,428    4,837
Unallowable OH Costs        207
Total Allocation
$689,940 $148,784
Rate 21.56%