Indirect Cost Rate Computation — Fringe, Overhead, G&A, and Forward Pricing Rates
Computing and applying the indirect cost rates that flow all overhead, fringe benefits, and G&A costs onto government contracts — the foundational cost accounting structure for every defense contractor.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Fringe Benefits Expense — Applied to Contracts (30% of Direct Labor) | Expense (+) | 4,500,000.00 | - |
| Overhead Expense — Applied to Contracts (65% of Direct Labor + Fringe) | Expense (+) | 9,750,000.00 | - |
| G&A Expense — Applied to Contracts (12% of Total Cost Input) | Expense (+) | 5,400,000.00 | - |
| Indirect Cost Pool — Applied (Cleared) | Expense (-) | - | 19,650,000.00 |
💡 Accountant's Note
Defense contractor cost accounting revolves around indirect cost pools and allocation bases. Every cost that cannot be directly identified with a specific contract is accumulated in an indirect pool and allocated to contracts using a measurable base. Standard structure: (1) FRINGE BENEFIT POOL: employee benefits (health insurance, pension, 401k, payroll taxes) allocated as a percentage of direct labor dollars (e.g., 30%). (2) OVERHEAD POOL: indirect manufacturing/engineering costs (supervision, equipment depreciation, facility costs, indirect materials) allocated as a percentage of direct labor plus fringe (e.g., 65%). (3) G&A POOL: general and administrative costs (executive salaries, corporate finance, legal, human resources, business development) allocated as a percentage of 'total cost input' (all costs excluding G&A) — typically 8–15%. These rates are: (a) FORWARD PRICING RATES: used for future work estimates and price negotiations, (b) PROVISIONAL RATES: applied during the year before final rates are established, and (c) FINAL RATES: computed after year-end and used to reconcile the actual cost of completed contracts. Negotiated rates are memorialized in a Forward Pricing Rate Agreement (FPRA) with the government's administrative contracting officer (ACO).
Practitioner & Systems Framework
💻 ERP Architecture
Deltek Costpoint and SAP-PS are the dominant ERP platforms for defense contractors — both designed specifically around indirect pool management. The system accumulates: direct costs (labor, material, subcontract, other direct costs) by contract, and indirect costs by pool. At period end: indirect rates are computed (actual pool costs ÷ actual allocation base) and applied to each contract. The variance between provisional rates applied during the year and actual final rates creates rate variances — favorable if actual rates are lower than provisional (more costs allocated than incurred = favorable variance) and unfavorable if actual rates are higher. These variances are reconciled in the annual Incurred Cost Submission (ICS).
⚠️ Audit Flags
Indirect rate computation is DCAA's primary audit focus area. DCAA audits the final indirect rate computation annually (the Incurred Cost Submission audit). Key tests: (1) Pool composition — are all costs in the pool allowable under FAR Part 31? Are any unallowable costs included that must be removed? (2) Base completeness — does the allocation base include ALL contracts (commercial and government) to ensure government doesn't subsidize commercial work? (3) Rate reasonableness — are the final rates consistent with the Forward Pricing Rates used in proposals and invoices? (4) Cost Accounting Standard consistency — are the accounting practices consistent with the contractor's disclosed accounting practices?
📄 Required Documentation
Indirect cost pool summaries by pool type (fringe, overhead, G&A), allocation base calculations, forward pricing rate agreement (FPRA), provisional billing rates during the year, year-end final rate computation, rate variance analysis, Incurred Cost Submission (ICE model), DCAA audit results on prior year ICS, and disclosed cost accounting practices.
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