Understanding these concepts will help you protect profits and give you the ability to negotiate new contracts effectively and competitively. Being correct and consistent in how you categorize expenses helps you effectively monitor escalating costs or eroding profit margins.
Rules for government contractors require you to distinguish and segregate direct costs from indirect costs. Common practice is to further categorize your indirect costs into subgroups (also called “pools”) – usually Fringe Benefits, Overhead and G&A.
Fringe benefits are costs related to employing your labor force. Examples include:
- Holiday labor cost
- Other paid leave labor costs (such as jury duty, family leave)
- Employer payroll taxes (FICA taxes, state unemployment taxes)
- 401(k) employer match or contribution
- Health insurance and similar benefits
Overhead and G&A have a somewhat less clear definition. Overhead costs support the efforts of the direct labor workforce, not necessarily related to a specific contract.
Common examples of Overhead Cost:
- Small business personnel commonly wear multiple hats and often need to divide their time between many categories. Indirect labor is categorized based on what you are doing at the time. Overhead labor might be, for example, a meeting with project managers and/or the direct labor force that does not fall under the statement of work.
- The travel costs incurred to get you to the aforementioned meeting.
- Fees and costs associated with hiring direct employees. This could include the labor time for your HR person to do interviews, the costs of obtaining security clearances, outside recruitment fees, and the cost of job advertising.
- A proportionate share of total facilities costs (e.g., rent, office supplies, IT services, telephone costs, etc.)
General and Administrative (G&A) expenses are the residual costs necessary to run a business, regardless of whether you have government contracts.
Common examples of G&A Costs:
- Labor for strategic planning, business development efforts and to manage or perform administrative functions
- Bonuses for people who primarily charge their time to G&A
- Professional fees, such as legal, accounting, payroll processing fees, IT services.
- Travel – perhaps in support of business development efforts
- Business insurance (general liability)
- State & local taxes (not federal taxes!)
- Conferences, business meetings
- Dues and subscriptions
- A proportionate share of total facilities costs
Reference the following blog: