Overhead Versus G&A Versus ICR Versus Other Indirect Expenses
Your company may structure indirect pools, bases, and rates in any way it wishes. Every company is unique. Executive management of your company knows the needs of your company better than any customer.
If your sales reap federal government funds, the federal government will not tell you how to manage your company – or how to structure your indirect rates. They just won’t pay for the expenses that are not compliant with regulations and applicable Terms and Conditions (T’s and C’s).
Let’s discuss what typically happens – using generally applicable definitions – among different companies.
Non-profit organizations follow FAR 31.7 as opposed to FAR 31.2. Detailed instructions are in the Office of Management and Budget (OMB) Uniform Guidance at 2 CFR part 200, subpart E. Select items of cost are denoted as allowable or unallowable at part 200.420 and FAR 31.603 (b), as opposed to FAR 31.205. Non-profits use Facilities and Administration (F&A) as opposed to General and Administrative (G&A). With certain exceptions, these non-profit regulations require one catch-all Indirect Cost Rate (ICR) for all indirect expenses. Types of expenses, incurred for the organization as a whole (not directly for one Job, grant, or contract), are rolled together into one ICR pool. We allocate the one ICR pool among all of the Jobs.
Some non-profit organizations that receive federal government funding, especially universities, separate Facilities and Administration (F&A) from other ICR expenses. We allocate the ICR pool to Jobs using one base – and the F&A pool to Jobs on a different base. For example, F&A might only be allocated to Jobs performed at the corporate headquarters. The ICR pool might be allocated to all Jobs based on total direct costs. If goods are produced or services are provided in small quantities (or for low costs) at many satellite Government-owned or third-party locations – allocating F&A to corporate Jobs makes sense. The pool of indirect expenses must have a causal or beneficial relationship to the base on which they are allocated.
General and Administrative (G&A) expenses encompass the management and administration that keeps a for-profit company running. G&A includes Accounting, Human Resources, Business Development, Purchasing, Contract Administration, plus similar departments and functions. Very small for-profit companies can have one G&A pool to allocate all indirect expenses.
Most for-profit companies, including small businesses, collect administrative and management expenses in G&A plus, separately, collect labor-related (company) expenses in a Labor Overhead or Fringe Benefits (Fringes) pool. Fringes encompass employer-paid payroll taxes, earned Paid Time Off (or Vacation, Sick Leave, etc.), employer-paid employee-health (and related) premiums, Workers’ Compensation, and similar expenses. This pool has a causal or beneficial relationship to labor dollars, labor hours, or another labor-related allocation base.
Companies with high-dollar subcontracts might have Subcontract General and Administrative (SG&A) expenses. These are consistently recorded as SG&A, regardless of the Job, when incurred for the same purpose in like circumstances. SG&A might include qualifying potential suppliers, soliciting (e.g., RFB, RFP), analyzing proposals received, tracking (drop) shipments and milestones, issuing change orders, documenting compliance with sales-award requirements (e.g., approvals, disclosures, Customer Furnished Property, DPAS ratings), and close-outs.
Larger companies structure their indirect rates using G&A, Fringes, and Overhead. There are two kinds of Overhead. Material Overhead encompasses shop rags, machine oil, disposable gloves, and other manufacturing or assembly items. Indirect pools gather expenses for allocation, as opposed to tracking specific quantities/dollars used on each Job. We would not count the number of shop rags used up in each run or Job. Labor Overhead encompasses quality reviews of all potential small-purchases service suppliers (for use on multiple Jobs), outsourced quality testing of labor processes (used on multiple Jobs), possibly project management labor (if charged consistently to Overhead, regardless the Job), and other labor-related items for company-wide or many-Jobs’ benefit.
Even larger companies use tiers of indirect pools. For example, the Facilities expense pool might gather expenses to be allocated to the dollars in the Fringes and the G&A pools. Afterward, the Fringes and the G&A pools are farther allocated to Jobs. Fringes might be allocated on all labor dollars, while G&A might be allocated on Total Cost Input (TCI). TCI is everything except G&A. In this case, some Facilities expenses are absorbed by labor dollars (through Fringes) and some absorbed by TCI (through G&A).
A company’s indirect rate structure can have multiple tiers.
In any case, FAR 31.201 (c) requires, “When substantially the same results can be achieved through less precise methods, the number and composition of cost groupings should be governed by practical considerations and should not unduly complicate the allocation.” In simple terms, use as few pools and rates as are common to one base. For example, if the Labor Overhead pool of expenses and the Fringes pool of expenses – both – use total labor dollars as the base, then combine the two pools for one calculation on their mutual base (and name it Overhead or Labor-related or some other one, named pool).
Each pool of expenses is divided by the base that benefits. This calculation yields the rate. (Move the decimal point two places to the left and add a percent sign.) For example, $500,000 of allowable G&A divided by $1,000,000 of allowable plus unallowable TCI yields a G&A rate of 50%.
- ICR – one pool/rate of all allowable indirect expenses
- F&A – the G&A of non-profits, like universities
- G&A – management and administration
- SG&A – management and administration of significant-dollar subcontracts that benefit multiple Jobs
- Fringes – employee benefits, usually including payroll taxes, paid by the employer
- Overhead – items benefitting multiple Jobs related to either Material or Labor
That describes the difference among Overhead and G&A versus ICR indirect rates.