McNew & Associates, Inc. Blog


Overhead vs G&A – What is the Difference?
March 3, 2010, 7:49 PM
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6-601 Indirect Costs

FAR 2.101 defines an indirect cost as “any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost.” Further, an indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective.

Because of their nature, indirect costs cannot be charged to final cost objectives on an individual basis. Therefore, indirect costs must be classified and grouped together into indirect cost pools, typically either an overhead cost pool or the general and administrative expense (G&A) cost pool. The pools in turn are allocated to final cost objectives using an indirect cost allocation base that best links the cost pool to the cost objectives.

6-602 Overhead Costs

Costs that are incurred for or that only benefit an identifiable unit or activity of the contractor internal organization such as an engineering or manufacturing department are considered overhead costs. It is common to find separate overhead pools for engineering, manufacturing, material handling, and for certain off-site activities. Yet, it is conceivable that a very small contractor could have only one overhead pool.

Examples of overhead pool costs are:

  • Department supervision
  • Depreciation of department buildings and equipment
  • Training of department employees
  • Fringe benefits of department employees

Overhead rates are developed by dividing the overhead pool costs by the selected allocation base, e.g., direct labor dollars or direct labor hours.

To allocate means to distribute overhead pool costs to contracts. In order to distribute overhead pool costs, the contractor must select an allocation base. There must be a relationship between the selected allocation base and the pool of costs to be allocated to contracts. For example, an engineering overhead pool would logically be allocated over total engineering direct labor dollars or engineering direct labor hours. Additional information regarding the allocation of indirect costs to contracts can be found at FAR 31.203, Indirect costs.

6-603 G&A Expenses

G&A expenses represent the cost of activities that are necessary to the overall operation of the business as a whole, but for which a direct relationship to any particular cost objective cannot be shown. G&A includes the top management functions for executive control and direction over all personnel, departments, facilities, and activities of the contractor. Typically, it includes human resources, accounting, finance, public relations, contract administration, legal, and an expense allocation from the corporate home office.

The G&A rate is developed by dividing total general and administrative expenses by the selected allocation base, e.g., total cost input (i.e., total direct and indirect costs, except G&A), value added cost input (i.e., total cost input except G&A, material and subcontract costs), or single element cost input (e.g., direct labor dollars, direct labor hours, direct materials costs).

*DCAA’s Information for Contractors, DCAAP 7641.90 January 2003

McNew & Associates, Inc.                                                     

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www.mcnewassociates.com

Email:  mcnewassoc@mcnewassociates.com

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