Overhead Rate Structures & Competitive Analysis

A well-designed and effective Indirect Overhead Rate Structure is a critical element in being a successful and compliant government contractor.  The goals of a competitive Indirect Overhead Rate Structure are to optimize cost recovery, improve the company’s competitive position, ensure compliance with the applicable laws and regulations and to minimize administrative burden.

Among the key questions to consider and answer are:

  • Which costs should we charge direct to contracts?  For example, should we charge procurement and contract administration labor direct to contracts?  Of for example, should we charge trucks, field supplies, etc. direct?
  • Should we separate Overhead Costs from G&A Costs?  Overhead costs are those indirect costs more closely related to providing services to customers, and G&A costs are those costs to manage and operate the overall business.  There are certain advantages to separating Overhead costs from G&A costs – certainly for larger contractors – although many small and mid-sized contractors use a combined Overhead/G&A pool.  The key is to optimize cost recovery and to be competitive.
  • Should we separate Home Office Overhead Costs from Field Overhead Costs?   For many contractors, their contracts include work performed in their own office (Home Office) and also work performed at the client’s office or work site (Field Office.)  The cost drivers for these two types of Overhead costs are very different, and designing the Overhead Rate Structure to account for this difference and to optimize cost recovery is critical to cost recovery and profitability.  It’s also important to help gain and keep market share.
  • How do we allocate Corporate Office Costs?  Many contractors have a Corporate Office which oversees multiple business operations and segments.  Designing an allocation strategy for the Corporate Office costs is also critical to profitability and market share.  How the company “pools” these various costs and then allocates them to the segments is critical to recovering these costs and being competitive.

A key element of CGS’ approach to developing the optimal Indirect Overhead Rate Structure is our proprietary competitive analysis.  Using known industry data points, we can analyze the competitiveness of the various alternative Overhead Structures to determine whether the proposed alternative structures will give us a competitive edge.  This analysis is important not only from a historical perspective, but perhaps more importantly, where the company is going in the future in terms of markets, customers, contract types and mix, etc.

CGS has helped numerous clients to develop, analyze and implement their Indirect Overhead Rate Structures and Corporate Office allocations including a large, international Engineering and Construction firm with $15B+ in annual revenues.  The new approach that we developed and implemented helped to improve annual costs recovery at the business unit by $10M+ each year and to compliantly recover over $175M/year in Corporate Office costs.

Please contact us today to learn how we can help to improve your company’s cost recovery and profitability as well as gain a competitive advantage.