Indirect cost rate guide to help small businesses get higher reimbursements and compliant proposals — GovScout

Meta description: Learn to compute an indirect cost rate for federal work, build a DCAA-ready rate model, and set proposal prices for full reimbursement and compliance.

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TL;DR

• Build a clear indirect cost rate model (fringe, overhead, G&A) before you bid on federal work.
• Split costs into direct and indirect parts and pick solid cost bases like labor or total cost.
• Do the math: divide the pool by its base to get the rate; check your rate with your revenue and cash flow.
• Match your rates with FAR Part 31 and DCAA guidance to keep audits and price checks smooth.
• GovScout helps you search SAM.gov fast, save and track bids, and create AI proposal outlines with your rate model built in.

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Why indirect cost rates count in federal contracts today

Small businesses face growing cost pressure. Agencies check cost reasonableness and allowability closely on cost-type, T&M/LH, and fixed-price work. A low indirect cost rate cuts your cash; a rate that does not fit the rules can trigger audit problems or price rejections.

For small businesses such as 8(a), SDVOSB, HUBZone, or emerging prime contractors, a written indirect rate is a must. It shapes:

• The competitiveness and profit of your proposals
• Your chance to talk with contracting officers and auditors about your rates
• Your long-run strength on larger awards and IDIQs/GWACs

This guide shows a clear, small-business style method to build, compute, and use indirect rates in proposals.

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How to compute and use your indirect cost rate (step-by-step)

Step 1: Set your base terms and rules

Before you compute rates, know what costs you can claim and how the government sees indirect costs.

Key ideas:

• Direct cost: The cost you can point to a contract (for example, direct labor or materials for a task order).
• Indirect cost: Costs that support several contracts or your whole business, like rent or admin salaries.
• Indirect cost rate: The percentage that links an indirect cost pool with an allocation base.
• Allowable vs unallowable: FAR Part 31 lists what costs can be used for cost-reimbursable work.
• Consistent treatment: Use the same method for a cost on all contracts.

See these sources for more details:
– FAR Part 31 – Contract Cost Principles and Procedures
– DCAA “Information for Contractors” for DoD work
– 2 CFR 200 Subpart E for grant guidance

This matters because evaluators and auditors check that your structure has a close word-to-word connection. An out-of-sync structure creates questions and cost issues.

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Step 2: Draw your cost layout – direct and indirect

Chart how money moves in your business.

2.1. List all your costs

Collect your latest 12 months of numbers or your projected numbers if you are new:

• Payroll by role
• Benefits and taxes
• Rent, insurance, and utilities
• IT, software, and licenses
• Professional fees (CPA, legal, HR)
• Marketing, BD, and proposal support
• Travel and training
• Owner’s pay and draws

2.2. Mark costs as direct or indirect

Follow this idea:

• Direct cost: Exists because of one contract and can be tracked to that contract.
• Indirect cost: Supports several contracts or the whole firm.

Examples:

• Direct labor: Engineers or analysts who work solely on a project.
• Indirect labor: CEO, CFO, HR, or proposal staff who work for the overall business.
• Direct other direct costs: Project software, materials, or travel that fit one project.
• Indirect expenses: Office rent, company insurance, or firm-wide software.

• Keep your decision clear. If you put the same cost in both groups or change its placement without logic, you risk double-charging.

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Step 3: Pick your indirect cost rate model

Small firms do not need many rates. You need a simple model that fits your business and holds up to review.

A common model for small businesses:

Rate Type	What It Covers	Usual Base	When to Use
Fringe	Benefits, payroll taxes, paid leave	Labor cost (direct plus indirect)	For almost all cases
Overhead	Costs that support project work	Direct labor or labor plus fringe	For service work
G&A	Management and corporate costs	All costs except G&A	For growing contractors
Material/SubK Handling	Purchase and managing materials/subKs	Direct materials or subK costs	For heavy supply or subK mixes

For many small firms, use:

• A fringe rate on all labor.
• An overhead rate on direct labor (or labor plus fringe).
• A G&A rate on total cost input (all costs minus major pass-throughs).

3.1. Put expenses into pools

Example pools:

• Fringe pool: Health plans, payroll taxes, retirement contributions, paid time off, workers’ comp.
• Overhead pool: Supervisors, project management, project facilities, shared equipment, some IT.
• G&A pool: Executive salaries, accounting, HR, legal, corporate rent, corporate IT, marketing, proposal work.

Link your chart of accounts so each expense goes into the right pool.

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Step 4: Select clear allocation bases

Your allocation base must show a direct link with the cost it drives. It also must be measurable and used in every period.

Usually:

• Fringe: Use total labor dollars or hours (direct plus indirect).
• Overhead: Use direct labor dollars (or labor plus fringe).
• G&A: Use total cost input (all costs except G&A) or a value-added number.

Evaluators check that each pool has a close, clear bond with its base and that the approach fits others in your field.

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Step 5: Do the math – calculate your indirect cost rates

The rate comes from dividing a cost pool by its base:

Rate = (Indirect Cost Pool) ÷ (Allocation Base)

5.1. An example for small businesses

Imagine these numbers for a year:

• Fringe pool: $150,000 (for benefits, taxes, PTO)
• Labor base (direct plus indirect): $500,000

Fringe rate = $150,000 ÷ $500,000 = 30%

• Overhead pool: $200,000 (for project work, shared tools)
• Direct labor base: $400,000

Overhead rate = $200,000 ÷ $400,000 = 50%

• G&A pool: $180,000 (for management, accounting, HR, corporate costs)
• TCI base (all costs except G&A): $1,020,000

G&A rate = $180,000 ÷ $1,020,000 ≈ 17.65%

Store these as your provisional billing rates. Also keep the schedule with pools, bases, and assumptions ready for audit or pricing talks.

5.2. Check that your rates work

• Compare your rates with peers. Ask your CPA or partners what numbers they see in your space.
• Build a sample pricing model. Check if your fully loaded labor rates match market conditions.
• Watch your cash flow. Rates that are too low may show up as cash burn on fixed-price work.

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Step 6: Use your indirect cost rate when pricing proposals

Convert your model into proposal numbers.

6.1. Build fully loaded labor rates

For example, with a base direct hourly wage of $60:

1. Add fringe: 30% of $60 is $18. Total now is $78.
2. Add overhead (assume overhead applies to labor plus fringe):
   • 50% of $78 is $39. Total now is $117.
3. Add G&A on top of the total cost.
   • 17.65% of $117 is about $20.66. Final total is about $137.66 per hour.

This $138 per hour is your fully loaded internal cost. Then add your profit (for instance, 8–12% based on risk and market). For T&M work, use this as your billing rate. For CPFF proposals, list the fee separately. For fixed-price work, use these numbers to ensure profit over the life of the contract.

6.2. Follow Section L & M rules

Review Section L for the cost and price formatting and required breakdowns. Section M explains how cost and price realism is measured. If the RFP asks for:

• A rate breakdown (fringe, overhead, G&A) – follow that order.
• Separate fee/profit lines – do not mix fee into your indirect rate.
• Disclosure of any NICRAs or forward pricing rate agreements – cite approvals from DCAA or the agency when needed.

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Step 7: Make your rates compliant and defendable

7.1. Match FAR Part 31 allowability

Take these steps:

• Remove costs that are not allowed (for example, some advertising, entertainment, alcohol, lobbying, or bad debts as noted in FAR 31.205) from your pools.
• Use account codes to mark these unallowable costs and leave them out of your pools.
• Keep records that show how you exclude these costs.

7.2. For DoD cost-type work

DCAA may check:

• Your incurred cost submissions (ICS);
• Your provisional billing rates;
• Your accounting system and its ability to track costs.

Review DCAA checklists and guidance such as the DCAA ICE Model. While you do not need a fully DCAA-approved system to start, you must:

• Keep direct and indirect costs apart;
• Use clear, written allocation methods;
• Track costs by contract separately.

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Data Snapshot: what to look up, where

Public numbers for indirect rates differ by industry, size, and business type. Instead of chasing one target, use these methods:

• Industry benchmarks:
– Ask your CPA for benchmark data from industry resources or trade groups.
– In fields like professional services (NAICS 541511, 541512, 541611), overhead and G&A may range widely; compute your own from your books.

• Contract and pricing trends:
– Look at past awards on USAspending.gov by NAICS and agency.
– Check agency guidance on indirect costs.

• Bid environment:
– Use SAM.gov notices to see when agencies stress cost realism or have indirect rate limits.
– Review Q&As to see what peers ask about indirect cost models.

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Mini case example: A small SDVOSB builds an indirect rate with GovScout

Scenario:
A 12-person SDVOSB IT firm shifts from commercial to federal contracts. It aims for a multi-year T&M/FFP hybrid help desk contract at the VA.

1. Market research with GovScout

• The firm uses GovScout to search SAM.gov for VA help desk and IT support work under NAICS 541513/541519.
• They use filters such as agency = VA, type = T&M/FFP, and small business set-aside.
• They export past solicitations and study pricing details, cost breakdowns, and any indirect rate limits.

2. Build the rate model

• With help from their CPA and an APEX counselor, they classify past 12-month costs and set up three pools: fringe, overhead, and G&A.
• They pick bases: fringe on all labor, overhead on direct labor plus fringe, and G&A on total cost input.
• They compute provisional rates of 28% for fringe, 45% for overhead, and 15% for G&A.

3. Price the VA contract

• They plug these rates into a pricing workbook and build fully loaded labor rates per labor category.
• They use GovScout to save and track opportunities in a pipeline, and they link their pricing workbook for consistency.

4. Build a compliant proposal package

• They check the VA RFP Sections L and M as captured by GovScout.
• With GovScout’s AI proposal outlines, they create a cost volume outline that meets the required format and a narrative that explains their cost methods and indirect rate logic.

The result is a compliant cost proposal, realistic pricing, and indirect rates that hold up at audit and pricing reviews.

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Common pitfalls and ways to avoid them

1. Mixing direct and indirect treatment for the same cost
   • Keep a clear written policy on cost treatment. Do not use different methods across contracts.

2. Hiding unallowable costs in indirect pools
   • Mark unallowable costs in your accounts; leave them out of your calculation pools. Use FAR 31.205 for guidance.

3. Relying on old or random rates
   • Recalculate your provisional rates at least each year or when major changes occur.

4. Basing rates only on what others charge
   • Start with your own numbers and then check how they compare with actual market data.

5. Ignoring details in Section L/M instructions
   • Prepare a checklist based on the RFP and show your indirect cost model exactly as requested.

6. Losing your audit trail
   • Keep a file named “Indirect Rate Support – FY____” with all calculations, financials, and cost policies.

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Quick FAQ on indirect cost rates

1. Do I need an approved indirect cost rate for federal bids?
   Many small businesses bid using provisional rates based on sound projections. Formal approval, such as a NICRA, comes later when cost-reimbursable contracts or certain grants are awarded.

2. What is a NICRA and when is it needed?
   A NICRA is an agreement that fixes your indirect cost rates for a period. You usually ask for a NICRA after you win cost-reimbursable contracts or certain joint agreements.

3. Can I use a 10% de minimis indirect rate under 2 CFR 200?
   For non-federal entities getting federal grants and with no negotiated rate, 2 CFR 200.414(f) lets you use a 10% rate on modified total direct costs. This rule does not apply to FAR-based contracts. Confirm specifics with the agency.

4. How often should the indirect cost rate be updated?
   Plan to update your rates yearly and more often when you see major changes such as a new lease or a big change in staff.

5. What type of accounting system do I need for compliant indirect rates?
   Choose an accounting system that keeps direct and indirect costs separate, tracks costs by contract, supports clear allocation, and leaves out unallowable costs. Many small businesses start with QuickBooks and a good chart of accounts and then move to specialized systems.

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Call to action: Connect your indirect rates to real opportunities with GovScout

Once you have a working indirect cost rate model, put it to use by targeting the right opportunities—over and over.

With GovScout you can:

• Search SAM.gov quickly for cost-type, T&M, and fixed-price work where clear indirect rates matter.
• Save and track opportunities in one pipeline that stores your pricing models and bid decisions.
• Create AI proposal outlines that match Section L and M and include your indirect rate narrative.

Start with GovScout to turn your model into a regular tool for compliant pricing.

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Next Steps Checklist

• Pull your last 12 months of financials and list each cost.
• Mark every cost as either direct or indirect and write down your rules.
• Make pools for fringe, overhead, and G&A and choose matching allocation bases.
• Compute provisional indirect cost rates and check your math.
• Exclude unallowable costs according to FAR Part 31.
• Write a simple cost accounting policy and save the rate support file.
• Use GovScout to find target bids and output your pricing as Section L/M require.
• Review and adjust your indirect rates at least once a year.

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Author Bio

Written by GovScout (Cartisien Interactive), a team that has handled 100+ government and enterprise projects; CAGE 5GG89. Editorial note: Checked against primary sources for accuracy.

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SEO Tags

• indirect cost rate
• federal indirect cost rate calculation
• DCAA indirect rates
• FAR Part 31 cost principles
• small business government contracting pricing
• NICRA and provisional rates
• G&A, overhead, and fringe rates
• GovScout proposal pricing

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About GovScout

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Contact: hello@govscout.io

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