Overhead versus G&A Indirect Costs

Is there an important difference between a general and administrative (G&A) expense

and an overhead (OH) expense?  Do these indirect costs really matter?  The answer is
yes if you want to remain a government contractor and avoid issues with DCAA.   The
following information will help you make decisions about how to classify these expenses
that don’t have an obvious home at first glance.

What are direct and indirect costs?

Let’s start with reminding ourselves of the two kinds of expenses that exist when
dealing with contracts: the direct costs and the indirect costs.  Direct costs are those
expenses that can be traced directly to a cost objective.  A cost objective can be a
contract, project, task, or a contract line item.  An indirect cost is an expenditure that
cannot directly be identified with a single, intermediate or final cost objective; it is
associated with two or more cost objectives.   G&A and OH are indirect expenses
because they are costs that are incurred in the course of running your company and
cannot directly be tied to a single contract.

What are General and Administrative Expenditures?

General and Administrative expenditures are the portion of indirect costs that apply to
your whole organization.  They are costs that support the overall operation of business. 
Even if you have no government contracts, you would still have G&A expense.  A direct
relationship to any particular cost objective cannot be shown.  Some examples of G&A
expenses would be accounting, legal, general liability insurance, bank fees, and
corporate licenses.

If an employee does not work on direct labor projects and performs functions that
relate to the overall running of the business, then the labor would be G&A.  The time an
HR employee spends hiring a new worker would be an example of labor that is
considered G&A since it is an expense associated with the overall operation of the
business and not a particular project.  The cost of office supplies, postage, and furniture
would all be considered G&A since they are costs that would exist even if there was no
billable work.

What are Overhead Expenses?

Overhead expenses are the other portion of indirect costs and relate to projects, but
not to just one. If you have no projects, then you have no overhead. Overhead
supports the direct costs of the revenue generating projects of the company. An
example would be indirect labor, which is categorized by what you are doing at the
time.  A manager’s time spent overseeing several projects could be classified as
overhead labor since it would be costly to separate the time spent between each
project. However, if the manager is attending a general meeting with all other
managers at headquarters, then the time would be considered G&A labor. The travel
costs to attend this meeting would also be considered G&A labor. Expenses follow the
employee. So a cell phone used by the manager would be considered an overhead
expense since his primary job is to oversee projects. An example of an expense not
associated with labor that is an overhead expense is the depreciation on a piece of
equipment that is used on several projects and is not associated with just one cost
objective.  FAR 31.201-4 –Determining Allocability provides additional detail.

How are Indirect Costs Allocated?

To find the total cost of a job in your company, you have to take the sum of direct costs
and an allocation of indirect costs.  How are indirect labor and expenses attributed to
the cost of jobs?  They are distributed across projects based on the project’s direct
labor hours, direct labor costs, and/or direct material costs. Overhead rates are
developed by dividing the Overhead costs by the selected allocation base of direct labor
dollars or direct labor hours, typically.  G&A rates are usually determined by the total
cost input base representing the total activity of the business.

So when you are trying to find a home for all those expenses that don’t fall neatly into
the cost of one project, you now have some guidance on where they all belong. At a
minimum, be consistent in your logic as to where you record your expenses.   If you
still have questions, then you should call Cheryl Jefferson and Associates — the
professionals who make sure your contracts will be in alignment with the federal
acquisition regulations (FAR) if the Defense Contract Audit Agency (DCAA) audits them.