Indirect Rates Explained: What Contractors Need to Know for DCAA Compliance

Lee Schmidt

Indirect rates are at the heart of government contract accounting—and a common source of DCAA scrutiny. Understanding how fringe, overhead, and G&A rates work is essential for pricing proposals, filing incurred cost submissions, and passing audits. A.L. Schmidt CPA, LLC helps contractors in Ohio, Dayton, Arlington, and nationwide develop, track, and defend indirect rates that meet every DCAA standard.

 

 

Why Indirect Rates Matter for Government Contractors

Indirect rates determine how you recover costs not directly tied to a single contract—such as management salaries, office rent, or IT systems. The right rate structure can make or break your profitability on government work. For DCAA compliance, it’s not just about having rates—it’s about having the right support, documentation, and logic behind them. This is where many contractors in Dayton, Northern Virginia, and across Ohio run into trouble.

 

 

Types of Indirect Rates Every Contractor Should Know

  • Fringe Rate: Covers benefits, payroll taxes, and employee-related costs.

  • Overhead Rate: Includes expenses related to supporting contract work, like facility costs, indirect labor, and supplies.

  • General & Administrative (G&A) Rate: Applies to company-wide expenses—think executive salaries, accounting, marketing, and legal fees.

Each rate is calculated as a percentage: indirect pool costs divided by the appropriate allocation base (such as direct labor dollars).

 

 

How Indirect Rates Affect Your Business

  • Cost Proposals: Bids that don’t accurately estimate indirect rates can win contracts but lose money, or get rejected for appearing unrealistic.
  • Incurred Cost Submissions: DCAA checks that provisional rates billed throughout the year reconcile to your actual costs at year-end. Errors can lead to repayments, disallowed costs, or audit findings.
  • Cash Flow: Incorrect rates can delay payments, trigger DCAA inquiries, or create major cash crunches during contract closeout.

In the Cincinnati–Dayton corridor and at federal hubs like Wright-Patterson AFB, contractors are expected to know and defend their rates in every submission.

 

 

Best Practices for Tracking and Defending Indirect Rates

  • Keep cost pools and allocation bases well-defined and documented.
  • Update rate calculations regularly—don’t rely on last year’s estimates.
  • Align rates with how your contracts are actually managed and delivered.
  • Review for unallowable costs (such as entertainment or lobbying) and exclude them before billing.

For contractors growing beyond Southwest Ohio or entering new markets, this also means updating systems to track multi-state or multi-division operations.

 

 

Common Pitfalls—and How to Avoid Them

Contractors most often get in trouble with:

  • Incomplete or outdated allocation bases
  • Overcomplicated pools that are hard to explain or defend
  • Failing to adjust provisional rates during the year
  • Missing documentation to support how rates were set

A.L. Schmidt CPA, LLC helps businesses design indirect rate structures that are both efficient and fully compliant, using real-world examples from clients across Ohio, Arlington, Warner Robins, and beyond.

 

Get Help with Indirect Rates and DCAA Compliance

If indirect rates are confusing, you’re not alone. Most successful government contractors rely on outside specialists for setup, review, or troubleshooting—especially when scaling up or taking on new contract types.

 

 

 

Ready to optimize your indirect rates and protect your margins? Contact A.L. Schmidt CPA, LLC for a personal review and recommendations—so you can bid, bill, and close out contracts with confidence.