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Overhead versus G&A?


Needforspeed

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Hey Don - I guess that is part of my question. I can recall seeing the same or similar type expenses classified in one company as overhead  and another G&A. Like HR for example, IT, security, Finance and accounting. Is it up to the contractor to decide what they classify as such and treat that consistently? If anyone has any good, reliable literature to read up I’d be thankful 

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2 hours ago, Needforspeed said:

Is it up to the contractor to decide what they classify as such and treat that consistently?

Yes, that's the idea. This is a good explanation that I found in a Linkedin article:

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The FAR gives no substantial guidance or direction into how companies develop their indirect costs pools. Contractor can divide and stratify indirect costs pools in different manners. However, they must be consistent and methodical on how they classify and structure indirect costs pools. In more complicated government and defense contractors, some indirect costs are collected in intermediate pools and then allocated further to the final indirect pools. (5) The number of indirect cost accounts at single firms can range from as few as a dozen to as many as several hundred depending on the size of the firm, number of contracts, and nature of their business.

The article is a good primer on the topic of indirect cost allocation.

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14 hours ago, Don Mansfield said:

What distinction are you making between G&A and "overhead"? What do you think "overhead" is?

@Don MansfieldYour questions seem to imply that there is no distinction between overhead and G&A. But the FAR councils seem to think there is. I found the following phrase at FAR 16.601(b) and in three other places:

"(1) Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit..."

The term overhead appears at 40 places in FAR, but is not defined.

The term general and administrative expenses appears at 20 places in FAR and is defined at FAR 2.101.

I found the following in the Linkedin article you cited:

  • "The definition of fringe costs are very clear but overhead and G&A have a somewhat less clear definition."
  • "Items such as human resources are divded between G&A and overhead cost pools based on the number of employees (headcount) assigned to those particular cost centers."
  • "A firm needs to understand the major drivers of fringe, G&A, overhead costs and how to correctly allocate them into indirect cost pools."

The author uses separate headings for discusses of "overhead' and G&A, which seems to suggest a distinction.

The following appears in the DAU Contract Pricing Reference Guides, Volume 3: "A firm needs to understand the major drivers of fringe, G&A, overhead costs and how to correctly allocate them into indirect cost pools."

The Guides generally seem to make a distinction throughout.

So, if you are suggesting that there is no distinction between overhead and G&A, would you please explain?

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Vern the overarching themes between the article Don provided and the CPA article are the same to me. 

My only hangup is "business development". The explanation that overhead includes the indirect costs of managing contracts makes sense to me and that is an easy visualization. But I generally see that going hand in hand with capture managers growing a business line - finding partners, keeping tabs on agency spending and RFP release, business strategy, whatever. So, I would consider business development overhead rather than G&A. The CPA article says:

The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting...

I think what we have agreed is that business development can be either, so long as the contractor is consistent in its treatment of the cost as it goes into the expense pool. From a perspective of explaining it to the staff managing these lines of business, I would rather say "capture manager, VP business development, business strategy, whatever, all of your time is overhead, no matter what."

I also do not think business development has to or necessarily will serve the greater benefit of the company, not like an accounting department would anyway. Your capture team selling to client A serves no benefit to client B and except for maybe someday (maybe not) bringing in revenue to your company, does not benefit the company as a whole.

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19 minutes ago, Needforspeed said:

Vern the overarching themes between the article Don provided and the CPA article are the same to me. 

@NeedforspeedIt makes my head hurt to read things like "overarching themes."

I simply asked Don to state and explain the presupposition(s) embedded in his question, which seems to imply that there is no distinction between overhead and G&A.

As for your point:

19 minutes ago, Needforspeed said:

The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting...

I don't know if that's "typical" of all companies. To me, G&A includes what FAR 2.101 says it includes:

Quote

any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period.

Is there or is there not an official distinction between overhead and G&A?

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Some hopefully helpful stuff:

48 CFR 9904.410-30:

Quote

(6) General and administrative (G&A) expense means any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period.

48 CFR 9904.410.40:

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(d) Any costs which do not satisfy the definition of G&A expense but which have been classified by a business unit as G&A expenses, can remain in the G&A expense pool unless they can be allocated to business unit cost objectives on a beneficial or causal relationship which is best measured by a base other than a cost input base.

48 CFR 99404.410-60(c):

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(2) Business Unit C has included selling costs as part of its G&A expense pool. Unit C wishes to continue to include selling costs in its G&A pool. Under the provisions of this Standard, Unit C may continue to include selling costs in its G&A pool....

Quote

(5) Business Unit C has included selling costs as part of its G&A expense pool. Unit C has used a cost of sales base to allocate the G&A expense pool. Unit C desires to continue to allocate selling costs using the costs of sales base [which is not permitted by CAS 410]. Under the provisions of this Standard, Unit C would [then] account for selling costs as a cost pool separate and apart from the G&A expense pool, and continue to allocate these costs over a cost of sales base. If Unit C uses a total cost input base to allocate the G&A expense pool, the selling costs will become part of the total cost input base [used to allocate G&A expenses].

In summary, CAS permits the treatment of selling costs as either a component of G&A expenses or a component of another indirect cost pool (i.e., "overhead" pool). As has been posted above, it is the contractor's decision, which then must be followed consistently thereafter.

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52 minutes ago, Needforspeed said:

Vern the overarching themes between the article Don provided and the CPA article are the same to me. 

My only hangup is "business development". The explanation that overhead includes the indirect costs of managing contracts makes sense to me and that is an easy visualization. But I generally see that going hand in hand with capture managers growing a business line - finding partners, keeping tabs on agency spending and RFP release, business strategy, whatever. So, I would consider business development overhead rather than G&A. The CPA article says:

The G&A cost pool typically includes the salaries and benefits of c-suite personnel as well as business development, finance and accounting...

I think what we have agreed is that business development can be either, so long as the contractor is consistent in its treatment of the cost as it goes into the expense pool. From a perspective of explaining it to the staff managing these lines of business, I would rather say "capture manager, VP business development, business strategy, whatever, all of your time is overhead, no matter what."

I also do not think business development has to or necessarily will serve the greater benefit of the company, not like an accounting department would anyway. Your capture team selling to client A serves no benefit to client B and except for maybe someday (maybe not) bringing in revenue to your company, does not benefit the company as a whole.

Inasmuch as “Business Development” might encompass a broad category of specific activities, one also needs to look at various selected costs in 31.205 to determine allowability of specific activity costs. Some examples might include 31.205-1 Public relations and advertising costs, , 31.205-13 Entertainment costs and 31.205-38 Selling costs. 

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2 hours ago, Vern Edwards said:

So, if you are suggesting that there is no distinction between overhead and G&A, would you please explain?

I don't know of an official definition of "overhead". Without one, I don't know how to technically distinguish between G&A and overhead. I checked a few reference books that assumed, but didn't explain, a distinction between the two. The Government Contracts Reference Book said "See indirect cost" in the entry for overhead. I've also seen and heard the term "home office overhead" used synonymously with G&A in unofficial communications. 

The OP seemed to assume a distinction between overhead and G&A. I knew what he meant by G&A, but I didn't know what he meant by overhead--other than it was an indirect cost different from G&A. If the OP asked "why do some contractors include operating expenses in their G&A pools and others create separate indirect cost pools to allocate the same type of costs?", then I would have known exactly what they were asking.

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Thanks, Don.

The thing to remember is that G&A is an officially defined term, but overhead is not. In government contracting, overhead is mainly jargon for indirect cost pools other than G&A, although some people think of G&A as a kind of overhead.

We should think in terms of indirect costs and then in terms of specific pools of indirect costs. The term "general and administrative expense" really refers to the costs in an indirect cost pool that is not associated with manufacture of specific product lines or the performance of specific services, i.e., the cost of running the company as a whole. A G&A pool should include only those indirect costs associated with the operation of the business as a whole.

But as Don pointed our earlier, every contractor may pool its indirect costs as it sees fit, consistent with FAR Subpart 31.2 and the CAS, if applicable.

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I am familiar with G&A, home office overhead (usually G&A) as well as departmental overheads and overheads for separate Dvisions (e.g., Southwest Division, Eastern Division, Construction Equipment Rental, etc.).  In manufacturing there can be design division, plant division, materials division, manufacturing division, shipping division, etc.
 

You can easily look these overhead terms up. 
 

EDIT:

For construction contracts there is field office “overhead” or site office “overhead”, which are misnomers. Those are generally direct costs to a single contract or project  (shared over two or more contracts at a site).

The up to date term is now “General Conditions”.

All of those terms are for direct costs to the contract but not generally, directly to an individual FFP CLIN or work activity. Rather they are generally apportioned to (spread over) FFP CLIN(s).

They can be:

one time costs:  e.g., mobilization, demob, fences, borrow pit opening and closing costs, field office and shops setup and removal.

fixed (time related) costs per day or month or workday. 

variable costs (directly related to the amount of work or cost) or

semi-variable costs (not total directly related or a combination of variable and fixed (e.g., additional supervision personnel needed as the scope of work increases, etc.).

Depends upon the nature of the costs.

The term Field Office Overhead (HOOH) is still often used, simply because those costs are spread over the contract. However, General Conditions is a more accurate term, at least for FAR consistency in “overhead” terminology. I didn’t do a word search for General Conditions in the FAR but it is a commonly used industry term.

Edited by joel hoffman
Added some details
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3 hours ago, Retreadfed said:

In theory, but the contractor's decision is always subject to second guessing by DCAA.

This is where I was going to go once the thread was ripe for it.  For DOD contracts meeting the prescription at DFARS 242.7503 - for example all CR/T&M contracts - ACOs must make the determination of a contractor's compliance with DFARS 252.242-7005(c) System Criteria.  These criteria include, "(4) A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives", and "(12) Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions," and, "(18) Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles."  The ACO's determination is based on a DCAA audit report usually.

As a DCMA geographical ACO, I was always excited to have a commercially viable mid-size business in my portfolio, because I could trust market forces to appropriate its indirect cost rate structure.  Once many contractors got large and savvy enough though, new OH pools come out of the woodwork for their government-only business.  As a rule of thumb we are to be permissive in assessing the structure (others have alluded to this permissiveness above), so unless I knew their commercial lines well, I would have to dedicate much time to figuring out if the government line, under monopsony conditions, was being treated the same as the commercial line, under free market conditions.

An example of this difficulty might be, IAW one of the System Criteria quoted above, figuring out if the government line is compliant with FAR 31.203(b), which requires, "No final cost objective shall have allocated to it as an indirect cost any cost, 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."  What do I (or even the auditor for that matter) know about the "purpose" of costs incurred for their commercial work?

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13 minutes ago, WifWaf said:

Once many contractors got large and savvy enough though, new OH pools come out of the woodwork for their government-only business.

Absolutely!!! 

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3 hours ago, WifWaf said:

I was always excited to have a commercially viable mid-size business in my portfolio, because I could trust market forces to appropriate its indirect cost rate structure.

Having worked with consultants/subcontractors over the years - some brand new to government contracting - I always felt some folks just compared themselves to their competitors - through GSA schedules or other means - tried to decide if they were more or less valuable than these other companies, then picked labor rates for their services that were comparable and went with it, regardless of their expenses or cost rate structure. Then figured out this whole indirect cost rate stuff later 😀

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2 hours ago, Needforspeed said:

Then figured out this whole indirect cost rate stuff later 😀.

Lalala I don’t hear you 🙉 So anyway, I relied on market forces…

Okay, in reality assumptions were made on my part to manage a 200-contractor workload.  Not saying I was doing the taxpayer a great service, but we had to make risk-based decisions and approve some accounting systems without audit reports - or even any real knowledge of their rate structures!

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On 3/29/2023 at 10:56 AM, Needforspeed said:

😂 Thank you for your service WifWaf

I am sure this is sarcasm but I would send your thanks right up the flag pole if it were real.  You can instead thank the managers that assigned 200 contractors, which totaled nearly 2000 contracts or assistance instruments worth $2.5B, to a GS-12, and whom then had the audacity to track the approval of each business system though data metrics 4-6 levels above my supervisor.

That sort of reasoning - "we have to satisfy our internal customers (PCOs)!" - becomes insanity as you scale its application up.

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Wifwaf, I worked for DLA when CAS was part of its mission.  I always thought we placed too heavy a burden on our contract administrators.   Your workload was not unusual in my time, but it is and was too much.  This caused the cynics in the agency to take the expression "work smarter not harder and do more with less" and say when taken to its logical conclusion you can do everything with nothing.

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21 hours ago, Retreadfed said:

when taken to its logical conclusion you can do everything with nothing

So when push comes to shove, and the lack of billets filled force this do-more-with-less ethos, the best managers should have previously learned and come up the ranks in their offices so well that they can navigate where best to start to skimp on enforcement - be it an obscure, agency-level regulation, or perhaps things OFPP issued and doesn’t enforce, e.g., Performance-Based Contracting and nonpersonal service language crafting in the PWS.  There’s a list of all admin functions that DCMA supervisors could examine in FAR Part 42 and DFARS 242 but they’d have to know their office-level implementations of each function.

Either way, my point is that this it is management’s role, not a practitioner’s role, to decide where to cut.

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