The Proper Way to Determine an Overhead Rate in Government Contracts

Association of Construction and Development
November 22, 2012 — 1,853 views  

Determining an Overhead Rate in Government Contracts

There are two very important factors that impact the overhead rate in government contracts the most: the time and labor. Time and labor for a government project is usually specified in the preliminary government bid before a final contract is signed by an engineering group who has been classified as a procured vendor. The difficulty for most engineering groups is maintaining time constraints as specified in the government contract and supplying labor approved for government projects. This conflicts with a direct method of determining overhead that exist in non-governmental projects.

Factors That Comprise an Overhead Rate

Time and labor are among the most important factors that comprise an overhead rate for most projects. Time to complete a project can be delayed when other vendors associated with the government projects are not readily forthcoming with specifications needed to complete engineering drawings and models. Labor is another factor that is included in overhead. The cost of labor to complete a government project can't be determined far in advance as with other projects, until confirmation of the contract is accepted by government procurement. This can change the actual labor costs when too much time elapses before the government contract is confirmed. Even with preliminary cost estimates and quotes, labor costs rise if a government contract confirmation is delayed for more than 30 days. This is the usual time frame in most labor quotes for a labor cost quote to remain effective. Hiring costs for additional or specialized staff should also be factored into an overhead rate as well as payroll processing costs to accommodate additional staff. Travel costs are another factor in overhead to consider in government contracts. Engineering managers may be required to review the project site, necessitating travel and expenses.

The Proper Technique to Determine an Overhead Rate in Government Contracts

There's a basic technique to determine an overhead rate in government contracts. Use normal overhead rates to compare differences in time, labor, hiring and travel expenses in government contracts. This helps determine the percentage of overhead that needs adjustment. If, for instance, the usual rate of overhead is 35% for non-governmental projects and the government contract includes additional time, labor, hiring and travel expenses, the percentage rate of overhead can be increased to standard fair market rates. Be aware that some government contracts provide little room for negotiation of contract terms and conditions.


Association of Construction and Development