Two contractors can pay a systems engineer the exact same salary and still submit prices that are 40% apart. The difference is almost always indirect rates — the fringe, overhead, and G&A that turn a raw salary into the number you actually bill the government. Understanding them is the difference between a competitive price and a proposal that never had a chance. This guide explains the building blocks.

Direct vs. indirect costs

  • Direct costs are traceable to a single contract — the labor hours and materials for that job.
  • Indirect costs benefit more than one contract and can’t be traced to just one — so they’re pooled and spread across all work as a percentage rate.

Indirect rates are how those pooled costs get fairly allocated to each contract.

The three rates that matter most

  • Fringe — the cost of employing people beyond salary: payroll taxes, health insurance, PTO, retirement. Applied to direct labor.
  • Overhead — the cost of running the work: facilities, program management, tools, supervision. Often split into on-site vs. off-site pools.
  • G&A (General & Administrative) — the cost of running the company: executives, accounting, HR, business development. Applied near the top of the buildup, typically to total cost.

How they build a billable rate

Rates stack to turn a base salary into a fully-burdened (or “wrap”) rate:

  1. Start with the direct labor rate (salary ÷ productive hours).
  2. Add fringe on the labor.
  3. Add overhead on labor + fringe.
  4. Add G&A on the running total.
  5. Add fee/profit on top.

The cumulative multiplier from base salary to billable rate is your wrap rate. A wrap rate of ~2.0 means a $60/hr salary bills at ~$120/hr. Small differences in each pool compound quickly — which is why indirect rates so often decide who’s price-competitive.

Figure — how a base salary becomes a billable rate
Base salary+ Fringe+ Overhead+ G&A+ Fee$60/hr salary≈ $120/hr billable · wrap ≈ 2.0×

Why this wins or loses bids

On cost-reimbursable and T&M work, the government evaluates your rates directly, and a high G&A can price you out even with lean labor. On fixed-price work, your rates determine whether your bid leaves margin or loses money. Either way, you can’t build a credible Basis of Estimate without knowing your real, current rates.

DCAA basics

The Defense Contract Audit Agency (DCAA) audits contractor costs and accounting systems, especially on cost-reimbursable work. It doesn’t “certify” you, but it evaluates whether your accounting system is adequate — able to segregate direct and indirect costs, accumulate costs by contract, tie to a timekeeping system, and exclude unallowable costs (per FAR Part 31). An “adequate” system is often a prerequisite for cost-type awards, so many firms build toward it early.

How PursuitAI helps

PursuitAI’s rate card stores your labor categories and indirect rates so your proposal pricing and Basis of Estimate build from your real numbers — mapping GSA/negotiated labor rates onto RFQ line items and carrying your fringe/overhead/G&A into the cost narrative, instead of re-deriving a wrap rate by hand on every bid.

A word of caution

Cost accounting, allowability (FAR Part 31), and DCAA adequacy are technical and consequential areas. This is an overview, not accounting or legal advice — work with a qualified government-contract accountant to set and support your rates before you rely on them in a priced proposal.