GovCon FAQ #5: What are the types of contract terms on a federal award and how do indirect rates apply?


There are several different ways that the government can administer and compensate for services rendered or goods sold. The various methods can be cost reimbursable or based on a fixed price agreement where they could be per unit. The Federal Acquisition Regulation (FAR) Part 16 explains the various types of contracts in detail, summarized below are a few of the most common types.  

  • 公司固定价格
  • 时间和材料合同
  • 成本加成的固定费用 

Regardless of the type of contract, it’s going to be important to understand how indirect rates work. I’ll touch briefly on that before I get deep into how each contract works.  


If you’ve googled anything about government contracting, you’ve probably come across the term indirect rates. Indirect rates are used as a method to determine which proportion of indirect costs each program should bear. 换句话说, the costs a company is incurring that are not directly billable to the customer, but instead supports the company or results from the operations of the direct contract performance. These are costs that can be allocated to a final or intermediate cost objective and it can be used as a measure of performance for the company and an indicator of cost build up for bidding on contracts. Indirect rates apply to various contracting requirements for provisional rates, 远期利率, 计费, and incurred cost submissions that will need to be planned for and executed throughout the contracting process. Certain contract types require this work to be performed while others simply offer a benefit to the company’s financial performance. I’ll get into the why on that in just a few seconds. 

Indirect rates are those costs that are resulting from performing on the contracts. If you look at an instance of direct labor – I have an employee who works 40 hours a week on a contract, there are other costs that aren’t just the labor portion that are incurred to the company that are on behalf of the work performed to the federal government. 在劳动, 此外还有附加福利, meaning that there are certain costs that arise from the employment of those individuals (ex. PTO, 401k,工资税等等.). 如果你看看其他的比率, there are certain costs for subcontractors and occasionally an administrative burden involved. The indirect rates are set up to determine the cost associated with that direct labor piece that could be billed back to the federal government. It would be prudent to understand the basics of indirect rates, regardless of contract type.  


Firm fixed contracts include a negotiated contract price that we build either over time or at a point in time, and does not change regardless of the input of time or resources. 虽然这些合同不是基于投入, understanding the fundamental structure of indirect rates and budgeting will allow the company to bid a price that is competitive yet profitable to the company. 通常, winning a contract without understanding the true cost of performance can lead to an undesirable outcome. So, you could bid a contract to where you know what the direct labor is going to cost you. You have a calculation for that, and you bid it at a lower margin.  

The issue with this is that there are all sorts of costs that result from the employment of individuals and the performance of the contract in terms of fringe benefits, 开销, G&A, and sometimes a manufacturing and sub handling rate. Not understanding how these costs are included with direct labor could result in a poor performance, 即使你的利润率看起来不错. It’s important to understand what goes into all the costs of the simple direct labor to be able to bid a contract accurately.  

Another common issue with firm fixed price is that, 通常最容易管理, there is a risk that the company could lose out on their end. This is a type of contract where the company bears the risk, similar to a construction contract. You’re given a certain price to operate in and if you go over budget, the risk is on the company. That can be favorable from an administrative standpoint, but it also can be a risk from an operational standpoint.  


时间和材料合同 are those that are reimbursed for services rendered and materials based on a negotiated hourly rate. Another reason to understand why indirect rates are so important is because you want to make sure that your bill rates are reflective of all the costs you’re incurring, 直接和间接, so that they result in a profit for your company. A lot of times companies will just look at the gross margin on time and material contracts and think it’s performing well, only to realize that the actual hourly cost with indirect rates applied to that direct labor is more expensive than they anticipated. It’s essential to understand this in the bidding process so you can structure an agreed upon bill rate that will ensure the profitability of the company.   


The last and relatively most common and industry-specific to government contracting is cost-plus fixed fee. These are cost reimbursement type contracts which companies are compensated for the direct costs required to complete a job plus the allocable portion of indirect costs. Then there’s also an agreed upon fee percentage that’s applied, 通常在4%到10%之间, 你的真实利润是多少. Due to the nature of these cost reimbursement type contracts, there are several requirements to ensure fair and accurate reporting of indirect costs, 包括临时率, 年度已发生费用提交, 合同收尾程序, 等. Because 计费s are prepared and submitted using a provisional rate, there’s a yearly true up required that is reported through the incurred costs submission. These are also subject to audit to ensure that the information is being recorded accurately. If your team is set up with the expertise to support a cost-plus contract, understanding how it works from the start really is a benefit to the company because, 尽管它可能很难控制, you’re being reimbursed effectively for all your direct costs and the applicable indirect costs.  

It’s worth noting that there is a risk with some unallowable costs if you don’t manage those costs properly. These are costs that the federal government says may be indirect costs, but we don’t see those as something that should be reimbursed because they’re not technically supporting the actual contract or the individuals working on the contract. 如果你能管理好你不允许的成本, 在理论上, there should be a pretty good return on all cost-plus contracts, which certainly benefits the company to understand how that works and to be working on those contracts.  

Where we see the greatest success is when companies build a team with experience and partner with reputable firms and service providers so that they can set a foundation to succeed in the long run. The goal here is that you get onto a contract and you know how to administer it from the start, 你知道该怎么解释, 你知道如何计划和预算. Securing the proper resources will position you to take advantage of some of 我们讨论过的好处 同时最小化挫折. Investing in the company allows the CFO/CEO to focus on what’s upcoming and go after those contracts instead of looking in the rearview. We find that sometimes if some of these imperative functions aren’t invested in soon enough, you can spend some time trying to clean up the past, 我们希望帮助人们避免什么.  

There is a plethora of information that needs to be considered when contemplating working with the federal government. 认识到好处, 知道该考虑什么, and how to go through the process is a huge part of succeeding in the industry. While these answers represent the most common contract types and basic considerations, we would be happy to field any additional questions or further explanations on the information above to help you work through the process of becoming and succeeding as a government contractor. 

接下来: GovCon FAQ #6: How can I prepare to bid on an RFP that mentions an “approved accounting system”?


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