The three cost pools every GovCon company uses to allocate indirect costs — what goes in each one, how they cascade, and common mistakes.
In government contracting, you can't bill the customer for every cost directly. Costs that support multiple contracts—like health insurance, rent, or your CFO's salary—are collected into pools and allocated across all contracts using a rate.
There are three standard pools, applied in order:
What's in it: Everything related to employing a person beyond their salary.
Base: Direct labor dollars
Why it's first: Fringe is inseparable from labor. Every dollar of salary has a fringe cost attached. You can't have overhead without people, and people cost more than just their wage.
What's in it: The cost of running the operation where work happens.
Base: Loaded labor (direct labor + fringe)
Why it's second: Overhead supports the loaded workforce. You need people (with benefits) before you need the space and tools for them to work in.
What's in it: Corporate-level costs that support the entire business.
Base: Total cost input (all direct + indirect costs above)
Why it's last: G&A covers running the company as a whole. It applies to everything—not just labor, but materials, subcontracts, and ODCs too (though subs are often excluded or capped).
The pools are applied sequentially—this is called the cascade:
Direct Labor $100.00
+ Fringe (35%) $35.00
= Loaded Labor $135.00
+ Overhead (25%) $33.75
= Burdened Cost $168.75
+ G&A (10%) $16.88
= Total Cost $185.63Overhead is 25% of loaded labor ($135), not 25% of direct labor ($100). G&A is 10% of total cost ($168.75), not 10% of labor. Each pool's percentage applies to its own base, which includes everything above it in the cascade.
The Operator's View
Three common problems exist with indirect rate pools in GovCon firms.
The first is access—many early-stage firms simply don’t track their indirect rates at all. Arcvue solves that.
The second is attention. Most businesses that do have indirect rates never look at them, because without cost-plus contracts they don’t feel the immediate pressure of provisional vs. actual reconciliation. That’s the wrong frame. Stop thinking of indirect rates as a DCAA calculation. Start thinking of them as a signal.
Here’s what that looks like in practice. Your fringe rate spikes in January. You investigate and find January was a heavy PTO month—that checks out. But then you go one step further: how does January this year compare to the same month last year? You notice it’s running ten percent higher. You ask your HR manager and learn the sick leave policy changed and was heavily utilized right out of the gate. Now you have a predictable, quantifiable impact you can carry forward in your forecasting. Without that visibility, the change gets made, months pass, the anomaly eventually shows up in the financials, and you spend two weeks digging backward trying to remember what decision caused it.
The third is complexity. Don’t add a new rate pool unless it is absolutely necessary and the rules governing when to use one pool over another are completely black and white. Water always finds the path of least resistance—and in GovCon, that path is bidding the lower rate pool. Do that long enough and the heavy bidding causes the higher and lower pools to converge. Now you have additional pools to manage with no discernible difference between them, and a structure that adds overhead without adding insight.