Important Reminders for Government Contractors on Proper Cost Allocation

In this article, we discuss some essential reminders for government contractors when allocating direct vs. indirect costs as well as overhead vs. G&A costs.

may w3-1As a government contractor, proper cost allocation is crucial to receiving and retaining government contracts. Failure to allocate costs correctly can result in losing your ability to contract with the government and may even lead to fines. Here are some reminders for government contractors when allocating costs on any government contract.

Direct and Indirect Costs

When allocating contract expenses, it's important to differentiate between direct and indirect costs. Direct costs are expenses specifically identified with a particular final cost objective, such as labor, materials, contractor costs, or travel. Indirect costs, on the other hand, are not directly identified with a single final cost objective but rather with multiple final cost objectives or at least a single intermediate cost objective, such as rent, utilities, insurance, and depreciation.

Overhead vs. G&A Costs

Both overhead and G&A (general and administrative) costs are considered indirect costs, but it's essential to differentiate between them when allocating costs to your contracts. Overhead expenses support a specific operation or function of your company and are typically related to fulfilling contracts. G&A costs, however, exist regardless of whether you have billable work and are associated with the overall operation of your business.

How Our Expertise Can Help

Government contract accounting is more complex than it seems, and rigid accuracy is essential for maintaining your status as a government contractor. If you're uncertain about cost allocation, it's best to consult an accountant experienced in government contracting.

At Peter Witts CPA, we specialize in working with government contractors and handling the complexities of government contract accounting. Our team is well-versed in the specifications and requirements necessary for maintaining your good standing as a contractor for the United States government.  If you have any questions or concerns, please don't hesitate to reach out to us.


I’m Kristin, the PWCPA PC Customer Success Specialist. For more information about this topic, or any other, you can always reach me through our customer ticketing system.