When it comes to General and Administrative (G&A or SG&A) expenses, businesses of all types incur G&A expenses. Unlike Overhead which includes pooled indirect costs that are not identifiable to a specific contract, but are incurred in the performance of a contract, G&A expenses benefit a business as a whole instead of just a particular cost center, division, department, or line of business. For example, payroll processing and human resource expenses are part of the normal course of doing business and are therefore classified as G&A. Said another way, G&A expenses will exist whether or not your business has direct projects. But, it is not quite that simple and there are variations on how G&A is computed and allocated.
There are three acceptable allocation bases for computing your G&A indirect rate. They are Single Element, Total Cost Input, and Value Added, respectively. While a Single Element G&A rate consists of all costs associated with a specific cost element such as direct labor and a Total Cost Input G&A includes all direct and indirect costs (including unallowable costs) except G&A, a Value Added G&A rate is applied only to a subset of direct costs and will exclude subcontract or material costs (where applicable) from the allocation base. This method is used when material and subcontract costs significantly distort the allocation of G&A. Since FAR 52.219-9 requires large businesses engaged in Federal contracting to develop a Small Business Subcontracting Plan, invariably the dollar volume of direct subcontract costs will become a greater percentage of a large contractors allocation base when compared to total ODC's. Therefore, as the dollar volume of subcontractor work performed grows, your G&A indirect rate will decrease as your allocation base (denominator) gets larger and thus the distortion effect. Therefore, a separate subcontractor or material handling pool is created to include those overhead expenses related to procurement, receiving, supervision, etc. with the allocation base consisting of subcontractor or materials expenses.
To illustrate, here is a real-life anecdote about a government contractor that was engaged in manufacturing and was using a Total Cost Input allocation base instead of a Value Added G&A base. The contractor regularly purchased materials in performance of their prime contract's statement of work and they managed to keep their G&A rate relatively low and on par with their provisional rate. Late one government fiscal year when there was money left over that needed to be spent, a contracting officer requested a favor. The favor was for the contractor to procure and pass-through a significant amount of computer hardware that was unrelated to the contractors main line of business. The contractor was directed to order and pay for the hardware and would be in turn reimbursed for the cost of the hardware plus a burden for G&A. The materials were to be drop-shipped directly to the agency to make things that much easier. What the contractor did not realize at the time was the impact of the purchase was to have on its G&A rate. When it came time for submitting their ICE submission, the effect of their willingness to order materials that became part of their direct costs drove their G&A rate down to the point where they had underspent their G&A provisional rates and therefore owed money back to the government! So the net effect was they provided a value-added service to the government by way of a one-off procurement of materials and those materials were added to Total Cost Input base, and it backfired. Had they previously incorporated a Value Added base with a separate material handling pool, their G&A base would not have been impacted as dramatically.
To summarize, a value-added G&A represents a more accurate picture of a company's administrative expenses relative to the work they directly influence or control, such as the procurement of goods and services. The added value is reflected in the administrative costs incurred by the contractor in managing subcontractors or ordering materials rather than that being the responsibility of the federal workforce. If your company purchases a significant amount of materials or uses or intends to use subcontractors, you should consider incorporating a Value-Added G&A and you will at the same time add value to your government customers. And, of course, SYMPAQ's indirect rate module provides the flexibility to accommodate complex G&A rate structures.