Though the courts do not refer to "fixed" overhead, DCAA constantly emphasizes only "fixed" portions of overhead are to be included. They go so far as to restrict construction contracts to allow only home office expenses allocable to all contracts to be included while construction job site/field overhead costs are excluded. Such restrictions do not apply to manufacturing and supply contracts. For these contracts, DCAA uses the common definition of fixed costs as those operating costs that do not vary with business volume, at least within a "broad range" of activity. Cited examples include depreciation, property taxes, support staff such as secretaries, accountants and executives, insurance and basic maintenance.

Variable overhead costs are not to be included in the formula. These are costs that fluctuate either directly or proportionately with some appropriate measure of direct costs. Examples include small tools, production shop supplies and certain fringe benefits because they vary by production labor and effort. The rationale for their exclusion is that the stop-work order prevents expenditures of these additional costs.

The guidance does recognize semi-variable costs and allows for inclusion of, for example, electricity costs while excluding usage costs as variable. To make the determination of whether a cost is fixed or variable the guidance urges auditors to ask "what would happen to those costs if the size of the performance base changed". Costs related, for example, to laid off workers (e.g. social security taxes, health benefits) would cease and those taxes in the pool would be related only to other contracts, not the delayed one.

Audit guidance. For construction contracts, auditors are told that only home office costs are considered fixed overhead while the indirect site office costs are to be excluded. Auditors are instructed to search for variable costs and remove them from the overhead pool. For manufacturing and supply contracts, auditors are told to examine the overhead in G&A and other indirect cost pools. Auditors are to examine the "behavior" of selected cost items considering use of graphic computation techniques. The guidance cites examples of costs and what to look for: payroll taxes, vacation and holiday pay, 401K and group insurance allocable to variable labor; equipment rental- long term rental agreements are fixed while rental in support of variable labor is variable; uniforms- for variable labor or guards and maintenance (usually fixed); vehicles- long term leases are fixed, maintenance and repairs are semi-variable while gas and oil is variable and; shop supplies – usually variable because the are associated with variable labor.

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