The advantages of your current method are considerable. It is an established method involving no changes and hence little need for auditors to review as well as no changes to your current method of accounting for costs. Also, the overhead rate provides for maximum recovery on direct labor and the G&A rate currently provides for a generous 20% add-on to other costs including materials. The only down sides I can think of are (1) the higher material costs will significantly lower your G&A, providing less recovery on direct labor (2) it is quite common for contracting officers (not auditors) to seek a minimal G&A allocation to materials and ODCs, often in the 0-5% range. COs are taught that a significant way to cut government expenditures is to negotiate a cap on G&A costs, especially those applied to direct subcontractor and material costs, even if higher levels are justified on a cost incurred basis and (3) as the attached sensitivity analysis indicates, once material costs exceed a certain level (around 35-40%) of your total costs, you stand to obtain more recovery with use of a material handling rate. Higher recovery occurs where there are higher percentages of material and vice versa for lower percentages.
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To discuss your needs, contact Bill Lennett, Principal, at 1-925-362-0712 or email him at
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