Updated November 2026 · VG CPA PC advisors
Common pools
Most contractors use three pools. Fringe covers payroll taxes, health insurance, retirement contributions and paid leave, allocated over labor dollars. Overhead covers costs that support direct work, such as facilities and project management, often split between on-site and off-site work. General and administrative (G&A) covers the costs of running the business as a whole.
Small companies sometimes start with a single indirect rate or two pools; the structure should grow with the business.
Allocation bases
Fringe is usually allocated over total labor; overhead over direct labor; G&A over total cost input or value-added cost input. The base should reflect the causal or beneficial relationship between the pool and the work.
Changing structures or bases mid-contract can create cost shifting and must be disclosed and justified. Consistency is what auditors look for.
Getting rates right
Rates must exclude unallowable costs, and indirect costs charged to commercial and government work must be allocated consistently. A wrap rate built from your pools tells you how much each direct labor dollar costs fully burdened, which is the starting point for pricing.
Review rates monthly against provisional billing rates and budgets. Large variances at year end create refunds or underbillings that hurt cash flow.