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Hey, it's Michael.

Quick story before we get into Phase 4.

A controller I worked with last year inherited the rate structure when she took the seat. The previous accountant had "set up the GovCon side" six years earlier and disappeared. No documentation. No methodology notes. Just numbers in a spreadsheet that everyone trusted because they'd been working.

Then the win rate started slipping.

Six proposals in a row, all on contracts they should have won. Past performance was strong. Technical scores were high. They kept losing on price by 3-8%.

When we opened the rate structure, the problem was visible in fifteen minutes.

Three separate cost pools collapsed into one overhead pool. Executive salaries loaded into overhead instead of G&A. Fringe rate hadn't been recalculated in 18 months and was running 6 points higher than reality. Allocation base was direct labor hours when most cost driver was actually headcount.

Net effect on the wrap rate: 7% too high.

On a $4M task order, that 7% was the difference between winning and losing.

This is Phase 4. And it's the most expensive piece of GovCon finance work nobody talks about.

The official structure for indirect rates in government contracting has three pools. Fringe, Overhead, and G&A. Each pool has its own purpose, its own contents, and its own allocation base.

If you're running a sub-$50M GovCon and you don't have three distinct pools — or you have three pools but the contents are wrong — you're not compliant. You're just untested.

Pool 1: Fringe. Payroll taxes, benefits, PTO, holiday pay, 401k match. Applied to all labor (direct AND indirect), not just direct. Typical range: 25-40%.

Pool 2: Overhead. Indirect labor supporting contract work, contract-related supplies, project management tools, supervision. Applied to direct labor + fringe on direct labor. Typical range: 15-40%.

Pool 3: G&A. Executive salaries, accounting, HR, allocated rent, legal, insurance. Applied to total cost input. Typical range: 8-20%.

The wrap rate is the math: Direct labor × (1 + Fringe) × (1 + Overhead) × (1 + G&A) = fully burdened labor cost. That number is what shows up on every proposal you bid.

Here's the part that surprises every new GovCon controller: most accounting systems out of the box don't enforce this structure. QuickBooks doesn't. Generic accounting setups don't. Even some GovCon-specific platforms let you configure pools incorrectly. The default behavior is one big "indirect" bucket — and the default behavior is wrong.

These are the patterns I find when I open new client books. The frequency is striking. The fixes are usually structural, not cosmetic.

1. Single overhead pool doing the job of three.

How to spot it: one indirect cost pool labeled "overhead" with 30+ accounts feeding it. If your overhead pool includes both project supervision and the CEO's salary, those costs don't belong in the same pool.

2. G&A costs hiding in overhead.

How to spot it: HR salaries, accounting, executive compensation, or facilities allocated to overhead. These almost always belong in G&A. The result: artificially low G&A rate, artificially high overhead rate, distorted pricing on every proposal.

3. Fringe applied only to direct labor.

How to spot it: your indirect labor accounts don't have fringe loaded on top of them. Fringe is supposed to load on ALL labor, direct and indirect. Skipping the indirect side understates your real cost of doing business by 5-10%.

4. Allocation bases that don't reflect cost causality.

How to spot it: overhead allocated on direct labor dollars when most of the overhead is driven by headcount. Two engineers at different salaries should cause the same supervision overhead — but a dollar-based allocation says otherwise.

5. Rates calculated annually and never revisited.

How to spot it: your rates haven't been recalculated since the start of the fiscal year. By month 8 you're pricing proposals against a 14-month-old reality.

None of these are "wrong" in the sense that DCAA will flag them on day one. They become wrong when they cost you a contract or generate a finding on an incurred cost submission three years later.

Three diagnostic questions. If you can answer "yes" to all three, your rate structure is genuinely defensible. If you can't, you've found the gap.

1. Could you produce, in under five minutes, a written methodology document explaining what's in each cost pool and which allocation base each uses?

Most GovCons can't. The structure exists in the accounting software, but the documentation doesn't exist anywhere. That's a problem during a DCAA review — they expect to see methodology in writing.

2. When was the last time your indirect rates were recalculated?

If the answer is more than a quarter ago, your proposal rates are drifting against actual rates. Quarterly recalculation is the standard for shops that operate at this level. Annual recalculation is structural exposure.

3. Could you point to the specific account or category that drives your overhead rate, and prove it through cost causality analysis?

If the answer is "overhead is just overhead," you're using arbitrary allocation. The fix is a cost causality test: for each indirect account, identify what direct activity causes that cost to be incurred. The allocation base should match the cause.

1. Pull your current chart of accounts and audit the indirect side.

For every indirect account, write down which pool it belongs in (Fringe / Overhead / G&A). Compare to where it actually lives in your system. Document the discrepancies.

2. Recalculate your rates using YTD actuals.

Don't wait for year-end. Pull YTD actuals through last month, calculate what each pool's rate is right now, and compare to your published proposal rates. If the gap is more than 2 percentage points on any pool, you have a pricing problem on every active proposal.

3. Document your methodology in writing.

One page per pool: what's in it, what the allocation base is, why that base reflects cost causality, what the recalculation cadence is. This becomes your defense document during any DCAA review.

4. Set quarterly recalculation cadence.

Calendar it. Assign an owner. Build a recurring task in whatever system you use. End-of-quarter recalculation, with the new rates approved by the CFO or controller before they get used in proposals.

Indirect rates aren't just a compliance issue. They're a competitive weapon.

Here's why. Three GovCons can submit the same proposal with the same labor mix and the same fee, and one wins and two lose — because the indirect rate stack underneath the price is different. A 5% lower wrap rate doesn't mean you're cheaper. It means your rate structure is tighter. The bid wins because the cost base is more competitive at the same margin.

The GovCons that grow profitably past $20M aren't the ones with the lowest costs. They're the ones whose indirect rate structures accurately reflect their real cost of doing business — not artificially high (which loses proposals) and not artificially low (which makes the books unsupportable in audit).

Phase 4 is where competitive advantage gets built. Phase 3 keeps you out of trouble. Phase 4 helps you win.

If you want to go deeper this week:

•         Phase 4 deep-dive: Indirect Rate Structure & Methodology — sample methodology documentation, rate recalculation templates, cost causality testing framework, and the indirect rate health-check we use with new clients.

•         The full 9-Phase GovCon Finance OS — the complete curriculum, from bookkeeper foundations through CFO-level strategy.

•         Join the Founding Member community on Skool — weekly office hours, peer connections, real GovCon case studies.

Phase 5: Pricing and contract profitability. The 7 pricing principles that separate plateaued accountants from CFOs — and the most expensive pricing mistake I've ever seen, a contract that won and then quietly drained $400K of margin over 18 months before anyone noticed.

Until then — audit your indirect side.

—Michael Harris, Founder/CEO of 4G Consulting, LLC