Allocating Overhead Under FAR 31.203: Questions to Ask the GC
When trade subcontractors bid cost-reimbursement federal projects, negotiate contract changes, or price equitable adjustments, allocating home-office overhead requires strict compliance with federal cost accounting principles. Under FAR 31.203, contractors cannot arbitrarily assign indirect costs to federal projects. Clarifying accounting boundaries with your general contractor early ensures that your indirect cost pools remain allowable, properly supported, and fully defensible.
How Does the Prime Distribute Direct Versus Indirect Job Charges?
Under federal rules, cost classification must remain consistent across all work. FAR 31.203 explains that once direct costs have been determined and charged directly to a contract or other undertaking, indirect costs represent the remaining expenses to be allocated across intermediate or two or more final cost objectives.
Critically, the regulation dictates that no final cost objective shall have allocated to it as an indirect cost any expense if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. When coordinating with your general contractor, ask how supervisory and administrative expenses are treated across the job. For drywall and framing trades managing field oversight, aligning your project accounting with standard practices like estimating general conditions ensures you do not double count jobsite administrative labor against home-office overhead pools.
Which Allocation Base Governs General and Administrative Pools?
Federal procurement rules require contractors to accumulate indirect expenses in logical cost groupings based on the reasons those costs were incurred. Under FAR 31.203, the contractor must determine each grouping to allow the use of an allocation base common to all cost objectives to which the grouping is allocated, selecting a base that distributes costs according to the benefits accruing to intermediate and final cost objectives.
Before submitting cost proposals, verify the specific mechanics of the allocation base with the general contractor:
- What specific allocation base is accepted for distributing general and administrative pools across trade subcontracts?
- Does the prime's cost input base retain all proper elements without fragmenting the pool?
- Are practical considerations being applied to avoid unduly complicating the allocation when less precise methods achieve substantially the same results?
Once an allocation base is accepted, FAR 31.203 prohibits fragmenting the base by removing individual elements. All items properly includable in an indirect cost base must bear a pro rata share of indirect costs, regardless of whether those items are accepted as government contract costs. For instance, if a cost input base allocates general and administrative costs, every item that properly belongs in that cost input base—allowable or unallowable—must bear its pro rata share of those expenses.
Do Offsite Operations or Subcontracting Shifts Require Separate Pools?
Subcontractors performing prefabricated framing, offsite drywall module fabrication, or extensive specialty assembly must evaluate where their indirect expenses accumulate. FAR 31.203 notes that separate cost groupings for costs allocable to offsite locations may be necessary to ensure an equitable distribution based on benefits accrued.
Furthermore, the regulation states that the method of allocating indirect expenses may require revision when significant operational shifts occur. These shifts include changes in:
- The extent of subcontracting
- The nature of the business
- The volume of sales and production
- Manufacturing processes or contractor products
- Inventories or fixed-asset improvement programs
Ask the general contractor if your offsite shop facilities or changes in subcontracting volume warrant unique cost pools rather than blending into standard home-office overhead.
How Does the Contract Schedule Map to the 12-Month Base Period?
Timing issues often complicate cost recovery when projects span multiple reporting years. According to FAR 31.203, the base period for allocating indirect costs is the cost accounting period during which those costs are incurred and accumulated for allocation to work performed during that specific period.
For contracts not subject to full or modified Cost Accounting Standards, the regulation specifies that the base period for allocating indirect expenses must be the contractor's fiscal year used for financial reporting under generally accepted accounting principles. This fiscal year is normally 12 months, though a different timeframe may be appropriate if a change in fiscal year occurs due to business combinations or related circumstances. Estimators handling delayed scopes or multi-year phase work must coordinate with the GC to verify how indirect pools will be reconciled over each 12-month period, particularly when preparing cost-based submissions under pricing change orders.
Will Excessive Pass-Through Limits Under 52.215-23 Disallow Markups?
Subcontractors must also confirm whether tiered contracting structures impact indirect cost recovery. FAR 31.203 explicitly establishes that indirect costs meeting the definition of an excessive pass-through charge in 52.215-23 are unallowable.
When working under a prime GC on federal cost-reimbursement or cost-negotiated work, ask whether lower-tier specialty trade scopes risk triggering pass-through restrictions. Clarifying this upfront protects your overhead allocation from disallowance during government audit or cost analysis.
Sources
FAR 31.203 Indirect costs | Acquisition.GOV
Published October 31, 2026. No affiliate links on this page. Facts come from the sources linked above; check them for updates.