How To Calculate The Entire Cost Of Employees

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How To Calculate The Entire Cost Of Employees

 Hi.  Does anyone have a good template for doing "all in" employee costing?  In order words, pay rate, burden, office space, equipment, etc.?  



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What kind of business are you in? e.g. do your employees bill time to internal projects or to clients?
What specific questions are you trying to answer?

I always start with direct costs of hire - pay, benefits, that can be readily identified as being driven by the employee activities; this varies from ops people to sales/field staff.
Allocation of office overhead can become an interesting exercise- it's not under the control of the employee, so sometimes this is an arithmetic exercise.
Also, what happens to the overhead if headcount changes rapidly?

Happy to help further if you wish.


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Len points out that applying an overhead can be misleading. As always overheads come in two buckets, one fixed, which can not be associated with an individual employee and the second variable, those costs required to support the new hire.

Generally fixed or sunk costs are not included when evaluating the cost / benefit of hiring a new employee. There is no easy answer to your question as each company is different requiring unique judgements when constructing the cost model.

Good luck and let me know if you need specific help.


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Hi Dick - I agree that OH cost can be split between fixed and variable, but that does not mean those fixed costs cannot be allocated over the headcount or square foot base.
In fact, this is required when you work on Govt contracts. All allowable indirect costs must to allocated to a final cost objective, such as customer contracts to recovered via billing. As long as you understand the relationships between the numbers, such as that the fixed cost portion of an OH rate that is a % of direct labor, will decrease as the direct labor increases and the variable cost portion remains relatively proportional to the volume of direct labor.

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Roger - I can certainly contribute to your suggestion. Your rates are very different than any I have seen (in 30 years of GovCon) at large & small companies. I have never seen Fringe or G&A that is higher than OH, can you share what creates such an unusal set of indirect rates?

I have more experience with large Govt contractors so I have never seen an OH rate as low as your example, rarely seen less than OH 100%, but I have also most often seen Fringe at all size companies in the 30's, have never seen 40's yet. G&A a bit hi too.

I am interested to understand the components of the pools/bases for these rates?

With regard to manufacturing, large companies often have more than one OH rate, and one example is to have a high manufacturing OH rate and a lower engineering OH rate.

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Theresa - Thanks for your feedback. The rates I cited apply to several small businesses in a niche market, IT services for the Intelligence sector, where there is such competition for fully cleared (TS/SCI with poly) engineers that benefits are exceptionally high (e.g., fully paid family health insurance). OH is low because most direct personnel work on government site.

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I work in the GovCon industry where every dollar of allowable indirect cost must be allocated as burden on direct costs on a causal beneficial relationship to the base.

In addition to being a requirement for Govt Contractors, it is also an excellent way
to monitor costs, specificially the percentage of indirect costs to direct costs to

Direct costs as defined by CAS (Cost Accounting Standards) are those costs that can be identified to a single final cost objective, such as one and only one client contract.

Indirect costs are those that cannot easily be identified to a single cost objective, but that benefit multiple final cost objectives; more than one or all client contracts.

Direct costs include direct labor, direct material/subs and ODC (other direct costs).

Indirect costs are typically divided into Fringe, Overhead, G&A & Unallowable.
Fringe benefit costs are typically allocated as a percentage of total labor.
Overhead is typically allocated as a percentage of direct labor supported.
G&A is typically allocated as a percentage of total direct & indirect cost.

We must collect costs in Pools such as Fringe Pool, OH Pool, G&A Pool, etc.
and then these pool costs are divided by their appropriate base to compute
a rate, such as a fringe rate, overhead rate, and G&A (Gen & Admin) rate.

Sometimes there may be multiple Fringe or Overhead pools where a group of
overhead costs clearly only benefit a portion of the direct labor, as is
the case when you have multiple locations, you might want to have two OH
rates that are only applicable to one or the direct labor bases not both.
Another common split may be engineering vs. manufacturing overhead where
the costs of supporting each type of work differs significantly and so
should be allocated differently.

These indirect rates are computed at the beginning of the year using budgeted costs to compute budgeted rates, and these budgeted rates are used for creating cost proposals and for billing customers during the year until year end actiual costs are known and are divided by direct cost bases to determine year end actual indirect rates. Those actual indirect cost rates are audited and then applied as burden to direct cost bases and are adjustments made to annual billings and must be rebilled to either collect the underbilling or repay the overbilling that was done using the budgeted indirect rates.

So the simple model is Pool/Base = Rate

When I teach accountants to do this for the first time, I suggest they start with a trial balance in Excel with column 1 = Account numbers. column 2 = Account names,
column 3 = Balance sheet, 4 = Direct, 5 = Fringe, 6 = OH, 7 = G&A, 8 = Unallowable.

Then for each line of the TB, put that amount in the correct column until all are
in one and only one column, then add totals at bottom to confirm you counted all.

And there you have the amounts that make up your pools an bases to compute indirect cost rates to apply as burden to direct costs, so that all costs ae fully allocated.

The only cost excluded form these allocations are unallowable costs that cannot be billed to the Government basd on FAR (Federal Acquisition Regulations) Part 31.

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Hi everyone, need your help.
I am looking for a road-map on how to calculate a G&A rate for a government contractor business.

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The best source I have found to understand how indirect rates are calculated is downloading the Incurred Cost Electronically (ICE) from DCAA ( Schedules A-D show how the G&A costs (including B&P and IR&D) are used in calculating G&A, OH, and Fringe rates.

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I have no 'template' but have run FP@A and costing initiatives for several very large companies, including MSFT, AT&T Wireless, as well as several startups, etc. I think it very imnportant to estimate costs per employee as granularly as possible as some costs, although small (supplies, phone, coffee/beverages) as they can surely add up as FTEs grow. I am not in favor of allocating space as an employee cost individually, but rather forecast space costs per a ceratin group of employees, i.e. every 20 new fte's will require 'X' amount of new space.

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Hi Ricardo,

I can probably definitely help you with this although since G&A does not travel alone, I am curious about the other rates, and what is prompting you to ask about this. There are mutliple ways to compute G&A and they depend on whether. Offhand you would need to select between a total cost or value-added G&A base or using a 3-factor formula. Those are the three most common. tell me more on what is prompting this question and I will be glad to help however I can.

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Hi Ricardo - Just went to close this window and had a thought I should mention in case it is a concern with regard to confidentiality, because we can discuss this here with no secret information required, just wanted to make sure you knew that is not what I'm
asking for to help you. Just curious if you are new to GovCon or if company is, are you trying to do a budget, proposal, cost claim, Govt billing, DCAA audit or what?

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Here are some ideas - let me know if this is what you are thinking. These are more driven to change management behaviors instead of external reporting.

IT dept support - by number of computers in the dept.
Human resources cost - based on headcount (not on salaries)
Overhead - in our case we aim to cap overhead at 5% of expenses (not revenues) so emphasis may be to be more efficient (i.e., reduce expenses not revenue.
Depreciation, utilities - based on square footage. Motivates managers to be more efficient with their space.
Employee benefits are easy when it relates to FICA and pension benefits but may not be so clear cut with health care benefits. We have three health care rates (i.e., single, employee +1 and family). We are now identifying types of coverage by employee and thus by department. Before this year allocation was a % of salary. Found out that in one dept employees lobbied to increase hours to 30 (limit to get health care benefits). The marginal cost was huge when going from 28 hours to 30 hours with little to no corporate benefit. Managers were made aware of this practice so they could control it.
Found some surprises when performing a time and motion study in our Admissions office and in our billing dept. We had been allocating 80% of admissions to LOB A, and 20% to LOB B based on volume. But based on admissions it changed to 6% and 94%. It swung LOB B from a gain to a loss, we changed staffing in admissions office to swing LOB B back to gain.

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Hi Augusto - Would I be safe to assume you do not work for US Government contractor?
I would agree with the first part of your suggestion with regard to the basis for allocation of IT, HR & Facilities (assume this includes rent, maintenance, etc.)
as long as you have a system that will compute on the manual bases, as we do, I
would agree with those allocation bases. When you get to Overhead, what are you
talking about hear "capping at 5% of expenses not revenue" what does this mean?
What expenses and what does revenue have to do with computing overhead rates??
On the fringe, just a heads up that you can make yourself crazy with that one by trying to go down to dept. or employee and in the effort to do so (track by ee),
odds it will get whacked out worse than before or as soon as you grow is what I
have seen. Too many little pieces of cost trying to follow the labor of each ee
and in the end I think you will not find a significant difference to = effort.
I have found even most huge companies stick with a single fringe pool as a %
becasue there ends up being so many variables in both directions they offset
and net back to 1% or less difference. I have found this ot be the case even
with companies who think they have very distinctly different fringes like for
for employees working overseas some things are more expensive, but those costs
tend to be offset by benefits those employees cannot partake in such as in the holidays, jury duty pay, etc. In eevry case I have seen so far you can spend a
whole lot of time picking the costs apart but when you get them all lined up
and put them next to each other, for starters the curve to get 100% is crazy,
and I am usually the proponent of more detail is better, but this on this one
I have seen enough times not to be worth it. By all means you want to do the
initial analysis to be sure but I think you will reach same conclusion on this.
I look forwadr to hearing about that overhead calc.

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In view of the above discussion it might be very helpful to many members if those of us in the government contracting arena would share our knowledge of the normal range of indirect cost factors (Fringe, Overhead and G&A) in particular sectors.
For example, a small IT services contractor might have a Fringe rate of 40-45%, Overhead of 7-10%, and G&A of 15-19%.
I'd be curious to know what a small manufacturer in the government contracting world might have as an Overhead rate. Anybody?

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We don't break out fringes separate from our G&A, or Overhead pools, but our overhead pools, in a midsized manufacturing Contractor around 20% of total, direct cost and our overhead runs 240% of Direct Labor.

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Hi Damon - Thanks for sharing. So you are saying your Overhead costs are 20% of total direct cost and that same overhead number is 240% of direct labor. May Iwhich ne of thosebases you use to apply your OH - to diect labor or direct cost?

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Roger - I just looked at two small manufacturers to answer your question and saw:
Fringe 17% with OH 64%
Fringe 9% with OH 72%
Both with G&A 3%

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A good source of information for government contractors on indirect rates as well as other government contracting accounting and financial issues is the DCAA publication “Information for Contractors”, which can be found at Chapter 6 discusses bases and pools and shows examples. Even if your government contracts aren't subject to DCAA rules and audits, this publication is still a good reference.

One comment about G&A rates: The examples shown in the DCAA publication point out that research and development costs can be combined into your G&A rate. This is generally a good idea, especially if you’re in a high tech company where R&D costs can be significant. However, if your grants or contracts are with DHHS (which includes the NIH, a large provider of research grants), you must adjust out the R&D component if you include R&D in your G&A rate. Guidance on this is explained at and and an example is shown at

This disparate treatment of R&D rates among government agencies illustrates another factor that experienced government contractors know – the rules vary from agency to agency and from contract to contract, and you need to thoroughly understand the requirements in each of your contracts. This can take a lot of time to learn, especially since many of the requirements will be incorporated by reference. But a lack of comprehensive understanding of the requirements can cost much more; at best, you could be leaving a lot of money on the table, and at worst, you could be subject to criminal penalties.

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