Indirect costs are made up of two major categories: Overhead and General and Administrative (G&A) expenses. Depending on the contractor’s way of doing business, overhead costs may be broken into lower level such as manufacturing, engineering and material. The indirect costs tied to these levels are grouped together in what are known as pools.

The CPRG, Volume 3, Chapter 9 and Volume 4, Chapter 2 describe how to allocate indirect cost pools across contracts or product lines, where businesses create “allocation bases” which are divided into the total amount of each pool to derive a rate. For example, projected manufacturing labor hours or dollars for the entire business unit of the next year can be divided into the planned manufacturing overhead pool to derive a manufacturing overhead rate. This rate is then applied to the direct manufacturing labor for each product or contract, thus equitable allocating the indirect manufacturing costs. The same process would be done for other areas such as engineering or material costs.