Developing Aggressive Pricing: Overhead vs. G&A
The government contracting arena is filled with words, phrases, and acronyms that can be difficult for the less experienced to define, let alone distinguish subtle differences between. G&A (General and Administrative) costs and OH (Overhead) costs are two good examples. What do they mean and, more importantly, what are the differences between the two?
What is Overhead?
Overhead costs support the revenue-generating projects of the company. If a company had no projects, it would have no overhead expenses.
What is G&A?
General & Administrative support the overall management and operation of the business. Even if a company had no billable projects, it would still have G&A expenses. Think executive staff and leadership team.
Does My Company Need Separate Cost Centers for G&A and OH?
Early in a company’s evolution, it may not make sense to differentiate between OH and G&A expenses into a single cost pool. As the business grows, and you have more costs than base labor, breaking out OH from G&A may allow you to recoup some of the costs associated with processing those direct costs to which G&A can be applied.
Just to clarify, if an employee works on direct labor projects, any indirect labor or expenses that the employee incurs would be charged to an Overhead account. Similarly, if an employee does not work on direct labor projects, their time would be considered G&A and should be charged, along with any expenses incurred, accordingly.
How Flexible are the Classifications?
Many people believe they know which items go into each cost center, but every company is different. The process of classifying costs as G&A or OH is not as static as may first appear.
When a new RFP comes in, you can define how your company is structured so you can spread the cost of the people involved in servicing the contract across a wider swath of employees, thus containing costs and keeping your pricing aggressive.
Too many people in OH drives costs up, possibly making your bid non-competitive. Keep OH basic and contract-specific; classify company-specific costs under G&A. This isn’t always possible, but there is flexibility and in many cases, you can use both OH and G&A to arrive at pricing that is most aggressive and competitive.
A lot of factors must combine to win a government contract, but learning how to get the most benefit out of OH vs. G&A costing is an important component in developing an effective Price to Win strategy.