What overhead rate should I use in my T4C settlement?

Your T4C settlement proposal should use your established indirect cost rates — either your negotiated forward pricing rates or your actual rates for the performance period.

Negotiated rates: If you have negotiated indirect cost rates with your cognizant federal agency (typically DCAA for DoD contractors), use those. Negotiated rates are easiest to defend because the government already agreed to them.

Actual rates: If you do not have negotiated rates, use your actual indirect cost rates for the performance period covered by the settlement. "Actual" means based on your real accounting records, not estimates. Your CPA can compute these from your general ledger.

Rate types to distinguish: Fringe benefit rates (applied to direct labor), overhead rates (applied to direct costs or direct labor), and G&A rates (applied to total cost input). These are separate calculations with separate bases. Using the wrong base is a common error TCOs flag immediately.

DCAA audit risk: Larger settlements (typically over $100,000) may be subject to DCAA audit. If your settlement is likely to be audited, ensure your rate computations match your actual indirect cost pools and bases exactly. Inconsistencies between your settlement rates and your prior invoices are the first thing auditors check.

What not to do: Do not inflate rates for the settlement. Do not use industry average rates without support from your own accounting records. Do not use your contract's billing rates as if they were your actual rates — billing rates are negotiated estimates, not actual incurred costs.

If you do not have established accounting records supporting indirect cost rates, start compiling them immediately. This is the most common reason T4C settlements take longer than expected.

RELATED GUIDES

• → Recoverable costs in a T4C settlement
• → FAR Part 31 allowable costs
• → What is a FAR 49.206 settlement proposal?