Let’s talk money, but not in the “how to get rich” kind of way. We’re going to talk about GovCon pricing, the kind that helps you win and stay profitable without getting sideways with the government.

When you're just starting out, pricing feels like a mystery. What can I charge? What counts as an allowable expense? Do I need a DCAA-approved accounting system on day one?

Short answer: No, you don’t need a compliant accounting system from day one. But as you grow and go after bigger contracts, you’ll need to understand direct costs, indirect costs, and how to build an acceptable indirect cost rate structure.

Let’s break it down in simple terms, Support.

Allowable Expenses

The government only reimburses costs that are considered allowable. That means the expense must be:

• Reasonable (not excessive for the work performed)
• Allocable (clearly connected to the contract work)
• Consistently applied (treated the same way across all jobs and accounting)

Examples of unallowable expenses include alcohol, fines, lobbying, and entertainment. So no, your golf outing with a friend doesn’t count as a business expense in federal contracting.

Direct Costs

Direct costs are easy to trace to a specific contract. You can point to them and say, “That was for this job.”

• Examples of direct costs include:
• Labor hours worked on the contract
• Materials and supplies used only for that job
• Travel specifically for contract performance
• Subcontractor costs tied directly to the project

Indirect Costs

Indirect costs are expenses that support multiple contracts but can’t be traced to just one. These are grouped into different cost pools. Here's what that looks like:

Fringe Benefits
Employee-related expenses that aren’t tied to one contract
Examples:

• Health insurance
• Paid time off
• Payroll taxes

Overhead
Costs that support contract execution, but not directly
Examples:

• Office rent for your operations team
• Project management salaries not charged directly
• Supplies and utilities shared across contracts

General & Administrative (G&A)
Company-wide costs that support the overall business
Examples:

• Accounting and legal fees
• CEO salary
• Business insurance
• Office supplies for corporate functions

Eventually, your contract pricing will need to reflect a percentage rate for each of these indirect pools. That’s called your indirect cost rate structure, and the government will expect you to apply these rates consistently.

Here’s the good news: You don’t need to master this all today. If you’re going after simplified acquisitions, micro-purchases, or subcontracting opportunities, you can often get away with keeping your pricing simple.

But if you want to grow into prime contracts with cost-reimbursement or time-and-materials structures, getting comfortable with indirect costs now will make you a much more competitive and confident contractor later.

Pro Tips

• Start by clearly separating direct vs. indirect costs in your books
• Track your fringe, overhead, and G&A expenses, even if you don’t apply rates yet
• Use a tool like QuickBooks with job costing enabled to build good habits early
• When you’re ready to develop indirect rates, get help from a GovCon CPA (it’s worth it)
• Most importantly: price for profit, not just to win

You don’t need to be an accountant, but understanding the fundamentals of cost structure can help you bid smarter, not just cheaper.

If you found this helpful and want more hands-on strategy around bidding and pricing, be sure to check out my Federal Government Contracting Strategy Guide. It’s packed with tips like this to help you start strong and build a real business in the federal space.

Here’s to building your confidence and your cost strategy, one step at a time.

-Derek James 

Free Training, Book, Derek's Flagship Course