FAR Overhead Rate for A&E Firms: What It Is and How to Calculate It

In federal contracting, more money invites more scrutiny, and few numbers draw as much attention as a contractor's overhead rate. Whether you are submitting a proposal, billing a cost-reimbursement contract, or defending its books in an audit, the Federal Acquisition Regulation (FAR) overhead rate sits at the center of how much indirect spending the government will actually reimburse.

For architecture, engineering, and professional services firms moving into federally funded work, understanding this single percentage is often the difference between full cost recovery and money left on the table. This guide explains what the rate is, how it is calculated, what typical firms report, and how to keep it defensible.

What Is a FAR Overhead Rate?

A FAR overhead rate is the ratio of a firm's allowable indirect costs to its total allocable direct labor, expressed as a percentage of direct labor.¹ It represents the share of general business expenses a firm may bill to a government agency on top of the direct labor charged to a project. The term is often used interchangeably with "indirect cost rate."

The distinction between direct and indirect costs is foundational. Direct costs, mainly the labor of staff working on a specific contract, are charged straight to that contract. Indirect costs, such as rent, administrative salaries, utilities, and insurance, support the business as a whole and cannot be traced to a single project.² The overhead rate is the mechanism that spreads those indirect costs across billable work.

FAR Part 31

The rate exists because federal law requires it. The numbers that feed the calculation are governed by Part 31 of the Federal Acquisition Regulation, which sets out the cost principles and procedures for pricing contracts and determining which costs are allowable.³

How the Rate Is Calculated

The formula is fairly simple. The overhead rate divides a firm's allowable indirect costs by its total direct labor base.² A firm with $1.5 million in allowable indirect costs and $1 million in direct labor carries a 150 percent overhead rate, meaning that for every $100 in direct labor, the firm carries $150 in indirect cost.⁴

The most important part of any overhead rate calculation is deciding which costs belong in the indirect pool.

Under FAR 31.201-2, a cost must satisfy five requirements before it can be billed. It must:

• Be reasonable, judged against what a prudent person would spend in a competitive business (FAR 31.201-3)
• Be allocable, benefitting the work in a logical proportion (FAR 31.201-4)
• Be consistent with applicable Cost Accounting Standards (CAS), or with generally accepted accounting principles where CAS does not apply
• Comply with the terms of the contract
• Comply with any limitations set out in FAR Subpart 31.2, which includes the specific rules of FAR 31.205⁵

Failing any one of these requirements makes the cost unallowable.⁵ FAR 31.205 then works through more than 50 categories of selected costs, allowing some outright, permitting others subject to limitation, and declaring the rest expressly unallowable. Since the burden of proof rests with the contractor, costs that are not properly segregated before an audit are often disallowed, which erodes the rate a firm was counting on.

Field Rate vs. Home-Office Rate

Overhead is not always a single number. A field office situation exists when a firm's employees perform services on a continuous basis out of a contracting agency's facility or project trailer rather than the firm's own office, and it supports its own field overhead rate designed to reimburse the fringe benefits of field personnel and the home-office support the firm still provides.⁶ Because employees working out of a state DOT's on-site office do not receive the firm's normal office support, agencies do not want to pay the full home-office overhead on those hours.⁶

Costs are allocated to the field pool on a reasonable and determinable basis, with indirect costs that benefit the whole organization split between the offices.⁷ Field employees typically carry high utilization, so a field rate is usually leaner than the home-office rate once the two are separated, and splitting them out tends to raise the home-office rate.⁶ Every structure must be applied the same way each period to pass review, and firms that do not report a field rate risk leaving overhead unabsorbed on home-office jobs.⁶

What Goes Into the FAR Overhead Rate

The indirect pool is usually grouped into a handful of recognizable categories. The table below shows the cost types that typically make up an A&E firm's overhead.

FAR Rate Component Categories

Sources: Table 1¹

Allowable vs. Unallowable FAR Rate Costs

Whether a given expense can enter the pool at all depends on FAR Part 31. The following table contrasts costs that are typically allowable with those that are not.

Sources: Table 2²

Executive compensation is allowable only up to FAR's reasonableness limits, and travel is reimbursable only to the extent it stays within specified per diem rates. A single unallowable expense left in an allowable pool can contaminate the entire pool's claimed costs, which is why segregation matters as much as classification.

Typical FAR Overhead Rate Ranges

Most audited architecture and engineering (A&E) firms have FAR overhead rates within a relatively tight range. Below, we show various industry benchmarks for FAR overhead rates, along with their typical ranges.

FAR Overhead Rates by Industry Benchmark

Sources: Table 3³

Rates also vary by discipline and firm profile. The ranges below reflect recent AEC industry benchmarking.

FAR Overhead Rates by Firm Type

Sources: Table 4⁴

A high rate is not automatically a bad one. Whether a rate is healthy depends on whether your billing rates and utilization are high enough to cover its indirect costs and still turn a profit, since the break-even point is the overhead rate plus 100 percent.^{4 9}

The FAR Audit and Compliance

For most DOT work, the rate has to be audited. FAR overhead audits are specialized enough that AASHTO publishes the Uniform Audit and Accounting Guide to bring consistency to how rates are calculated and reviewed.¹⁰ The guide was updated in March 2024, superseding the 2016 edition, and is treated by state DOT auditors, A&E firms, and CPA firms as the leading reference for indirect cost rate schedules.³

The Uniform Audit and Accounting Guide translates dense FAR Part 31 language into industry-specific procedures. Because most states honor a reciprocity agreement, a rate audited to the AASHTO standard in one state is generally accepted by transportation agencies elsewhere, sparing firms a separate audit in every state where they bid.¹⁰

The FAR audit itself is a formal examination by an independent CPA conducted under Generally Accepted Government Auditing Standards. The best ways to stay compliant with FAR standards are by keeping accrual-basis records, reconciling the overhead schedule directly to audited financials or the tax return, and preparing before the auditor arrives.³

How to Improve or Manage Your FAR Overhead Rate

Managing your FAR rate well is mostly a matter of discipline in three areas: cost segregation, timekeeping, and documentation. By contrast, charging unallowable costs to indirect pools, inconsistent or undocumented cost treatment, weak timekeeping, misallocating direct and indirect costs, and letting the overhead schedule drift out of reconciliation with the financial statements can represent costly mistakes.¹¹

You can improve your FAR overhead rate by running internal mock audits, keeping every cost traceable, and training your staff on allowability and timekeeping turn the rate from a compliance obstacle into a tool for maximizing legitimate cost recovery.¹¹

References

1. Wiss. "How to Optimize Overhead Rates in Construction & Engineering." https://wiss.com/construction-management-and-engineering-firms-optimize-overhead-rate/
2. Gray, Gray & Gray LLP. "FAR Overhead Rate Audits." https://www.gggllp.com/services/audit-assurance/overhead-rate-audits/
3. AASHTO Journal. "AASHTO Issues Accounting & Audit Guide Update." https://aashtojournal.transportation.org/aashto-issues-accounting-audit-guide-update/
4. Monograph. "Overhead Rate Formula: A Guide for A&E Firms." https://monograph.com/blog/overhead-rate-formula-ae-firms
5. 48 CFR  31.201-2 - Determining allowability. Legal Information Institute. https://www.law.cornell.edu/cfr/text/48/31.201-2
6. Mayfield CPA. "Field Office Overhead Rate - Required? A Must? Necessary?" https://www.linkedin.com/pulse/field-office-overhead-rate-required-must-necessary-mayfield-cpa
7. Florida DOT. "Reimbursement Rate Audit Guidelines." https://www.fdot.gov/docs/default-source/procurement/pubs/reimbursement-rate-audit-guidelines.pdf
8. Cherry Bekaert. "FAR Overhead Calculations for A/E Firms." https://www.cbh.com/insights/articles/far-overhead-calculations-for-a-e-firms/
9. Wipfli. "10 Financial Metrics Every A&E Firm Should Track." https://www.wipfli.com/insights/articles/cns-10-financial-metrics-every-a-and-e-firm-should-track
10. Brady Ware. "Q&A: AASHTO Audit Guide Basics." https://bradyware.com/qa-aashto-audit-guide-basics/
11. Stambaugh Ness. "2024 AASHTO Audit Guide Updates - Back to Basics." https://www.stambaughness.com/blog/2024-aashto-audit-guide-updates-back-basics/

¹Table 1:

1. Wiss. "How to Optimize Overhead Rates in Construction & Engineering." https://wiss.com/construction-management-and-engineering-firms-optimize-overhead-rate/
2. Cherry Bekaert. "FAQs: Overhead Rate Audits & FAR Part 31 for A&E Firms." https://www.cbh.com/insights/articles/faqs-overhead-rate-audits-far-part-31-for-ae-firms/

²Table 2:

1. Gray, Gray & Gray LLP. "FAR Overhead Rate Audits." https://www.gggllp.com/services/audit-assurance/overhead-rate-audits/
2. Eubanks Accounting & Advisory. "Incurred Cost Audit: What DCAA Reviews and How to Survive Scrutiny." https://eubanksaccounting.com/2026/06/16/incurred-cost-audit-what-dcaa-reviews-and-how-to-survive-scrutiny/
3. Eubanks Accounting & Advisory. "The GovCon's Guide to DCAA Incurred Cost Submissions." https://eubanksaccounting.com/2025/03/21/the-govcons-guide-to-dcaa-incurred-cost-submissions/

³Table 3:

1. Wiss. "How to Optimize Overhead Rates in Construction & Engineering." https://wiss.com/construction-management-and-engineering-firms-optimize-overhead-rate/
2. Wipfli. "10 Financial Metrics Every A&E Firm Should Track." https://www.wipfli.com/insights/articles/cns-10-financial-metrics-every-a-and-e-firm-should-track
3. MacPage. "FAR Compliance: Safe Harbor, Overhead Rate, or Audit?" https://macpas.com/far-compliance-safe-harbor-overhead-rate-or-audit/

⁴Table 4:

1. Wiss. "How to Optimize Overhead Rates in Construction & Engineering." https://wiss.com/construction-management-and-engineering-firms-optimize-overhead-rate/