In 1948 the Armed Services Procurement Regulations (ASPR) was issued as a result of the Armed Services Procurement Act, remaining in place until 1978. ASPR defined direct cost as “any cost that is specifically identified with a particular final cost objective, but not necessarily limited to items that are incorporated in the end product as material or labor.” This is a fairly broad definition and clearly establishes that direct cost includes more than direct material and direct labor. The APSR also discussed Other Direct Costs (ODC), which were costs that were not material nor labor and provided examples, such as “travel and subsistence, consultants, telephone, computer costs and report reproduction.”
While today travel and consultants are often proposed as ODC, the other three examples are generally things of the past. During this period of time DoD spent a relatively small percentage of its funding on the acquisition of services. It is no surprise that many Administrative Contracting Officers (ACOs) and DCAA auditors became fixated on direct costs being material and labor, with ODC being limited primarily to travel.
What are Direct Costs?
In Government Fiscal Year (GFY) 2017, DoD spent 50% of its funding on services ($163.7B). Service contracts lead to many more direct costs which are not necessarily costs incorporated into an end product or deliverable. Today, FAR 31.202(a) defines direct costs in a much more complex way:
“No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.”
Other Direct Costs
While it is understandable why the “same purpose in like circumstances” wording was added to bring in the consistency aspects of Cost Accounting Standard 402, the concept that direct costs are more than material and labor has been lost over time. Additionally, FAR does not define ODC at all. Today service contracts drive the need to propose numerous ODCs that raise the hair on the back of an auditor’s neck. A service contract statement of work to provide vehicle maintenance in the field may require the contractor employee to carry with them a tablet to review the repair and maintenance specifications. This is likely a reasonable direct cost in the proposal for this service contract for field maintenance. The conflict arises when an auditor or price analyst sees the same cost of tablets for direct employees working at the contractor facility being charged to the overhead pool and allocated to contracts as part of the indirect overhead rate. It is important to get in front of these direct costing decisions and make the case that while the tablets are used for similar purposes, they are not like circumstances.
Controlling Direct Cost Items
Further complicating matters is that the acquisition and control of many items proposed as ODC today require the efforts of the purchasing, inventory, and receiving personnel that are accumulated in the material handling pool. Apply your material handling rate over your ODCs and you are likely to get an auditor throwing a statement at you like:
By definition material handling should only be applied to material and subcontract costs.
So, I guess the name of the pool will have to be changed to “Stuff Handling.” On a more serious note, ensuring your base for allocating the indirect costs of purchasing, inventory, and receiving is properly disclosed with the word “material’ is important. Stating your base includes all acquired item charged direct to final cost objectives maybe a good wording.
Flexibility is in Order
For those of you using a value-added G&A base, questions may also arise. CAS 410-50(d)(2) provides that a value-added base includes ODC and shall not include material and subcontract cost. Maybe the CAS board needs to consider adding more flexibility here.
Beyond material and ODCs, labor can be complicated in a service contracting environment. For example, the contractor has indirect program management personnel to manage much of its contractual efforts. At the same time, the contractor has a service contract to deliver program management for base operations. Again, while these program managers provide similar effort, it is not in like circumstances.
There are a couple keys to dealing with these complications:
- Define your disclosed practices in terms that provide for flexibility necessary to growing service contract unique circumstances, and
- Address the differing circumstances as part of the basis of estimate when developing your proposal. This way your rationale is already in place when questions arise.
Redstone GCI assists contractors throughout the U.S. and internationally with developing BOEs designed to withstand audit scrutiny, as well as assisting contractors with the development of accounting policy and disclosure statements which provide assurance to contractors and allow for flexibility in the determination of direct and indirect costs.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant