DISTINGUISHING DIRECT FROM INDIRECT COSTS: Other Considerations
Costs That are Predominantly Direct. Other costs that were almost exclusively charged direct included subcontracts, trade discounts, refunds, and allowances on purchases, purchased labor (on-site and off-site), special tooling and special equipment. DCAA urges its auditors to ensure that that the contract where special tooling and equipment are direct charged provide for it and if they are unauthorized, DCAA is to ensure such items are not included in other direct charges such as materials, supplies or miscellaneous costs.
Unique Situations. Sometimes costs that would be considered indirect in most circumstances are properly direct costs if unique circumstances apply. The Summary indicated that certain employee related costs such as health insurance, pension and vacation pay were charged direct by a minority of firms. This is common, for example, for service contracts under which employees are dedicated to a single contract and distinguishing between direct and indirect labor is not important because all employees are considered to be charged to the contract. Under such circumstances, a court held that vacation pay was properly classified as direct labor.
Costs Not Direct or Indirect. Several costs reported in the Summary are neither clearly direct nor indirect. These costs include overtime premiums, cash discounts, incoming material inspection, inventory adjustments and holiday differential pay. For overtime premiums, DCAA states though it is commonly treated as an indirect expense, it may be acceptable as a direct charge when it is the contractor’s policy to do so. Cash discounts are normally small and infrequent so are recorded as indirect since tracking these costs would be an administrative burden. Incoming materials inspection as a direct costs can be problematic, especially with uses of material resources planning systems. Inventory adjustments may be difficult to track to specific contracts especially when two or more contracts use the inventory. Holiday differential may be direct as an ODC or overhead or even sometimes as a fringe benefit cost. However, inclusion as a direct cost runs into similar problems associated with overtime premiums – its difficult to attribute to one contract if an employee works on more than one.
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