Directly associated costs means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred (FAR 31.001).
Directly associated costs can relate to both allowable and unallowable costs (or activities). If related to unallowable costs, "directly associated costs" are also unallowable if material (i.e. significant) in amount (FAR 31.201-6). The concept of "materiality" often requires the exercise of judgment. In exercising this judgment, contractors must consider
- the actual dollar amount
- the cumulative effect of all directly associated costs in a cost pool, and
- the ultimate effect on the cost of Government contracts.
For example, FAR 31.201-6(e)(2) states that salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on compay activities to determine if the costs are material. That same FAR reference however cautions that time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee's regular duties.
Other examples of directly associated unallowable costs include:
- Bad debts. Actual or estimated losses arising from uncollectible accounts receivable due from customers and other claims and any directly associated costs i.e., collection fees and/or legal costs associated with collection efforts are unallowable (see FAR 31.205.3).
- Entertainment costs. FAR 31.205-14 states that cost of amusement, diversion, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.
- Lobbying costs. Pursuant to FAR 31.205-22, costs incurred in attempting to improperly influence (see FAR 3.401), either directly or indirectly, an employee or officer of the executive branch of the Federal Government to give consideration or to act regarding a regulatory or contract matter are unallowable. Employee(s) travel and/or administrative support costs directly associated with unallowable lobbying effort are also unallowable .