Wednesday, May 13, 2015

Other Direct Costs (ODCs)

Everyone is familiar with labor and material costs that can be identified specifically to a contract and therefore charged direct to that contract. Subcontracts are another cost category that is identifiable and charged direct to contracts. In addition to the big three (labor, materials, and subcontracts) there are other types of expenses which, under certain circumstances, may be charge direct to a specific job or contract. Typically these are lumped together and referred to as ODCs or Other Direct Costs.

Examples of ODCs include

  • special tooling and test equipment, dies, jigs, and fixtures
  • plant rearrangement
  • packaging and packing
  • consultant's fees
  • outbound freight
  • expediting
  • royalties
  • travel

ODCs can be charged direct to contracts, allocated on some representative basis, or charged partially direct and partially by allocation.

When it comes to auditing ODCs, contract auditors are always wary of inconsistent charging practices between fixed price and cost-type contracts. Cost type contracts are "riskier" than fixed price contracts because contractors might be tempted to charge ODCs direct on cost-type contracts because they would be fully reimbursable while charging ODCs indirect on fixed price contracts so as to allow their cost type contracts to share in the absorption of ODCs.

Auditors are also cautious to determine whether costs charged to ODCs might also have continuing use on other contracts or on successor contracts and therefore should be capitalized rather than expensed. Plant rearrangement costs to configure a facility for a particular contract might fall in this category.

Contractors should generally charge everything direct that can be identified direct to a contract. In the case of ODCs where charging practices could go either way, contractors should establish firm practices, document them, and consistently follow them. That will help avoid potential audit issues.

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