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.

Audits of Direct Costs - ODCs

The past couple of days, we've been discussing audits of direct costs included in contractors' annual incurred cost submissions. Often times, Government contractors believe that audits of incurred cost proposals are limited to review and analysis of indirect rates. Not so. The traditional incurred cost audit encompasses all costs charged to flexibly priced contracts, be they direct or indirect. Today we will discuss ODCs (Other Direct Costs).

 

Travel costs is probably the most common ODC. Almost every contractor incurs travel in some form. Travel costs (and many of the types of costs recorded as ODCs) can be both direct and indirect charges. Direct travel must be specifically identifiable to a contract in order to be charged as such. Other ODCs may include:

• Special tooling, dies, jigs, and fixtures
• Plant rearrangement
• Packaging and packing
• Consultant fees
• Outbound freight
• Expediting fees
• Royalties
• Printing and reproduction

In reviewing these costs, the auditor will determine whether

1. The contractor's cost representations are reliable and accurate,
2. The amounts charged to Government contracts are reasonable and are allocable to Government contracts
3. Costs have been accumulated in accordance with generally accepted accounting principles appropriate in the circumstances, and
4. The contractor has been consistent in allocating such costs to commercial and Government work.

Item 4, above is one area that gets a lot of attention from contract auditors. Auditors are trained to discern disparities in accounting practices that benefit commercial work at the expense of Government contracts.

Sometimes reviews of ODCs fall outside the expertise of the contract auditor. In those cases, the auditor will request technical assistance from or through the contract administration office or the contracting officer. For example, technical advise may be required when the contractor manufactures special tools or incurs plant rearrangement costs which are charged to ODC, or when packaging costs represent a significant amount of ODCs.