When pricing work for the government, contractors must be aware of which costs are allowable under the FAR (Subpart 31.2). Allowable costs include both direct (labor, materials, etc.) and indirect (fringe, overhead, G&A) costs. There are specific costs which are not allowable against any government contract, for example costs for alcoholic beverages.
The determination of what is allowable is only the first step in the process. Depending on your accounting system structure, the same type of cost might be direct or indirect. For example, contract administration costs might be a direct charge or might be included in an indirect pool. For a manufacturing company, there might be small supplies (expendables, for example) that could be direct or indirect. How do you decide whether it should be direct or indirect?
Costs that meet the “Single Cost Objective” standard should be direct. Materials ordered for a specific contract for example would be for a single cost objective, i.e. that contract. Similarly, labor that supports a specific contract and only that contract also qualifies as a direct cost for a single cost objective. Indirect costs that are applied to all contracts should not contain costs that are for a single cost objective (contract). It’s important to be consistent in how you allocate direct and indirect costs. It wouldn’t be fair, for example, to have Contract “A” charged direct for its contract administration and have contract administration costs for other programs in an indirect pool that will also be applied to Contract “A” as an indirect burden. Contract “A” would be double-charged then for that function. The same applies to tools and supplies that are used in the production of items that will be sold under multiple contracts. Those costs are not allocable to a single contract and are therefore appropriately included in an indirect cost pool that is applied to all contracts.
As another example, if employees on Contract “A” are required to have specific training, training that is not required or particularly useful on other contracts, the cost of that training is for a single cost objective and should be directly charged to that contract because it does not benefit other contracts. That does not necessarily make it an allowable cost on a cost reimbursable contract. Depending on the terms of the contract, it could be unallowable and therefore would reduce the profit on that contract. On the other hand, training costs for certain classes of employees who support multiple programs to maintain certifications or keep them abreast of developments in their fields can be indirect costs and therefore applied to all contracts through an indirect burden.
Auditors, in reviewing your accounting system, will be looking at whether you are appropriately and consistently allocating your direct and indirect costs in a manner that treats all contracts fairly. Where reasonable and allocable, they expect costs incurred for a single cost objective to be charged to that objective (contract).