Directly Associated Costs – An Eye Opening Analysis

March 5, 2014

Want an easy way to increase your profits?  Then take 5 minutes to read this blog!  Many companies overstate their unallowable costs by incorrectly interpreting the definition of “directly associated costs.”  Ask yourself how you would treat the labor cost of an engineer who attends an unallowable domestic trade show.  Your answer is likely- Unallowable.  Many companies automatically identify the cost as unallowable since they interpret it as a directly associated cost of the tradeshow.  After reading this blog, you will begin to treat some of these costs as allowable, thus increasing your profit.

Contractors, even those without contracts subject to the Cost Accounting Standards (CAS), must account for unallowable costs in accordance with CAS 405.  CAS 405 requires contractors to identify and exclude unallowable costs from all billings to the government, including directly associated unallowable costs.  The CAS Board recognized the need to further clarify the meaning of directly associated costs and did so by providing an illustration at CAS 405-60(e).  In this illustration, the CAS Board emphasizes that the labor associated with an employee who is performing an unallowable activity is not automatically unallowable.  The circumstance that would make it unallowable as a directly associated cost is when the unallowable activity constitutes a significant part of employee’s responsibility.

Still doubt in your mind regarding the interpretation of “directly associated costs”?  Then consider the CAS Board’s response to the Department of Defense on this topic.  This letter does a fantastic job interpreting “directly associated costs” and reinforces the need for analysis of the employee’s primary responsibilities before automatically assuming the cost is unallowable as a directly associated cost.

Let’s return to the example of an engineer who attends an unallowable domestic trade show.  Would you still automatically record the cost as unallowable?  Of course not!  You would first determine if the engineer’s main responsibility was to participate in unallowable trade shows.  If not – you would record the cost as allowable.

Lastly, some government auditors will likely misinterpret the definition of “directly associated costs,” which will result in them asserting the costs are unallowable.  However, now you have the tools that will help you educate them, and your contracting officer, on the proper interpretation.

Please contact Nicole Mitchell at 301.231.6200  for questions or assistance with your federal government contracting issues.