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Pricing Handbook 9. Other direct costs Table of Contents 9.6 Packaging & Transportation Costs 9.7 Cost Realism as Related to ODCs
9. OTHER DIRECT COSTS (ODCs) This chapter addresses the terms, concepts, and issues involved in analyzing ODCs. ODCs are other costs charged directly to the Government that have not been included in proposed material, direct labor, indirect costs, or any other category of cost. ODCs can include but are not limited to: special tooling, travel expenses, relocation expenses, pre-production and start-up costs, packaging and transportation costs, royalties, spoilage and rework, computer expenses, federal excise taxes, and reproduction costs. In submitting a cost proposal, a contractor should list all ODCs and provide a basis for pricing. ODC�s can be both direct and indirect. When these costs can be identified with a specific cost objective (i.e., a product, function, project, or program), the contractor should charge them directly to a given effort. However, costs normally charged indirectly cannot be charged direct unless the costs will be incurred for a different purpose and/or under different circumstances than typically incurred. When reviewing proposals or invoices, the analyst must guard against "double-counting" by ensuring that the same ODCs are not included in more than one cost category, and that all costs are classified in accordance with the company�s accounting practices. The analyst must also assess the overall reasonableness, allowability, and allocability of the proposed ODCs. The process of reviewing a contractor�s cost and pricing data as well as the general principles of cost and price analysis is the same for ODCs as for the previously discussed cost elements. The following sections will concentrate on the proper evaluation process and techniques which can be utilized to analyze the most common ODCs: travel, pre-production costs (including special tooling and test equipment), relocation costs, royalties, and packaging and transportation costs.
Travel costs usually include the costs of transportation, lodging, and meals and incidental expenses (M&IE) incurred by employees while traveling on official business. Travel estimates proposed by contractors are usually based on the potential number of trips, places to be visited, length of stay, mode of transportation, and estimated per diem, or living allowance. When evaluating travel costs, the analyst should review proposed costs to ensure that the purpose of the trips is within the scope of the tasks to be performed. The Screening Information Request (SIR) should request that the contractor provide the number of trips and persons per trip, as well as destination, duration, mode of travel, and purpose of travel. Costs for transportation may be based on mileage rates, actual costs incurred, or on a combination of both. Costs for lodging are based on per diem to the extent that they do not exceed the daily maximum rate set forth in the Federal Travel Regulation, prescribed by the General Services Administration, actual expenses, or a combination thereof. A contractor�s actual costs may exceed the maximum per diem expenses allowed. To be allowable, actual expenses must meet all of the following conditions: 1.) one of the conditions from the Federal Travel Regulations should apply (see below); 2.) there must be written justification for the use of higher amounts, approved by an officer of the contractor�s organization; 3.) costs that become expenses and will in the future be incurred on a regular basis require advance approval from the contracting officer; and 4.) documentation must be provided for all supporting actual costs. Federal Travel Regulations provide the following examples of travel situations which may warrant authorization or approval of actual and necessary expenses.
In the same aspect, there are occasions when less than the full per diem is considered reasonable and allowable. Such instances occur when no lodging costs are incurred, when actual lodging amounts to less than full per diem, and on partial travel days. Below is a checklist of questions that the analyst should consider when reviewing travel costs.
ABC Company has proposed an "ODC" of $13,769 for travel costs. ABC Company must provide justification. The following paragraphs and tables detail how ABC Company furnished its travel estimate. In Table 9-1, ABC Company divides the total cost into three groups of trips. ABC Company then provides the number of personnel per trip, time period of travel, duration, mode and cost of transportation, departure and destination points, lodging costs, and other associated costs such as ground transportation (car rental). Although a copy of ABC Company�s travel policy is not provided in the example, the policy should be provided in the proposal. Table 0-1. ABC Company Travel Estimate ($)
In Table 9-2, ABC Company provides justification for the proposed trips. This allows the analyst and technical evaluator to determine if proposed travel costs are necessary and within the scope of the efforts proposed. Table 0-2. ABC Company Travel Justification
Utilizing the information provided in Table 9-1, Table 9-2, and the company policy, the analyst can assess the reasonableness, allowability, and allocability of proposed costs. The analyst can check the proposed lodging and M&IE for reasonableness by using the allowable lodging and M&IE rates published in the Federal Travel Regulations by General Services Administration. Proposed airfare can be verified with a travel agent, through the airline, or through the Office of Adjunct General (OAG) Desktop Flight Guide. The car rental costs can be cross-checked using a quote from a rental car agency for a vehicle that is adequate in size and type for the number of people and the purpose of the trip. The Government technical review should include an evaluation of the necessity and appropriateness of the proposed trips as well as their duration and the time period of travel. The number and skill levels of traveling personnel should also be reviewed by the technical evaluator for necessity and reasonableness.
Generally, these costs are nonrecurring costs to be incurred early in the life of a contract. These costs may include pre-production engineering, special tooling and special test equipment, special plant rearrangement, training programs, initial rework or spoilage, and pilot runs. Most often, special tooling and special test equipment form the majority of pre-production costs. Proposals should clearly identify any pre-production and startup costs allocated to the contract. Evaluating Special Tooling and Special Test Equipment Below is a list of guidelines the analyst should follow when examining special tooling or equipment. 
Special Tooling The analyst should focus on understanding the estimating procedure used to develop the tooling costs and perform a detailed review of the contractor�s cost estimate for selected items. As part of the review process, the analyst can compare the estimates for a selected group of tools with actual costs or actual hours expended for similar tools utilized in previous production. Analysis of the selected tooling requires the analyst to evaluate proposed labor and materials in accordance with the cost and price analysis principles applicable to each cost element. 
Tooling may require both engineering and manufacturing labor. Labor hour estimates will generally vary from detailed, timephased estimates to a very broad approach in which the tooling cost is estimated as a percentage of the effort required to produce the end-product. The latter method is rarely used and should only be accepted when detailed information is not available. Because the issues surrounding special tooling are so complex, the analyst should rely on information provided from the Government technical team regarding the need for and the extent of proposed tooling costs. The evaluation must determine if expensive tools are justified and whether a sufficient number of skilled employees are available to use them. Special Test Equipment The analyst should evaluate special test equipment in the same manner as special tooling. A review must establish whether proposed special test equipment is adequately justified.
When related to work on a specific contract, relocation is often listed as an ODC. The most common relocation costs are travel costs for an employee and members of the immediate family and all associated transportation costs of the household and personal goods to move to a new location. Other examples of relocation costs which are generally allowable are outlined below. [FAA AMS Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-6, par. aa(1)]
The analyst must evaluate the relocation costs to determine if proposed costs are reasonable and allowable. Relocation costs should not exceed the employee�s actual expenses, except expenses for miscellaneous costs. Depending upon a specific relocation agreement or company policy a flat amount not to exceed $1,000 may be used, in lieu of actual costs for such miscellaneous expenses as the connection and disconnection of household appliances, driver�s license, utility fees and deposits etc.
Occasionally, certain processes or designs which involve payment of royalties are required for contract performance. If royalties are more than $250, the contractor should provide the following information on a separate page for each separate royalty or license fee: name and address of licenser; Although analysis is limited due to the nature of the cost, the analyst is still responsible to ensure the Government is not paying undue costs. The analyst must determine if royalties should be included in the price of a contract and determine if proposed costs are reasonable for the value received. A verification that the Government does not already have rights to the patent or copyright under another contract must be performed. It will probably be necessary for the analyst to seek legal advice concerning the royalty cost. A determination must also be made as to whether the contract will include royalty reporting requirements and royalty escrow or recapture provisions. When determining the reasonableness of the proposed royalty costs, the analyst must verify that the royalty costs have not been a result of less than an arm�s length bargaining agreement. Situations the analyst should review closely include: payment of royalties to persons and corporations affiliated with the contractor; payments to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Government contract would be awarded; or payments under an agreement entered into after the contract award.
9.6 Packaging & Transportation Costs Packaging instructions will be provided to the contractor and included in the Screening Information Request (SIR) and the resulting contract. These instructions usually detail any special treatments required. Transportation costs are treated similarly. Specific directions are generally provided by the Government as to how, when, and where items will be transported by the contractor. The two most important issues regarding transportation are: 1.) who bears the cost of transportation and 2.) who bears the risk of loss? Two terms are used in contracts to address these issues: F.O.B. (Free on board) Origin and F.O.B. Destination. F.O.B. Origin means that the contractor is responsible only up to the point the goods leave their loading dock. At this point, the responsibility transfers to the Government and the Government assumes all risk and costs for shipment of the property. F.O.B. Destination means the contractor is responsible until the property is delivered to the Government�s stated location and accepted by the Government (The F.O.B. points usually signify when and where the Government (buyer) actually takes title.). When evaluating packaging and transportation costs, the analyst should compare a contractor�s cost estimate with costs incurred for similar packaging and transportation expenses in order to determine the reasonableness of the proposed cost. Additionally, the analyst can compare these costs to current market prices. Packaging estimates are sometimes derived from a percentage of total manufacturing costs or are based on averages experienced for prior years. Often, when packaging estimates are based on complex technical determinations and the dollar value is significant, the assistance of a Government packaging specialist is necessary. Transportation costs can be checked against quotes from various freight companies.
9.7 Cost Realism as related to ODCs Cost realism refers to the existence of factual, verifiable, and predictable data whose use in an estimating methodology equates to the costs most likely to be incurred by a contractor, given their proposed technical and management approaches. A measure of cost realism is the extent to which a proposal factually states anticipated contract costs and related performance and technical risks. Outlined below are many of the tests for assessing realism as it relates to ODCs that have been discussed in this chapter.
Differences between company accounting practices and contractual circumstances explain why firms categorize costs differently. There are no hard and fast rules to apply to the evaluation of ODCs. ODCs must be evaluated on a contractor-by-contractor and situation-by-situation basis. The analyst must verify that the proposed costs are consistent with the company�s accounting practices, that costs are not included in other cost elements, and that costs are reasonable and allowable. |
The contractor will generally provide the basis of estimate for the proposed cost. The contractor must also provide reasonable justification for the relocation of an employee and demonstrate that relocation costs were in accordance with an established company policy or practice. 
date of license agreement; patent numbers, patent application serial numbers, or other basis on which the royalty is payable; brief description (including any part or model numbers of each contract item or component on which the royalty is payable); percentage or dollar rate of royalty per unit; unit price of contract item; number of units; and total dollar amount of royalties. In addition, if specifically requested by the contracting officer, the contractor should provide a copy of the current license agreement and identification of applicable claims of specific patents.