Direct Costs

understanding direct costs for federal contracts

Best Basis

The best foundation for building proposed direct costs, are actual incurred costs (AIC) on a similar project. Any changes, including escalation, material-quantity discounts, and other differences are explained and supported with documentation. Each change, such as trend analysis for a purchased part with several past purchase orders, bridges the AIC to the proposed future costs. The AIC basis need not be for exactly the same deliverable or for exactly the same quantity. AIC with supported increases and decreases permit the best accuracy.

Historical Accounting Records

The direct costs, only for the specific project, are:

  • Labor, by category, which is “hands-on”
  • Material, which is an element of the deliverable or is both used up during the creation of the deliverable and not expensed elsewhere (e.g., shop rags)  
  • Other Direct Costs (ODC), not included elsewhere (by labor category hours or by bill of material elements)
  • Subcontracts and independent contractor (e.g., a Subject Matter Expert) arrangements
  • Travel
  • Other allowable items (perhaps called out in the sales contract)

Note that the proposed labor categories might be specified in the solicitation (e.g., Request for Proposal). These need not match the labor categories in historical accounting records. We propose solicitation labor categories by matching (and renaming, for the proposal) either whole categories or particular employees. The customer category labeled, “Blueprint Designer” might have equivalent education, experience, and duties as the in-house category labeled, “CAD Operator.” The customer category labeled, “Engineer II” might require education, experience, and capabilities of two employees from the in-house category labeled, “Electrical and Data Engineer” plus three employees from the in-house category labeled, “Senior Engineer.” The proposal labor categories follow the solicitation requirements.
With significant historical accounting records, the most common method of calculating the cost of each labor category uses the average cost (per direct hour) of all employees in that (proposed) category. Although some employees will be assigned to other projects or leave the company’s employ – the theory is that replacement employees, in the same category, will cost about the same.

Identical or similar material, with several, recently placed purchase orders can support proposed material. With ample, historical accounting records, supplier pricing can be projected from the past.

ODC often includes services or products, the cost for which can be projected as described for labor (for the former) or material (for the latter). Travel can be based on identical or similar, recent, trips – and changed (or prorated) for number of travelers, number of travel days, etc.

No Prior Basis

Some cost elements, or entire proposals, represent costs with little or no historical data. To build a foundation from air, we default to competition, first.

Salaries and wages for employees, who are not yet hired, can be estimated by industry salary guides, similar job postings, and Internet research. Salary data for a geographic area and job qualifications or duties can be purchased from suppliers, who specialize in this supporting data. Professional associations often help gather support for a reasonable competitive-market estimate.

A solicitation (e.g., Request for Bid), for material prices, to several suppliers might return competitive bids. A website (e.g., Amazon) might compare product pricing from multiple sources, which can be printed to document the lowest bidder.

Travel components can be estimated from a website (e.g., Kayak), which compares airfare, rental car, and hotel rates from multiple sources. Pricing can be printed to document the lowest bidder. Note that proposed dates of travel are not firm, and may change as contract requirements change. A proposal reflects the submitter’s best estimate of timing and costs.

With decades of cost-proposal experience, we find creative ways to support the build-up of direct costs. Our recommendations are formula-driven. Clients can change one cell in a workbook of spreadsheets, to revise all affected numbers. For example, reducing annual escalation from four percent to three percent, in one cell, recalculates all costs for each subsequent year. We help technical proposers and project managers solidify hours by labor category and material quantities that consider. We guide our clients to ensure sufficient documentation supports subcontracts, which cost or price analysis is the responsibility of the client, not the U.S. Government. We offer the depth and the breadth of experience to draft supportable, proposed direct costs.