Other Direct Cost (ODC)
An Other Direct Cost (ODC) is an expense that can be directly attributed to a specific government contract or task but is not classified as direct labor or direct material. ODCs support contract performance and are separately tracked for billing, compliance, and audit purposes [citation:2].
What Is an Other Direct Cost?
An Other Direct Cost, commonly referred to as ODC, is an expense that can be directly attributed to a specific government contract or task but is not classified as direct labor or direct material. ODCs support contract performance and are separately tracked for billing and compliance purposes [citation:2].
The Federal Acquisition Regulation (FAR) defines ODCs as "costs not previously identified as a direct material cost, direct labor cost, or indirect cost." These are costs that can be identified specifically with a final cost objective that the offeror does not treat as a direct material cost or a direct labor cost [citation:6].
Key Characteristics
Directly traceable to a specific contract or task order [citation:2]
Not categorized as direct labor or direct material [citation:2]
Often variable based on contract scope and requirements [citation:2]
Must be allowable, allocable, and reasonable under federal cost principles [citation:7]
Subject to audit and documentation requirements by agencies such as DCAA [citation:4]
Common Examples of ODCs
ODCs encompass a wide range of expenses that are directly required for contract performance but are not labor or materials. Common examples include:
Travel costs (transportation, lodging, per diem) for contract-specific work [citation:1][citation:2][citation:6]
Consultant fees and subcontractor services tied to a specific contract [citation:1][citation:2]
Equipment rental or lease costs for contract-specific needs [citation:2]
Specialized software licenses required only for the contract [citation:2]
Computer services and data processing [citation:6]
Freight and shipping costs for contract deliverables [citation:2]
Training costs directly related to contract performance
Testing and laboratory fees
Special tooling and test equipment [citation:6]
Preproduction costs [citation:6]
How It Works in Government Contracting
ODCs are identified during proposal pricing and contract negotiation, then tracked throughout contract performance and invoiced according to contract terms [citation:2].
Proposal Development: When preparing cost proposals, contractors must separately identify and justify ODCs. The Defense Contract Audit Agency (DCAA) reviews proposal adequacy, including ODC estimates, as part of the evaluation process [citation:8].
Contract Performance: During contract execution, ODCs must be tracked with supporting documentation. For federal contracts, prior approvals may be required for certain ODC expenditures, and it is the contractor's responsibility to ensure such approvals are obtained in writing [citation:7].
Audit Considerations: ODCs are a key subsystem reviewed during DCAA business system audits. Auditors examine the contractor's compliance with DFARS criteria for accounting systems, including how ODCs are tracked, documented, and billed [citation:4].
Regulatory Framework
ODCs are governed by federal cost principles and regulations, including:
Federal Acquisition Regulation (FAR) Part 31 – Defines allowable costs and establishes the standards of allowability, allocability, and reasonableness [citation:1][citation:3][citation:7]
FAR 31.201-1 – Addresses the composition of total cost, including direct and indirect costs allocable to a contract [citation:3]
Cost Accounting Standards (CAS) – For contractors subject to CAS coverage, ODCs must be accounted for consistently and in accordance with disclosed practices [citation:5]
DFARS 252.242-7006 – Defines criteria for adequate accounting systems, including the handling of direct costs [citation:4]
Distinction from Other Cost Types
ODCs vs. Direct Labor: Direct labor represents wages and related costs for personnel directly performing contract work [citation:2]. ODCs are all other direct costs not classified as labor.
ODCs vs. Direct Materials: Direct materials are physical items incorporated into deliverables, including raw materials, purchased parts, and subassemblies [citation:2]. ODCs encompass non-material expenses like travel, services, and rentals.
ODCs vs. Indirect Costs: Indirect costs (overhead and G&A) cannot be directly associated with a single contract and must be allocated across multiple cost objectives [citation:2]. ODCs are directly traceable to a specific contract and charged directly, not through overhead pools.
Why It Matters for Contractors
Business implications: Proper ODC management ensures full cost recovery and accurate profit calculation. ODCs can represent a significant portion of total contract value and must be accurately estimated in proposals [citation:2].
Compliance impact: Incorrect classification of costs as ODCs versus indirect costs can result in audit findings, questioned costs, or repayment obligations. The "same purpose, like circumstances" principle in CAS 402 requires consistent treatment of similar costs [citation:5].
Strategic importance: Transparent cost structures with well-documented ODCs improve proposal competitiveness and government trust. Some contract vehicles, like GSA Schedules, historically limited ODC inclusion, making it important to understand which vehicles support ODC billing [citation:10].
Risk considerations: Unsupported, unallowable, or misclassified ODCs may be disallowed during audit, affecting revenue and performance ratings. Costs that are "directly associated" with unallowable costs may also be deemed unallowable [citation:5][citation:9].
Unallowable Direct Costs
Certain costs are generally unallowable as direct costs on government contracts unless specifically authorized in writing by the Contracting Officer [citation:1]. These include:
Acquisition of real property [citation:1]
Special rearrangement or alteration of facilities [citation:1]
General purpose office furniture or equipment (usable for purposes other than the contract) [citation:1]
Travel to attend general scientific meetings [citation:1]
Foreign travel without specific authorization [citation:1]
Entertainment costs and alcoholic beverages [citation:9]
Advertising and bad debts [citation:9]
Contributions and donations [citation:9]
Common Misconceptions
ODCs are the same as indirect costs or overhead.
ODCs are directly tied to a specific contract and charged directly, while indirect costs are allocated across multiple contracts through overhead pools [citation:2].
All travel automatically qualifies as an ODC.
Travel must directly support the contract scope and be reasonable, necessary, and properly documented. Travel to general scientific meetings, for example, may be unallowable without specific authorization [citation:1].
ODCs are minor expenses that don't require detailed tracking.
ODCs can represent a significant portion of total contract cost and are subject to the same audit scrutiny as labor and materials [citation:2][citation:4].
Once approved in the budget, all ODCs are automatically allowable.
The fact that a cost is included in an awarded proposal does not itself determine allowability. Costs must still meet FAR standards and be properly documented [citation:7].
Frequently Asked Questions
What types of costs are commonly classified as ODCs?
Common ODCs include travel, consultant fees, equipment rentals, software licenses, specialized training, computer services, freight, and testing fees [citation:2][citation:6].
How are ODCs different from direct materials?
Direct materials are physical items incorporated into deliverables. ODCs may include services or expenses not physically part of the end product, such as travel or consulting [citation:2].
Can ODCs be included in fixed-price contracts?
Yes. ODCs are typically built into the total contract price and must be clearly defined in the proposal. Contractors bear the risk if ODCs exceed estimates under firm-fixed-price contracts.
Are ODCs subject to audit?
Yes. ODCs must be documented and may be reviewed for allowability, allocability, and reasonableness by agencies such as DCAA [citation:4][citation:8].
What is the 33% rule for ODCs on GSA Schedules?
For GSA Multiple Award Schedule contracts, proposed rules have suggested limiting the total value of ODCs to 33 percent of the overall order value, though this may vary by contract vehicle [citation:10].
Related Government Contracting Topics
Federal Acquisition Regulation (FAR) Part 31: The primary regulatory framework defining allowable costs, including ODC criteria and limitations [citation:3][citation:9].
Direct Labor: Costs related to personnel directly performing contract work, distinguished from ODCs [citation:2].
Direct Materials: Physical items incorporated into deliverables, distinguished from ODCs [citation:2].
Indirect Costs: Costs allocated across multiple contracts, including overhead and G&A, which are treated differently from ODCs [citation:2].
Cost Accounting Standards (CAS): Standards governing cost allocation and consistency, including how ODCs must be treated [citation:5].
Defense Contract Audit Agency (DCAA): The agency responsible for auditing contractor costs, including ODC documentation and allowability [citation:4][citation:8].
Strategic Importance
Other Direct Costs represent a significant element of contract pricing and performance that directly impacts profitability, compliance, and audit outcomes. Proper identification, documentation, and management of ODCs ensure full cost recovery while maintaining compliance with federal regulations [citation:2].
For contractors, understanding ODC requirements is essential for developing competitive proposals, passing audits, and avoiding questioned costs. The distinction between direct and indirect costs must be consistently applied, and documentation must support the direct relationship between ODCs and specific contract requirements [citation:5][citation:7].
As contract vehicles evolve, the ability to include ODCs in various procurement mechanisms affects how contractors structure their offerings. GSA's efforts to incorporate ODCs into the Multiple Award Schedule program reflect the importance of this cost category in delivering comprehensive solutions to government customers [citation:10]. Contractors who master ODC management position themselves for successful contract performance and favorable audit outcomes.