Mr. Gunn,
I am a consultant working with an organization that has attended your seminars and we are now trying to figure out the best method of allocating "indirect" job expenses specific to the firm.  My client, who is a General Contractor, doesn't have a lot of labor associated with their contracts and, in fact on some projects, may not have much at all compared to other projects.  In the DCAA material that I have read, it is suggested to use "direct labor" as an allocation base. 

My questions

  1. Can another method be used such as sales or total direct cost instead of direct labor? (Provided that we use a consistent method that has stable results?)
  2. If such an alternative method is acceptable, would we (can we) then put all direct payroll taxes and direct workers comp. associated with a project in "direct costs" (and directly job cost it) instead of an "indirect pool" allocating these costs?

Any guidance that you can extend would be greatly appreciated.

RESPONSE: It is good to hear your General Contractor knew what to ask about from attending the workshop!

1. Yes, as long as the base chosen results in a Fair and Reasonable allocation of indirect costs.  Direct Labor is just a typical base, but it is not by any means the only base.  I would stay away from sales and consider a cost base.  Total “Direct Cost” or “Total Cost LESS your Indirect Cost” would be acceptable, as long as it results in a fare and reasonable allocation.  Remove any item out of that base that would unfairly allocate costs.

2. As far as what you charge Direct versus Indirect, that depends on your policy and consistent applicationand impact on allocation of indirect costs to cost objectives (contracts/jobs).  If you typically charge payroll taxes and workers comp, consistently as direct costs for direct labor (and you do the same for indirect labor to indirect costs), then it could be acceptable.  Vice versa, if you typically charge all of the above costs as Indirect and then allocate them, then it could be acceptable.

Make sure you document what you choose and why in your Policy Manual and then be consistent.