DCAA Accounting Terminology

Project Workforce Management Solution:

Direct Costs

Any cost which is identified specifically with a particular final cost objective (contract). A direct cost is an expense (cost) that is incurred to support a specific contract, job, or project. Without that specific contract, the expense would not normally be incurred. These costs are billed directly to the contract and are generally increased by application of a multiplier intended to recover a firm’s operating costs (Indirect Costs).

Indirect Costs

FAR 31.203 defines indirect cost as follows: An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives. It is not subject to treatment as a direct cost. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives. An indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective. A Firm recovers its Indirect Costs under contract by "loading" or "burdening" the Direct Costs with a share of the Indirect Costs. This is normally handled by applying pre-determined multiplier(s) to the Direct Costs, which are created by the firm to recover its Indirect Costs by fair distribution over all projects. The intent is to have every contract recover its "share" of the cost to run a business.

EXAMPLE: Is office rent a direct or indirect cost? Office rent is normally considered an Indirect Cost. An exception might be if the office space was only utilized during contract performance or was a specific requirement of the project.

Account Payable

Amount owed to a creditor for delivered goods or completed services.

Account Receivable

Claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered.

Accounting System Review

The Accounting System Review (ASR) consists of a questionnaire used to assess the capability of a contractor’s accounting system to handle a specific government pricing arrangement. The Contracting Officer contacts the DCAA Audit office to request an ASR prior to award of a contract. The auditor arranges a convenient time with the contractor to perform the ASR, either by phone or on-site.

Allocable Cost

A cost which is assignable or chargeable to one or more cost objectives in accordance with the relative benefits received or other equitable relationships defined or agreed to between contractual parties.

Allocation Base

The base used for determining the allocation rate for an indirect cost pool. The result that is obtained from dividing the total of the indirect cost pool by the allocation base is the indirect cost rate for that pool.


The scrutinizing of accounting records and supporting documents for accuracy and completeness.

Audit Engagement Letter

This letter is sent to the contractor prior to performing a post-award audit and explains the scope and objectives of the audit engagement.

Balance Sheet

A statement listing the total assets, liabilities, and owners' equity; indicating the net worth of the company for the given time period.

Bid & Proposal
(B&P) Cost

The cost incurred in preparing, submitting, or supporting any bid or proposal which effort is neither sponsored by a grant, nor required in the performance of a contract.

Billing Rate
(Flexibly Priced

An indirect rate (1) established temporarily for reimbursement of incurred indirect costs and (2) adjusted as necessary pending establishment of final indirect cost rates.  (FAR 42.701) Generally consists of loaded hourly rates for a particular contract containing direct labor, overhead, G&A and fee.

Burdened Cost/
Loaded Cost

The results of basic labor or material costs after all other direct costs, indirect costs and fees or profits have been calculated thereon.

Chart of Accounts

A numerical listing of a business’s general ledger accounts.

Cognizant Audit Agency

The cognizant audit agency is defined as the federal agency responsible for auditing the contractor’s indirect pool(s) and base(s).

Contract Records and Audit Findings

An information sheet for the contractor, which describes the types of records (supporting documentation) that the contractor might be asked to provide to the auditor during the course of an audit. Also included is a list describing some common audit findings.

Cost Accounting

A method of accounting which provides for assembling and recording of all elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work.

Cost Input

The cost, except general and administrative (G&A) expenses, which for contracting purposes is allocable to the production of goods and services during a cost accounting period. (FAR 31.001)

Cost Objective

A function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc. (FAR 31.001)

Cost Pools

A company may choose to apportion its Indirect Cost dollars (or "pool") by the amount utilized to support specific business functions.  Splitting up the total Indirect Cost pool may be considered a better way to fairly distribute costs over individual contracts.  For instance, it may be determined that X% of all Indirect Costs are related to the administration of the company’s business functions.  In order to recover the associated dollars, the company my decide that X% for G&A recovery must be applied to all Direct Costs OR only Direct Materials Costs, or etc., on all/some/certain contracts.  [Sorry, there’s no simple guidance on how a company might choose to apply its Indirect Costs to its contracts!]

Direct Labor

All labor hours directly associated with the performance of the project being proposed.

Direct Materials/ Other Direct Cost

Any cost which is generated solely as a result of another cost, and which would not have been incurred had the other cost not been incurred. These costs can be traced directly to the project. (FAR 31.001)

Estimating Costs

The process of forecasting a future result in terms of cost, based on information available at the time (FAR 31.001)

Expressly Unallowable

A particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable. (FAR 31.001)

Fee or Profit

Amount applied to all proposed costs (if allowable on all costs) which will (hopefully) be realized as a profit for the firm.  For DoD contracts, the profit/fee calculation is usually based on the record of weighted guidelines method focused on four profit factors: performance risk, contract type risk, facilities capital employed, and cost efficiency.  See Paragraph E of Part VII of the SBIR Desk Reference at www.acq.osd.mil/osbp/sbir/deskreference/07_nego.htm for more details.

Fringe Benefit Pool

A type of indirect cost pool that commonly is established for the purpose of accumulating employee fringe benefit costs.  This type of pool has become increasingly popular in recent years.  Common cost accumulated in such pools includes those for compensated absences, health insurance, workers compensation insurance, bonuses, retirement plans, and payroll taxes.

Fringe Benefit Rate

An indirect cost rate which expresses the relationship between costs accumulated in a fringe pool and the related base for allocating such costs, for a given period of time expressed as a percentage.  A typical allocation base for a fringe pool is the related labor dollars.

General &
Administrative Expense (G&A)

Any management, financial and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole.  G&A expense does not include those management expenses whose benefit or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period. (FAR 31.001)

G&A Cost Pool

A type of indirect cost pool that commonly is established for the purpose of accumulating G&A expenses.  G&A expenses are often distinguished from expenses included in one or more overhead pools on the basis that the G&A expenses are less directly associated with contract activities than overhead cost.  Costs typically segregated in a G&A pool include general management salaries, salaries of employees engaged in administration, finance and accounting, and a proportionate share of occupancy expenses associated with general and administrative activities. The G&A pool is also the repository for Bid and Proposal (B&P) and Independent Research and Development (IR&D) costs as well as certain other business development costs.

G&A may also be referred to as Handling.

G&A Rate

An indirect rate which expresses the relationship between costs accumulated in a G&A pool and the related base for allocating such costs for a given costs objective.  The base for allocating G&A expenses in determining the G&A rate usually consists of total cost input for a business unit before G&A expenses.

General Ledger

The master record of all the balance sheet and income statement account balances.

Indirect Labor

Any labor hours not directly related to the project.  This would be personnel assigned to tasks not directly related to a specific project or contract.

Indirect Materials/ Costs

Materials, purchases, and supplies (including travel) required for the operation of a business. These costs are not directly associated with a specific contract or project.

Indirect Rate Calculations / Determinations

After individual Indirect Cost Pools are identified, the Indirect Rates can be calculated.  The Indirect Rates are the multipliers applied to a Direct Cost to recover Indirect Costs.  One way to project or predict Indirect Rates is by working from a Budget for the upcoming year.  Another would be to base the rates on prior experience (year-end or quarterly financials).

Indirect Rate

Contractual or negotiated caps on indirect rates.

Internal Controls

A process created by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives.

Management Representation Letter

This letter is obtained from the highest level of the audited entity. The official who signs the Management Representation Letter is the person who, in the auditor's view, is responsible for and knowledgeable, directly or through others, about the matters in the representation letter. Written representations from management ordinarily confirm oral representations given to the auditor, indicate and document the continuing appropriateness of those representations, and reduce the possibility of misunderstanding. The letter includes representations about financial information, financial statements, internal controls, indirect rates, related party transactions, conflict of interest, and compliance with laws, regulations and contract terms and conditions. A management representation letter is required by General Accepted Auditing Standards (GAAS) and General Accepted Government Auditing Standards (GAGAS).

"Other" Cost Pool(s)

The above titles of cost pools are common in the Defense Contracting industry.  Since all companies are not alike, a firm should set up its Indirect Rate structure based on their own business type and philosophies.  HOWEVER, since many DoD procurements are set around this standard format, it is probably advisable to stick within these titles whenever possible, even if it doesn’t exactly fit the pool (what the firm considers to be the appropriate pool title might be identified as a subtitle for internal identification).

Overhead Cost Pool

A type of indirect cost pool in which common costs related to one or more groups of cost objectives are accumulated. It is most commonly used for the purpose of designating pools that contain costs that are general in nature, such as indirect labor, rent, supplies, insurance, and depreciation. This pool is often used to accumulate costs that are distinct from those necessary to the overall operation of a business or G&A costs.

Overhead Rate

An indirect rate which expresses the relationship between costs accumulated in an overhead pool and the related base for allocating such costs, for a given period of time.  A typical allocation base for an overhead pool is the related direct labor dollars.

Post-award Audit

An audit performed of costs incurred on a previously awarded contract. The audit can be performed while the contract is still being executed, referred to as an “interim audit” or after the contract has been fully executed, which may be referred to as a “final” or “close-out” audit. The audit consists of examining all costs incurred to ensure they are reasonable, allowable and allocable. Supporting documents including payroll records, invoices or receipts for material purchases, subcontractor agreements and billings, or other evidential matter will be reviewed by the auditor in the course of the audit.

Pre-award Audit

An audit performed of a cost proposal submitted in consideration of a future contract. The audit consists of reviewing the cost proposal and performing various audit procedures to ascertain the reasonableness, allowability and allocability of the proposed costs.

Provisional Rate

An alternate term for a billing rate.

Unallowable Cost

Any cost which, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost-reimbursements, or settlements under a Government contract to which it is allocable. (FAR 31.001)