Contractors must develop a Chart of Accounts (COA) that identifies direct and indirect costs separately. Indirect cost accounts must be specifically identifiable into a logical set of indirect account groupings. Direct and indirect costs should be identified through the COA.

Per FAR 31.202, A direct cost is any cost that can be identified specifically with a particular final cost objective. No final cost objective shall have allocated to it as a direct costs any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

A list of typical direct cost groupings may include: Labor, Overtime, Travel, Material, Subcontractors, Other Direct Costs (any direct costs that do not fit into one of the major costs groupings above)

Per FAR 31.203, An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. 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 list of typical indirect cost groupings may include: Fringe, Overheads (Labor, Facilities, etc.), ODC Handling, General & Administrative.