DMI (Direct Materials Inventory)

What is DMI (Direct Materials Inventory)?

Direct Materials Inventory (DMI) refers to the physical resources, components, and raw materials that are directly incorporated into the final product or service being delivered under a government contract. Proper management of DMI is critical for accurate cost accounting, compliance, and overall contract performance.

Definition

DMI consists of items that can be directly traced to a specific deliverable under a government contract. Unlike indirect materials which support the production process, DMI forms a tangible part of the final product. The cost of DMI is typically a direct cost assigned to a specific contract line item (CLIN). Federal Acquisition Regulation (FAR) Subpart 31.2 describes principles and procedures for determining allowable costs, including direct material costs. Maintaining accurate records of DMI quantities, costs, and usage is crucial for demonstrating compliance with Cost Accounting Standards (CAS) and supporting cost proposals and claims.

Key Points

• Material Traceability: DMI items must be readily traceable to specific government contracts to justify their direct cost allocation.
• Inventory Valuation: Contractors need to use acceptable inventory valuation methods (e.g., FIFO, LIFO, weighted average) and consistently apply them across contracts.
• Proper Storage and Control: DMI needs to be stored securely and managed with appropriate inventory control systems to prevent loss, damage, or obsolescence.
• Subcontractor Management: Contractors are responsible for ensuring that their subcontractors also properly manage and account for DMI if those costs are being passed on to the government.

Practical Examples

1. Aircraft Manufacturing: A contractor building military aircraft uses specific types of aluminum, wiring harnesses, and avionics components as DMI. The costs of these materials are directly charged to the aircraft production contract.
2. Software Development: A software company providing a custom solution to a government agency might consider specific software libraries, development tools, or cloud service resources used directly in the software's creation as DMI if these are directly tied to the end product delivered.
3. Construction Project: In a construction project for a new government building, the lumber, concrete, steel, and roofing materials are examples of DMI, and their costs are directly allocated to the project.