Fines and Penalties - Part II

This is our second and final part in discussing FAR 31.205-15, Fines, Penalties and Mischarging Costs. Yesterday we discussed the "fines and penalties" section and today we will discuss the "mischarging costs" section.

Actually, this cost principle covers a whole lot more than just "msicharging". The entire section reads:

Costs incurred in connection with, or related to, the mischarging of costs on Government contracts are unallowable when the costs are caused by, or result from, alteration or destruction of records, or other false or improper charging or recording of costs. Such costs include those incurred to measure or otherwise determine the magnitude of the improper charging, and costs incurred to remedy or correct the mischarging, such as costs to re-screen and reconstruct records.

This section has caused a fair amount of confusion over the years. For one, the term "mischarging" is not defined in FAR. Second, is the question as to whether the mischarging is deliberate or inadvertent. The Government says both, contractors like to limit the applicability to "deliberate". This question has not been tested through the appeal process that we know of.

But the phrase that has caused a lot of ruckus over the years is "costs to re-screen and reconstruct records". A number of years back when the requirement to "certify" incurred cost submissions was instituted, many contractors withdrew their incurred cost claims and "scrubbed" them to ensure that all unallowable costs were identified and excluded. The Government took exception to these scrubbing costs. The Government reasoned that it had already paid for that service so why should they pay a second time. Additionally, contractors should have adequate systems in place to identify and exclude unallowable costs from their books and records used to support pricing and billings. Having to scrub those records a second time was tantamount to admitting that the accounting system was not adequate.

The auditors got aggressive and began to question "scrubbing" costs and any directly associated costs they could think of. Some contracting officers went along with the auditors but some did not. In order to ensure consistency, the Government added this provision in 1989.

These potentially unallowable activities still go on today but not nearly to the degree that they did back in the 1980s. Also, auditors have moved on to new hot-button issue and don't have time for this one. Thirdly, its difficult to compute a defensible cost impact as scrubbing activities are typically performed by indirect personnel who most likely, don't keep track of their time at this level of detail. Finally, contractors have made significant improvements in their systems for identifying and excluding unallowable costs from Government contracts.