Know Your Contract Terms

The allowability of costs under Government contracts are generally covered by the cost principles contained in FAR Part 31 and the FAR supplements issued by various departments. For example, the DOD FAR Supplement (DFARS) adds additional coverage for public relations, compensation, independent research and development and bid and proposal costs, insurance and indemnification, legislative lobbying costs, external restructuring costs and most recently, costs related to counterfeit electronic parts and suspect counterfeit electronic parts. The Department of Energy FAR Supplement (DEAR) contains additional coverage for independent research and development and bid and proposal costs, insurance and indemnification, pre-contract costs, professional and consultant service costs, and costs relating to legal and other proceedings. The NASA FAR Supplement (NFS) adds additional coverage for compensation and pre-contract costs. And we could go on and discuss other agencies added requirements.

But if you stop at the FAR and the FAR Supplements, you might be setting yourself up for potential cost disallowances because often times, contracts will contain provisions that restrict contractors from claiming certain types of costs on Government contracts.

One of the first things a Government contract auditor will do upon commencing an audit, oddly enough, is to brief the Government contracts to determine whether there are any restrictions on costs that go beyond FAR Part 31 cost principles. And, such restrictions are not difficult to find. Take for example FAR 52.222-2 regarding the Government's willingness to pay overtime. The clause itself requires contracting officers to insert an amount. Usually the amount is zero and if its left blank, the wording of the clause means the amount is "zero".

Facilities Capital Cost of Money (FCCM) is generally allowable but there are certain contracts (SBIRs, for one) that do not allow contractors to claim FCCM. A lot of contractors are unaware such restrictions exist and indiscriminately apply FCCM to all of their contracts.

Some agencies set salary caps for key individuals working on their contracts (or allocated to their contracts) and when they set such caps, also require contractors to obtain pre-approval for any salary increases. In all cases, these caps are set well below the FAR ceiling limitations. Contractors are still free to pay whatever they want, they just can't claim the entire amount on Government contracts of the particular agency.

Another common restriction found in contractual documents involves insurance costs. Often times, the Government will indemnify contractors for certain risks making additional insurance coverage unnecessary. When that happens, contracts will specify that insurance is unallowable even though according to FAR, insurance costs are allowable. Sometimes however, insurance costs are still allocated to contracts through a home office allocation where details are not readily discernible. Contractors need to be aware of such prohibitions and need to understand the components that comprise home office allocations to avoid allocating unallowable costs to Government contracts.