Wednesday, November 10, 2010

Attorney-Client Privileged Information

Many contractors retain professional and consultant services such as accountants, lawyers, actuaries, and marketing consultants. The cost principle covering these services is primarily in FAR 31.205-33, Professional and Consultant Service Costs, but is covered elsewhere, depending on the nature of the service. We have discussed in the past the importance of adhering to the strict documentation requirements of this standard. FAR 31.205-33(f) contains three specific documentation requirements that must be met for professional and consultant service costs to be allowable. These are:
  1. Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses if any) and details of actual services performed.
  2. Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided.
  3. Consultant work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

Government auditors often focus on this area because many contractors have less than stellar record-keeping practices and fail to maintain the required level of detail. This area is considered "low hanging fruit" by the audit community - a failure to provide documentation in just one area will render the cost unallowable. Therefore, it is absolutely essential that contractors set up policies and procedures to collect and retain supporting data. Consider how far behind auditors are in auditing incurred costs. We know of companies with five years of contract costs yet unaudited. Those contractors will someday have to support professional service costs that were incurred five years earlier. If that is your company, could you find consulting agreements, invoices, and work product?
And speaking of work product, there is a special category of work product that is considered attorney-client privileged information. The question then is whether the information must be provided to the Government. There are many valid reasons for refusing to provide privileged information to the Government. Failure to provide it does not necessarily render the associated costs unallowable. Although a work product satisfies the requirement to provide evidence of services rendered, other evidence may also suffice. The DoD audit guide (DCAA Contract Audit Manual) provides the following guidance to auditors:

Although a work product usually satisfies this requirement, other evidence may also suffice. If the contractor provides sufficient evidence demonstrating the nature and scope of the actual work performed, the FAR 31.205-33(f)(3) requirements are met even if the actual work product (for example, an attorney’s written advice to the contractor) is not provided. The auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.

If you find yourself in a situation where you cannot release a work product due to attorney-client privilege, auditors are required to consider alternative evidence to demonstrate the nature and scope of the actual work performed. The success of prevailing in these situations depends a whole lot on how comfortable the auditor is in exercising professional judgment, and his/her training and experience. If you seem to be getting nowhere with an auditor, request a meeting with his/her supervisor.

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