Lobbying Costs Related to Legislative Earmarks

The Defense Contract Audit Agency (DCAA) recently issued guidance to its auditors to be on the lookout for lobbying costs related to legislative earmarks. This guidance from September 2011 is actually a reiteration of guidance first published about three and a half years ago. The new guidance however, adds links to Governmental and non-governmental available sources of information on historical and current lobbying and earmark activities. We recommend that contractors peruse these databases in order to anticipate and prepare for possible auditor queries in this area.

A legislative earmark refers to a Congressional provision directing funds to be spent on specific projects. Typically, a legislator seeks to insert earmarks in spending bills that direct a specified amount of money to a particular contractor, organization, or project in his or her home state or district. Earmarks are still alive and well in D.C. The Office of Management and Budget reported that in the 2010 Defense Appropriations Act alone, there were 1,759 earmarks totaling $4.3 billion.

Some contractors, seeking earmarks, might expend a significant amount of effort including professional services for the purpose of influencing or attempting to influence Government officials in connection with earmarks. Auditors are being instructed to evaluate contractor's procedures for properly identifying and accounting for costs associated with lobbying activities and legislative earmarks. Auditors are being instructed to question these costs under FAR 31.205-22, Lobbying and Political Activity Costs. The new DCAA guidance states that FAR 31.205-22  applies to "... costs incurred associated with any attempt to influence legislation (e.g. earmark) ...". Actually FAR 31.205-22 makes no reference to "earmarks". This is a DCAA editorial insert and we've seen a legal opinion that makes a contrary case that FAR 31.205-22 does not apply to earmarks. A stronger case could be made citing FAR 52.203-12, Limitation on Payments to Influence Certain Federal Transactions, which prohibits the cost of activities to influence the award, the extension, continuation, renewal, amendment or modification of a contract.

Notwithstanding the merits of DCAA's position on this matter, the fact is that most companies already voluntarily remove any costs related to "earmark" activities from any claim for reimbursement from the Government. The costs are usually immaterial in that whether claimed or not, an indirect rate is not significantly affected. And, since immaterial, the risks of becoming embroiled in a dispute with the Government have limited potential payback.