Today we mark the midway point in our series on what contractors need to know and do to claim cost of money. You can read Part 1 and Part 2 here and here. Today we are answering the question on where cost of money (FCCOM) may be claimed.
FCCOM is most often calculated based on the net book value of assets used on Government contracts and the cost of facilities under construction. There is a second application, often overlooked, involving "cost of ownership" calculations where contractors are leasing or renting property from a source that does not involve an arms-length transaction.
Net Book Value of Assets (Including Assets Under Construction): The most common scenario is when a business
is charging for costs for an asset it owns without using lease rates. For example, a business owns a new $1,000,000
office consisting of $750,000 for the building and $250,000 for the land. The costs for the office (exclusive of
maintenance, utilities, taxes, insurance, etc.) consists of (i) $25,000 for
interest ($50,000 borrowed at 5%), and (ii) $19,231 for depreciation ($750,000
over 39 years). The Government (i.e.,
DCAA – Defense Contract Audit Agency) questions the interest costs per
FAR. However, the business could claim FCCOM
of $17,332 [$1.875% FCCOM rate x ($250,000 for land + $750,000 for building –
$19,231/2 for depreciation on the building)].
The business would have a net reduction in allowable costs of $7,668
($25,000 - $17,332) instead of the entire $25,000. Please note, the administrative efforts for FCCOM
may be significant as FCCOM should be continually documented and proposed for
each contract award.
Lease (or Use or Market) Rates: DCAA routinely challenges the reasonableness
of less than arms-length rental rates that are not based on “cost of ownership”. Regardless of whether FCCOM has been proposed
or approved before, FCCOM is usually includable in a contractor's support for the reasonableness
of the lease rates. For example, a
business leases the same office as shown in the prior example but from a
related party (i.e., the owner as an individual) at a rate less than the going
market rate of $36,000 per year. The
business includes the $36,000 office rent in the overhead costs. The owner’s personal income tax shows a loss
on the office rental due to depreciation and $25,000 for interest. DCAA questions $16,769 of the $36,000 based
on allowing only $19,231 for depreciation.
However, the lease costs are reasonable and fully allowable since the
claimed $36,000 is less than the allowable cost of ownership of $36,563
($19,231 for depreciation and $17,332 for FCCOM). This can make a big difference with minimal
effort. The administrative efforts are
minimal for this as the FCCOM computations are only needed occasionally to
support the reasonableness of the lease rates.
The DCAA Contract Audit Manual supports this approach where it states at
8-414.1 c. (1), “Since cost of money would be an allowable cost if the
contractor had purchased the property, the cost of money should be included as
an ownership cost in determining whether the allowable cost will be based on
constructive ownership cost or leasing costs.”
Our March 22, 2011 blog on CAS 414 includes reference to a court case
for Engineering, Inc. which ruled that FCCOM should be included.
Next: The Eight Building Blocks of Cost of Money