Friday, May 10, 2013

Penalties on Unallowable Costs - Part III

This is the third installment on our discussion of penalties levied on contractors who unwittingly, inadvertently  or otherwise, included expressly unallowable costs in their annual incurred cost submissions. You can read Part 1 here and Part 2 here. Today's discussion deals with potentially available waivers of the penalties.

The FAR coverage of waivers is discussed in 42.709-5. There are three conditions that require the contracting officer to waive penalties. The regulatory language reads "shall waive" meaning that if one of the following conditions is present, the contracting officer must waive the penalty - its not left to his/her discretion. Here are the conditions:

1. The contractor withdraws the proposal before the Government formally initiates an audit of the proposal and the contractor submits a revised proposal. Note that an audit is formally initiated when the Government provides the contractor with written notice, or holds an entrance conference, indicating that audit work on a specific final indirect cost proposal has begun.

2. The amount of the unallowable costs under the proposal which are subject to the penalty is $10,000 or less. That is not $10,000 of expressly unallowable or previously determined unallowable costs but $10,000 allocated to Government flexibly-priced contracts. Also, the $10,000 figure is cumulative, not individual items. The ASBCA (Armed Services Board of Contract Appeals) went back and forth on whether the $10,000 figure was cumulative or individual but eventually decided on "cumulative" - the regulatory wording is not clear (see Appeal of Thomas Associates, ASBCA No 57126)

3. The contractor can demonstrate, to the contracting officer's satisfaction, that:

     a. It has a good system for identifying and excluding unallowable costs. The contractor has established policies and personnel training and an internal control and review system that provide assurance that unallowable costs subject to penalties are precluded from being included in the contractor's final indirect cost rate proposals, and

     b. The unallowable costs subject to the penalty were inadvertently incorporated into the proposal (i.e. their inclusion resulted from an unintentional error, notwithstanding the exercise of due care.

This last condition is where contractors might have the best case for getting penalties waived.


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Read our complete series on penalties for unallowable costs by following these links.
Part I - Regulatory Authority
Part II - Levels I and II Penalties, and interest
Part III - Waivers
Part IV - Calculating
Part V - Audit Guidance









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