Cost-reimbursement contracts (e.g. CPFF, CPIF, CPAF), the cost-reimbursement portion of fixed-price contracts, letter contracts that provide for reimbursement of costs, and time-and-material and labor-hour contracts provide for disallowing costs during the course of performance after the costs have been incurred (see, for example, our write-up on the Notice of Intent to Disallow Costs).
When contracting officers receive vouchers directly from the contractor and, with or without auditor assistance, approve or disapprove them, the process must be conducted in accordance with whatever procedures the individual agency has established for that process. However, for DoD contracts in particular, it is the contract auditor that reviews and approves vouchers (e.g. WAWF or Wide Area Work Flow). Generally, contract auditors are authorized to
- received reimbursement vouchers directly from contractors,
- approve for payment those vouchers found acceptable, and
- suspend payment of questionable costs.
If the examination of a voucher raises a question regarding the allowability of a cost under the contract terms (including FAR cost principles), the auditor, after informal discussion as appropriate, may, where authorized by agency regulations, issue a notice of contract costs suspended and/or disapproved simultaneously to the contractor and the disbursing officer, with a copy to the cognizant contracting officer, for deduction from current payments with respect to costs claimed by not considered reimbursable. This notice of costs suspended and/or disapproved is the infamous DCAA "Form 1".
It is important to note here that the disallowance of costs must be taken against the contract where the costs were incurred. The Government may not offset billings of one contract for potentially unallowable costs incurred and billed under another contract. If the contract where the overbilling allegedly occurred is completed and there are no further costs to bill, the Government cannot disallow costs. It must use other avenues such as making a "demand".
If the contractor disagrees with the deduction, which is almost always the case, the contractor has recourse. The contractor may
- submit a written request to the cognizant contracting officer to consider whether the unreimbursed costs should be paid and to discuss the findings with the contractor.
- file a claim under the Disputes clause, which the cognizant contracting officer will process in accordance with agency procedures; or
- do both of the above.