The Defense Contract Audit Agency (DCAA) just published a listing cost principles found in the Federal Acquisition Regulations (FAR) and the DoD FAR Supplement (DFARS) that identify expressly unallowable costs. Expressly unallowable costs of course are subject to penalties if, for example, a Government contractor fails to exclude them from its annual incurred cost proposal. DCAA's new 32 page listing is sure to be controversial because not everyone believes as DCAA believes when it comes to whether certain costs are expressly unallowable or merely unallowable. Keep in mind that this listing represents DCAA's "view" of costs that are expressly unallowable and while in many cases such views are not controversial (e.g. the cost of alcoholic beverages), there are some items where reasonable parties may disagree as to whether they are "expressly" unallowable.
Penalties are nothing to take lightly. The amounts can add up and become rather punitive. For information on penalties on unallowable costs, please refer to our five part series on the subject beginning here.
The new DCAA audit guidance, which can be accessed here is referred to as a tool to help determine whether statements from the cost principles that are used as a basis to question costs are expressly unallowable. Auditors are cautioned however not to blindly follow the listing but to exercise auditor judgment when evaluating the costs. But, in the same paragraph and in an almost contradictory manner, the guidance emphatically states that "If an audit team questions costs, based on a statement from a cost principle that is on the list, it should treat the questioned costs as expressly unallowable and subject to penalties." What happened to the exercise of judgment?
The guidance then cautions that the 32 page listing is not comprehensive. It states that "The fact that a statement in a cost principle is not included on the list does not mean that costs questioned, based on that statement, are not expressly unallowable. There could be situations where costs questioned could be expressly unallowable based on the facts and circumstances of that particular situation". Here, DCAA is encouraging its auditors to find examples to add to the listing.
There are many examples throughout the listing where DCAA has taken liberty with the precise wording of the cost principle. Take "advertising" for example. The cost principle (FAR 31.205-1) does not use the term "unallowable" or "not allowable". However, DCAA determined that the costs were expressly unallowable based on a 25 year old ASBCA (Armed Services Board of Contract Appeals) decision from 1987. Perhaps so, but there are many FAR experts out there that might disagree with that position.
Get ready for some fun and games.