According to DCAA's enhanced audit guidance, the overarching criteria for determining whether a cost is expressly unallowable is this:
In order for a cost to be expressly unallowable, the Government must show that it was unreasonable under all the circumstances for a person in the contractor's position to conclude that the costs were allowable. Thus, a cost principle makes costs expressly unallowable if (i) it states in direct terms that the costs are unallowable, or leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria and (ii) it identifies the specific cost or type of costs in a way that leaves little room for interpretation.There are many costs included in the FAR section on cost principles (FAR 15, Part 31) that leaves little room for interpretation as to whether the cost is expressly unallowable. Take FAR 31.205-51, Costs of alcoholic beverages, for example. The regulation states that the costs of alcoholic beverages are unallowable. Therefore, the cost of alcoholic beverages are expressly unallowable and contractors who fail to exclude such costs from their billings or incurred cost submissions, face the prospect of having the costs questioned and then being subjected to penalties. There are a lot of cost principles are not that clear or straight-forward and that's where one can expect that DCAA will take aggressive positions on whether such costs are expressly unallowable - especially given this new emphasis on identifying expressly unallowable costs.
In many situations, cost principles do not state in direct terms whether costs are unallowable. But, according to DCAA, the "... mere fact that the cost principle does not include the word unallowable or phrase not allowable does not mean that costs questioned based on that cost principle are not expressly unallowable." DCAA imparts a lot of weight on an old ASBCA case (Emerson Electric Co., ASBCA No. 30090, 87-1 BCA 19478) where the Board ruled that although the regulation did not state that foreign selling costs were unallowable, the only logical interpretation of the language was that they were expressly unallowable. DCAA loves the phrase "the only logical interpretation" because they use it over and over again throughout the guidance.
There is one aspect of the guidance that offers sound advice to auditors. It reads:
... the audit team will have to make a determination regarding whether the cost principle, used as the basis for questioning the costs, identifies expressly unallowable costs. In order for the cost to be expressly unallowable, it is not enough that our logical interpretation of the language is that the questioned costs are expressly unallowable. The Government must establish that it was "unreasonable under all the circumstances for a person in the contractor's position to conclude that the costs were allowable." Therefore, in situations where a cost principle does not specifically state that the applicable cost is unallowable or not allowable, the audit team will have to employ critical thinking when determining whether the cost principle identifies expressly unallowable costs. The audit team will need to analyze whether the cost principles identifies a cost or type of cost clearly enough that there cannot be a reasonable difference of opinion as to whether a questioned cost meets the criteria specified.One aspect of penalties is that DCAA is advisory to the contracting officer. DCAA cannot levy penalties. Contracting officers have the authority to waive penalties and often do waive penalties, especially when they are immaterial or the administrative cost of recovering them would exceed whatever amounts could be recovered. Additionally, auditors and contracting officers often do not agree on whether costs are questionable and even if they do agree that a cost is unallowable, often disagree on whether the cost is expressly unallowable.