Consulting Costs - Overview of Audit Guidance

There is a lot more that goes into determining whether consulting costs are allowable under Government contracts than just the "big three" documentation requirements (i.e. consulting agreement, invoice, and evidence of work performed). Yesterday, we listed the eight factors that the Government must consider in deciding allowability (FAR 31.205-33(c)) and today, as we indicated, we will look at how the Government structures its reviews in order to effectively "consider" those factors.

First of all, the contract auditor must have knowledge of the contractor's procurement and subcontracting procedures, including methods of ensuring competition. An important competent of the procurement system is understanding the contractor's procedures used to identify the need for consultants in the first place. After that, its important to fully understand the selection process and finally, the manner in accounting for the costs.

So, how does a contract auditor go about "understanding" and evaluating a contractor's system of internal controls for consultant costs? DCAA (Defense Contract Audit Agency) has gone to the trouble of compiling a list of questions that should be answered as part of a risk assessment. Depending upon how these questions are answered will dictate how much additional work is necessary to audit consultant costs.

(a) Are consultant's hours controlled in the same manner as the contractor's professional labor?

(b) Are time cards required?

(c) Does the purchasing department maintain specifications for purchased services?

(d) Is the organization receiving the service independent of that purchasing the service?

(e) Does the contractor have a written policy explaining prohibited activities by purchasing agents?

(f) Do procedures require complete history files for purchased services?

(g) Do buyers document the purchase order files to explain price variances?

(h) Are purchase orders specific and complete as to work scope, specifications, performance dates, and clauses of any type required by the contract?

(i) Does the contractor have an established policy regarding the types of information and provisions to be included in agreements with outside legal firms?

(j) Do procedures require competitive acquisitions of consultant services?

(k) Does the contractor have a designated reviewer(s) of bills submitted by outside legal counsel and procedures to be followed when the designated reviewer believes the outside legal bills contain duplicative of excessive charges?

(l) Does the contractor use consultants to engage in unallowable lobbying activity? If so, does the contractor identify and exclude such costs from billings, claims and proposals applicable to Government contracts?

Contractors, could you pass these tests?

There has been a lot of abuse over the years of this particular cost category. The Government is very sensitive when it comes to professional and consultant service costs charged to its contracts and contractors that make extensive use of consultants, must also ensure that it has sufficient policies and procedures in place to ensure the propriety of such costs.

Continue on to Part 3.