Expressly unallowable costs are particular items or types of costs which under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). Contractors who include expressly unallowable costs in their final indirect cost rate proposals are subject to penalty equal to the amount of the expressly unallowable costs (FAR 42.709-1). The Government, and in particular DCAA (Defense Contract Audit Agency) are usually very aggressive in making a connection between unallowable costs they find during an audit and the "expressly" unallowable provisions of FAR. By doing so, the Agency can recommend that contracting officers assess penalties, and the Government recoups more money from contractors. Refer to our five-part series on expressly unallowable costs from 2013.
Late last year and earlier this year, DCAA (Defense Contract Audit Agency) issued a pair of audit guidance memorandums on the subject of identifying unallowable costs that are "expressly" unallowable. The first one was dated December 18, 2014, subject: Audit Alert Distributing a Listing of Cost Principles That Identify Expressly Unallowable Costs. This memorandum contained a 32 page matrix of FAR cost principles that identified expressly unallowable costs. The second was issued on January 7, 2015, subject Audit Alert on Identifying Expressly Unallowable Costs. This guidance differentiated between unallowable costs stated in direct terms and unallowable costs not stated in direct terms. Either way, according to DCAA, the unallowable costs were "expressly" unallowable. We wrote about these two memorandums when they first appeared on DCAA's website. The first posting was dated January 28, 2015 and entitled Cost Principles that Identify Expressly Unallowable Costs. The second was the following day and entitled Identifying Expressly Unallowable Costs. At the time of our blog posts, we expressed our concern that DCAA was taking liberties with the FAR cost principles by calling out unallowable costs not stated in direct terms as expressly unallowable. The crux of the Agency's position was that if the cost principle left little room for differences of opinion as to whether the particular cost meets the allowability criteria, any unallowable costs were "expressly" unallowable.
The ASBCA (Armed Services Board of Contract Appeals) recently issued a decision that should cause DCAA to rethink its guidance (Raytheon Company ASBCA Nos. 57576, 57679, 58290 dated June 26, 2015).
In the Raytheon case, the Government contended that Raytheon failed to identify and exclude from its cost submissions, the cost of bonus and incentive compensation (BAIC) for those persons engaged in activities that generate unallowable costs under several cost principles (i.e. FAR 31.205-1, -22, -27, and -47) and that are expressly unallowable under these principles. Under the Government's logic, these directly associated costs were expressly unallowable because they related to expressly unallowable activities.
The Board ruled that BAIC cost is an item or type of cost, but it is not specifically named and stated as unallowable under FAR. While portions of salaries and fringe benefits are stated as unallowable, the Government, as claimant, has not show that BAIC constitutes either one. The Board believed that BAIC costs are not expressly unallowable costs.
The key point from the Raytheon decision is that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable. This differs significantly with DCAA's position that if the cost principle leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria, the costs are expressly unallowable.
If you are facing penalties for expressly unallowable costs, we recommend you consider whether such costs meet the tight FAR definition of expressly unallowable costs, as confirmed by the ASBCA in the Raytheon case.