Wednesday, October 19, 2016

There are Costs Associated with No-Cost Storage Contracts

Be careful if the Government asks you to enter into a no-cost storage contract. It may cost you some money.

We don't know how frequently the Government and contractors enter into no-cost storage contracts but often enough that there is a body of knowledge pertaining to no-cost storage contracts even though there is no mention of such contracting in the FAR (Federal Acquisition Regulations). Many no-cost storage contracts are for temporary storage of GFE (Government furnished equipment) or GFM (Government furnished materials) that may benefit a future contract. It could be special tooling or test equipment that the Government wants to keep around for future production runs. Contractors are often willing to enter into these no-cost contracts when space is not at a premium and can themselves, see a future need for whatever it is that the Government wants stored or warehoused.

The problem here is that while the contract may not make provision for cost, there is a cost involved in storing Government equipment and these costs must be paid and then allocated to something - usually an indirect expense pool - which is then allocated to contracts that receive no benefit from such costs. Contract auditors will come along and question those costs as not allocable to other Government work. And, they're correct. They've got FAR 31.201-4, Determining Allocability behind them as well as CAS (Cost Accounting Standards) 402, Consistency in Allocating Costs Incurred for the Same Purpose.

The likely result of any accounting treatment is that costs associated with the storage or warehousing are allocated to and reimbursed under other non-benefiting Government contracts. Irrespective of whether a contract provides for reimbursement of costs of particular items, the allocability of costs must be determined by the causal or beneficial relationship of the cost to the final cost objectives. Other contracts cannot bear the storage or warehousing costs that are properly allocable to no-cost storage contracts.

When a contracting officer (or commercial customer) has requested a contractor to store property at no cost, the contract auditor, if the costs are either directly or indirectly charged to other Government contracts, will issue a notice of intent to disallow costs on impacted contracts.

Do not be surprised if during an incurred cost audit, an auditor requests you to identify any no-cost storage contracts. Many times, the coy contract auditor already knows the answer.

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