Thursday, November 3, 2016

Know the Purpose for Which Costs were Expended - Then Make Your Allowability Determination

When determining the allowability of costs under Government contracts, one needs to have a very good grasp of the FAR (Federal Acquisition Regulations) cost principles (Part 31), a copy of the tome close by and good reference material to consult when costs don't fit nicely into FAR classifications. Often it is necessary to consult several cost principles to determine whether a cost is allowable or unallowable. Sometimes, after exhausting all available resources, you just don't know and you would like some guidance from the Government before including the costs in a proposal or an incurred cost submission. Good luck on that. Contracting officers are not inclined to give "private letter rulings" like the IRS and contract auditors will certainly not go out on a limb and offer their opinions. And even if they did, it wouldn't be binding on the Government anyway. Only the contracting officer has that authority. When the cost is immaterial, especially when the inclusion or exclusion has no impact on an indirect expense rate, many contractors simply forgo the costs.

Some costs are specifically unallowable regardless of purpose. The cost of alcoholic beverages is unallowable period. There is no justification possible that would make alcohol cost allowable. Likewise, the cost of lodging and per diem in excess of GSA maximum rates is unallowable. The allowability of many costs however are determined by first understanding the purpose. Take advertising for example. Advertising that promotes the sale of products or services is unallowable. Advertising that is specifically required by contract to acquire scarce items for contract performance or disposing of scrap or surplus materials is allowable. Help wanted advertising is generally allowable as well.

Here's another example. The allowability of legal costs depends significantly on the "purpose" for which the costs were incurred. Under FAR 31.205-33, Professional and Consultant Service Costs, legal costs are allowable. However, if you look at FAR 31.205-47, Costs Related to Legal and Other Proceedings, there are several categories of legal costs that are unallowable for policy reasons. Or, for example, legal expenses incurred in connection with contract novations would fall under FAR 31.205-27, Organization Costs and therefore unallowable because the Government is not going to pay for organization, reorganization, mergers, and acquisitions. It can get even more complicated. Legal costs incurred in connection with contract terminations fall under FAR 31.205-42, Termination Costs, and not only are they allowable (if reasonable) but can be charged direct as settlement expenses even if other legal costs are charged indirect. We could further complicate this discussion by bringing in the concept of "directly associated costs" - if in-house counsel is engaged in unallowable activities, you would also need to capture the applicable fringe benefits as unallowable.

In many cases, in order to make a determination of allowable or unallowable, it is necessary to first determine the purpose of the expenditure and weigh that against all applicable FAR Part 31 cost principles.

No comments:

Post a Comment