Tuesday, April 18, 2017

Plant Protection - In-House or Outsourced

Back in 2012, we discussed the FAR (Federal Acquisition Regulation) 31.205-29 cost principle on plant protection costs (see Plant Protection Costs). While such costs are categorically allowable, we noted that the growing significance of such costs in the post 9/11 era was drawing increased scrutiny by contract auditors. At that time, the concern seemed to be one of allocation - should the cost be charged direct or indirect?

Recently we because aware of another angle that DCAA (Defense Contract Audit Agency) is using to probe the propriety of plant protection costs - that being the concept of "reasonableness". The Agency's guidance states:
Reasonableness. There are now a number of commercial companies that provide plant security protection services, including well-trained uniformed guards. These security service companies often provide efficient plant protection services for less than the cost of such services performed by the contractor's own security employees. Accordingly, evaluation of costs of security guards at the contractor's facilities should include a comparison between the cost of the in-house services and the cost of engaging an outside security service firm. When excessive or unreasonable costs are questioned as a result of the above cost comparison, it is the contractor's responsibility to demonstrate the reasonableness and to justify the costs (see FAR 31.205-6(b)(1)).
Auditors are now being directed to perform a cost comparison of out-sourcing plant protection costs with the cost of performing those services with in-house staff. Where will the auditors obtain such comparative data? Obviously from contractors' books and records. What if the contractor has not performed a study? The auditor will challenge the costs because the contractor has not demonstrated "reasonableness". What if contractors' selection of plant protection coverage turns out to be more expensive than the alternative? The auditor will challenge the costs as unreasonable.

We recommend that contractors incurring significant plant protection costs be prepared to demonstrate the reasonableness of their choice of implementing plant protection. Sometimes it might not come down to pure dollars and cents decisions. There could be intangible or non-quantifiable benefits to one method over the other.

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