Wednesday, May 10, 2017

Idle Facilities/Capacity - Audit Guidance

We last wrote about idle facilities and idle capacity back in 2010. As far as the cost principle is concerned (i.e. FAR 31.205-17), nothing has changed. There are limits to how long the Government is going to pay or reimburse a contractor for idle facilities and idle capacity. At some point, those costs will become unallowable.

When DCAA (Defense Contract Audit Agency) converted its CAM (Contract Audit Manual) Chapter 7 into a stand-alone "Selected Areas of Cost Guidebook" last year, it created a chapter dealing with idle facilities and idle capacity including guidance on how contract auditors should approach potentially idle facility costs encountered at a contractor's facility.

There are two aspects to this new audit guidance that contractors should be aware of.

Directly Associated Costs.  The cost of idle facilities or idle capacity comprises more than just the cost for the facility. It also includes associated costs such as maintenance, repair, property taxes, insurance, and any other related cost incurred in retaining the facility. Therefore the auditor should consider the entire amount associated with the costs of idle facilities in determining the significance of the questioned costs.

Subleasing. Sometimes, a contractor will sublet an idle facility for a lesser amount than the actual costs incurred. In those cases, DCAA's position is that that the difference between the two amounts are unallowable. DCAA cites FAR 31.205-23 as the basis: "An excess of costs over income under any other contract is unallowable." We're not so enamored with this logic. It confuses the issue. If the costs represent idle facilities, they are unallowable period. The sublease revenue simply reduces the amount of the unallowable costs.

One additional comment, This is one area that is prime for an advance agreement under FAR 31.109. If you anticipate idle facilities, get an advance agreement with your contracting officer to prevent future disputes with contract auditors.

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