Monday, January 29, 2018

DoD Restrictions on Fringe Benefits

Here's a reminder to everyone that when reviewing the FAR cost principles to determine whether a particular cost is allowable or unallowable (or amount is capped) it is also necessary to consider cost principles in the individual FAR supplements for whatever Agency issued the contract. Most Agencies have a FAR supplement and some of those include revisions or further restrictions on costs.

Take, for example, the Cost Principle on Compensation, FAR 31.205-6 and specifically Section (m) concerning fringe benefits. FAR includes the following provision:
Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans. Except as provided otherwise in Subpart 31.2, the costs of fringe benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor (underscore added).
That seems pretty clear. But look what the DoD FAR Supplement adds (see DFARS 231.205-6(m)(1).
Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.
So why is the added DFARS language necessary? Probably because the  FAR language is not restrictive. It states that fringe benefits required by law, employer-employee agreement, or established policy are allowable but it doesn't specifically state that in the absence of law, agreement, or policy that the costs are unallowable. The DFARS adds that restriction.

Contractors must have their fringe benefit policies documented in writing or run the risk that a contract auditor will come in and question fringe benefit costs that are not documented. This applies to all contractors, no matter the size. Smaller contractors without full-time HR (Human Resource) departments are most at risk because of their inherent informality. But it shouldn't take Herculean effort to document and give to employees a listing of their fringe benefit entitlements. Do it now.

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