Thursday, February 8, 2018

Unallowable Litigation Costs

When contract auditors questions a particular cost in a contractor proposal or claim they are just doing their jobs. It happens day in and day out, all across the country. Auditors report their findings to contracting officers, contracting officers agree (usually) and the Government doesn't pay the expense. The Government conservatively estimates that it recovers $5.70 for every dollar it spends on contract auditing.

By contrast, when contractor employees report potentially unallowable costs, they have a pretty good chance of hitting the jackpot. Consider the case of Integral Consulting Services, Inc (ICS). ICS is a Government contractor based in Maryland that provides IT services. In 2012, the company was awarded a contract by the Army to provide "identity intelligence analysis support" (whatever that means).

From 2012 to 2014, the company loaded up its General and Administrative (G&A) pool with litigation expenses related to a dispute involving another Government contract. We don't know the totality of these litigation expenses but by charging them to the G&A pool, ICA overcharged the Army contract by more than $500 thousand.

An ICS employee blew the whistle on the charging scheme by filing a Qui Tam action whcih permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the recovery. In this case, the ICS employee (or by now, former employee, we suspect), received $92 thousand (or whatever portion of the $92 thousand his lawyer didn't keep).

Funny thing though, had a contract auditor found the expense, the Government would have kept the full $500 thousand. Now a lot of Qui Tam actions involve matters that contract auditors are not likely to catch during a routine audit - parts that do not meet MILSPEC, for example. But a contract auditor would most likely have found unallowable litigation costs. Legal and professional fees is a category that an auditor will always review because the category is considered a high risk for including unallowable costs.

If you want to read more about the ICS case, click here.

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