What is a "Sensitive" Consultant?

We feel that we're talking about consultant costs too much on these blog pages. But every time we think we have the guidance nailed down, something new comes up. The other day, some contract auditors informed a contractor that it was going to review "sensitive" consultant costs as part of their incurred cost audit. Of course we asked them what "sensitive" meant in the context of consultant costs. There answer was somewhat vague but went along the lines of "we'll know it when we see it". So, they proceeded to ask for details of all consultant costs as well as all of the 1099s the contractor issued (see our previous posting on 1099s).

Had the auditors known their own guidance, they would have been prepared to list "sensitive" consultant costs. According to the DCAA Standard Audit Program for reviewing consultant costs, sensitive consultants are defined as follows:

Prior audit experience and professional judgment must be exercised in determining which consultants are sensitive. Overall Agency audit experience in this area has resulted in the following ranking of consultant services (shown in decreasing order of sensitivity)

• lobbyists

• sales/marketing

• management services (excluding CPA firms)

• legal

• technical/engineering

• accounting, CPA firms, actuary, and insurance

• other

Regarding the highest risk category, lobbyists, DCAA (and other contract auditors) will access public websites to determine whether any registered lobbying firms are working on behalf of particular contractors. Just because a contractor shows up on a lobbying firm's list of clients however, doesn't mean that the lobbying firm engaged in lobbying activities on behalf of the contractor. Most lobbying firms perform non-lobbying activities in addition to lobbying activities so it is important to show the actual activities performed.

Consultant Costs - Ensure the Completeness of Your Listing and Supporting Detail

Here's a "heads-up" for Government contractors that are about to go through an incurred cost audit by DCAA (Defense Contract Audit Agency) or another contract audit organization. The auditors will probably be asking for copies of the 1099s you issued.

As we've reported on these pages a number of times, the Government considers consulting costs to be a high risk audit area. The sensitivity of this area hearkens back to the 80s when several major contractors were caught up in scandals involving consulting costs and other were hard-pressed to demonstrate allocability of many consultant costs to Government contracts. This sensitivity resulted in a revision to the FAR cost principle governing consultant cost allowability (FAR 31.205-33) by adding a "minimal support" requirement. Whereas formerly the principle required "evidence of the nature and scope of the service furnished", the revised principle specifically required details of agreements, invoices, and work products.

Auditors, being the clever people that they are, have been using these requirements ever since to question any consulting costs that are not supported by the three-legged support test. And for many years, this are represented "easy-pickens'" as contractors worked to improve their internal control systems over the sufficiency of supporting data. It remains a lucrative area for questioned costs even today. The backlog of incurred cost audits are problematic in many ways for contractors (e.g. delayed payments). One issue facing contractors is employee turnover, upgraded accounting systems, and record retention. Although contractors may have been able to provide adequate support when the costs were booked, i.e. in 2005 and 2006 and 2007, it is always more difficult to find today. You can almost be certain that any audit will include testing of consultant costs.

Auditors will typically ask contractors for a listing of consulting costs, either as part of an initial data request or perhaps during the "walk-through". Now, auditors are being instructed to compare the consultant listing provided by contractors to the 1099s issued during the year and look for discrepancies. Specifically, the instructions read:

Obtain vendor listing and 1099-Misc. (block 7) forms and review for possible consultants not included on the listing provided by the contractor.

That's actually not a bad audit step and one that contractors can do themselves prior to the auditors' arrival to insure the completeness of any consultant listing provided the Government.

Consultants vs. Subcontractors

There is sometimes confusion concerning whether something or someone is a consultant or a subcontractor. Not only are Government contractors and prospective contractors uncertain about the definitions and status but Government procurement officials are as well. From an "administration" standpoint, there is a great difference between the two. Subcontracts must be solicited, analyzed, negotiated, and administered by the prime contractor much like the Government would handle the prime contract. Consultants on the other hand, only need to comply with FAR 31.205-33 provisions (provide a consulting agreement, work product,and invoice).

There is a general rule of thumb to apply when distinguishing between subcontractors and consultants. A subcontractor is hired to perform a part of the prime contractor's statement of work (SOW). Such work might include subsystems, finished parts, or skilled labor to perform specific functions. For example, a base maintenance contractor might subcontract barracks painting requirements to a painting company. Or, an aircraft manufacturer might subcontract the avionics portion of a contract to a company that specializes in avionics.

Consultants are not usually hired for a specific contract or to complete a portion of the prime contractor's SOW. They are often subject matter experts whose expertise is not tied to a single contract.

FAR Definitions. The Federal Acquisition Regulations (FAR) have a few definitions that will help clarify the difference between subcontractors and consultants.

Subcontractor

FAR 3.502-1: Subcontractor (1) means any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract and (2) includes any person who offers to furnish or furnishes general supplies to the prime contract or a higher tier subcontractor.

FAR 3.1001: Subcontractor means any supplier, distributor, vendor, or firm that furnished supplies or services to or for a prime contractor or another subcontractor.

Consultant

FAR 31.205-33: Professional and consultant services ... means those services rendered by persons who are members of a particular profession or possess s special skill and who are not officers or employees of the contractor. Examples include those services acquired by a contractor or subcontractor in order to enhance their legal, economic, financial, or technical positions. Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions  recommendations, training or direct assistance, such as studies, analyses, evaluations, liaison with Government officials, or other forms or representation.