In its second significant cost allowability decision of the year, the Federal Circuit held that salaries associated with lobbying activities are expressly unallowable under Federal Acquisition Regulation (FAR) 31.205-22.

Although the decision is limited to salary costs associated with lobbying activities, its rationale creates uncertainty for other types of costs subject to a FAR Part 31 Cost Principle that uses similar “associated with” language. Contractors should anticipate closer scrutiny from auditors, who may feel emboldened by the Federal Circuit’s decision to characterize costs as expressly unallowable. The decision may also have implications for compliance with Cost Accounting Standard 405.

Although many types of cost may be generally unallowable, a smaller subset of costs are expressly unallowable. An expressly unallowable costs is “a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable.”  Contractors are subject to penalty if they submit to the government any expressly unallowable cost.  Congress made clear that the penalty was intended for limited circumstances where the regulations explicitly prohibit inclusion of a type of cost; providing alcohol as an example.

FAR 31.205-22(a) provides that costs “associated with” a list of lobbying and political activities are unallowable.  FAR 31.205-22 does not specifically name and state salary, or any other type of cost; it merely states “associated with.” The narrow question presented to the Federal Circuit was whether salary costs of employees engaging in such lobbying activity qualify as expressly unallowable costs.

Keep reading this article at: http://www.mondaq.com/unitedstates/x/860020/