unallowable costs | The Contracting Education Academy

November 28, 2019 By cs

Federal Circuit issues controversial decision involving expressly unallowable costs

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/

October 5, 2018 By AMK

ASBCA does not bar government claim to disallow contractor’s direct costs paid 11 years earlier

The Armed Services Board of Contract Appeals (ASBCA) recently held in DRS Global Enterprise Solutions, Inc. that the government’s 2017 claim disallowing fiscal year 2006 direct costs was not necessarily time-barred by the Contract Disputes Act’s (CDA) six-year statute of limitations.

The DRS decision is another in a line of statute of limitations cases that tend to enable the government’s practice of conducting untimely audits and subsequently asserting stale cost disallowance claims.

In September 2017, the government issued DRS a contracting officer’s final decision disallowing approximately $8 million of direct costs incurred in fiscal year 2006. DRS moved for summary judgment, arguing that undisputed facts establish that the government’s claim accrued more than six years before the final decision was issued and, therefore, the claim was time-barred by the CDA’s six-year statute of limitations. DRS set forth three alternative arguments for the date the government’s claim accrued. The ASBCA rejected all of these arguments.

First, DRS argued that the government’s claim for unallowable direct costs accrued no later than December 15, 2006, when the last voucher for the costs was paid. The ASBCA, citing to its prior precedent, stated that there is no “blanket rule” providing that the statute of limitations begins to run when the government pays a voucher or invoice. The ASBCA also distinguished its contrary holding in Spartan DeLeon Springs, LLC, ASBCA No. 60416, 17-1 BCA ¶ 36,601, from the facts of this case noting that, unlike in Spartan DeLeon Springs, DRS was not able to offer undisputed facts demonstrating that DRS’s vouchers contained sufficient information concerning the government’s potential claim.
Second, DRS argued that the government’s claim accrued no later than March 31, 2008, when DRS submitted its final indirect cost rate proposal containing the costs at issue. The ASBCA rejected this argument because the undisputed facts did not support that the final indirect cost rate proposal information addressed the specific bases for the government’s disallowance claim and, thus, DRS failed to establish that the government’s potential cost disallowance claim was “reasonably knowable.”
Finally, DRS argued that the government’s claim accrued no later than July 17, 2009, the date of the Defense Contract Audit Agency entrance conference. The ASBCA rejected this argument as well, reasoning that there was nothing in the undisputed record establishing that the auditor should have been aware of the government’s potential claim at the time of the entrance conference. In sum, the ASBCA found that DRS failed to offer sufficient undisputed facts to supports its positions.

Keep reading this article at: http://www.mondaq.com/article.asp?articleid=737536

July 20, 2017 By AMK

ASBCA throws DCAA another brushback pitch

In an April 2017 decision, the Armed Services Board of Contract Appeals (ASBCA) once again rejected the position of the Defense Contract Audit Agency (DCAA) that a cost or type of cost for which allowability depends on the circumstances or Contracting Officer discretion can nonetheless be “expressly unallowable” and subject to penalties under FAR 42.709-1(a).

Although the law is clear that penalties are appropriate only when such costs are named and stated to be unallowable in a cost principle such that a counter position is unreasonable, the DCAA has continued to assert its erroneous position in its audit guidance and findings.

A contractor is subject to penalties if it includes in its indirect cost submission an indirect cost that is “expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR.” FAR 42.709-1(a)(1).

The ASBCA has explained the standard for whether a cost is expressly unallowable is “objective.” General Dynamics Corp., ASBCA No. 49732, 02-2 BCA ¶ 31,888, reversed on other grounds, Rumsfeld v. General Dynamics Corp., 365 F.3d 1380 (Fed. Cir. 2004). An item of cost is expressly unallowable if it is “specifically named and stated as unallowable….” Raytheon Company, ASBCA Nos. 57576, 57679, 58290, June 26, 2015. Moreover, “the Government must show that it was unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable.” General Dynamics Corp.

In twin Memoranda for Regional Directors (MRDs) dated December 18, 2014 and January 7, 2015, the DCAA provided its audit teams with guidance concerning the identification of expressly unallowable costs that contradicted these clear rules. 14-PAC-021(R); 14-PAC-022(R). Relying on an ASBCA case from the 1980s, Emerson Electric Co., ASBCA No. 30090, 87-1 BCA ¶ 19,478, November 19, 1986, the DCAA opined that “a cost can be unallowable even though the cost principle does not explicitly state that the cost is unallowable or not allowable.” 14-PAC-022(R). “[I]n situations where a cost principle does not specifically state that the applicable cost is unallowable or not allowable, the audit team will have to employ critical thinking when determining whether the cost principle identifies expressly unallowable costs” and “whether the cost principle identifies a cost or type of cost clearly enough that there cannot be a reasonable difference of opinion as to whether a questioned cost meets the criteria specified.” Id.

Keep reading this article at: http://www.mondaq.com/article.asp?articleid=601112

July 17, 2017 By AMK

ASBCA issues important ruling in ‘contractor-on-the-battlefield’ dispute

Last month, the Armed Services Board of Contract Appeals (ASBCA) held that the U.S. Army breached its contractual obligation to provide physical security to its principal logistical support contractor, KBR, during the height of the Iraq War.

As a consequence, the Board found that KBR was entitled to be reimbursed for $44 million, plus interest, in costs that the Government had withheld from KBR relating to KBR’s and its subcontractors’ use of private security. A copy of the opinion is available here.

Before the Board, the Army had argued that the costs in question were unallowable because KBR’s LOGCAP III contract with the Government prohibited the use of private security. In response, KBR argued (among other things) that any violation of this prohibition had been excused by the Government’s prior material breach of its obligation to provide physical security. On the basis of an extensive documentary and testimonial record (including a month-long trial), the Board agreed with KBR, finding:

[D]espite the many and continuing failures of the government to provide the promised level of force protection to KBRS and its subcontractors . . . , the government seeks to disallow the PSC costs incurred . . . in order to accomplish [the] mission under the LOGCAP contract despite the government’s breach, and argues that its breach was not material. It is hard to imagine a contract breach more material than this one, which eviscerated the promise at the heart of the justification for the government’s claim.

Keep reading this article at: https://www.insidegovernmentcontracts.com/2017/06/asbca-issues-important-ruling-contractor-battlefield-dispute/

October 27, 2016 By AMK

Whistleblower alleges culture of intimidation at DCAA

J. Kirk McGill was a Senior Auditor at the Defense Contract Audit Agency (DCAA), the agency responsible for auditing the Department of Defense’s (DoD) contract expenditures. He is also a whistleblower whose disclosures to Congress have resulted in multiple Congressional hearings, the termination of a nonprofit from grants worth over $400 million, and the closure of a loophole in contracting policy for nonprofit grantees.

Importantly, his case also sets a precedent for federal whistleblowers to engage in whistleblowing activities while on official time. None of this was easy, and it came—as is too often the case for whistleblowers—at a personal cost to McGill.

In 2013, McGill and his DCAA team were loaned out to the National Science Foundation’s (NSF) Inspector General (IG) to conduct a follow-up audit of the $433 million construction grant NSF had awarded for a project called the National Ecological Observatory Network (NEON). The project was not competitively bid, and despite an earlier DCAA audit finding serious problems with the initial proposal, NSF awarded it to a nonprofit organization called NEON, Inc.—a nonprofit focused solely on the project.

McGill, who was the Auditor-in-Charge, and his team found that NEON, Inc.’s accounting system was seriously flawed and lacked important supporting documentation. The audit also found poor budget controls that meant the project managers wouldn’t know if the program ran over budget—even tens of millions of dollars over budget—until it was too late to prevent. (The NSF later admitted that the project had run $80 million over budget.) As concerning as those numbers are, the audit also found that NEON, Inc. was abusing a $1.8 million category of funds called “management fees,” which were being used to pay for unallowable costs like alcohol, lobbying, and a lavish holiday party. McGill reported two instances of suspected fraud to the NSF IG through the normal channels. The IG investigated and referred the cases to the Department of Justice (DOJ) for potential prosecution, but DOJ declined to pursue them [p.3].

When McGill examined the requirements of reporting suspected fraud in an audit report, he found himself trapped.

Keep reading this article at: http://www.pogo.org/blog/2016/10/whistleblower-alleges-culture-of-intimidation-at-dcaa.html

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.

The Armed Services Board of Contract Appeals (ASBCA) recently held in DRS Global Enterprise Solutions, Inc. that the government’s 2017 claim disallowing fiscal year 2006 direct costs was not necessarily time-barred by the Contract Disputes Act’s (CDA) six-year statute of limitations.

Last month, the Armed Services Board of Contract Appeals (ASBCA) held that the U.S. Army breached its contractual obligation to provide physical security to its principal logistical support contractor, KBR, during the height of the Iraq War.

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