Bill Walter is a Partner in DHG’s Government Contract Advisory practice. He has over three decades of experience in the government contracting industry.
DCAA recently issued two pieces of guidance to its auditors likely foretelling the next big challenge between contractors and DCAA auditors. The guidance focuses on the identification of expressly unallowable costs and the recovery of penalties on those questioned costs.
On December 18, 2014, the Agency issued MRD14-PAC-021(R), Audit Alert Distributing a Listing of Cost Principles That Identify Expressly Unallowable Costs. The guidance contains over 32 pages of cost principle excerpts and directs the DCAA auditor to question “costs based on a cost principle that is on the list” and “treat the questioned costs as expressly unallowable and subject to penalties.”
On January 7, 2015, the DCAA issued 14-PAC-022(R), “Audit Alert on Identifying Expressly Unallowable Costs.” The primary purpose of this guidance is to assist auditors in making determinations regarding whether cost principles identify expressly unallowable costs.
Listing of Cost Principles that Identify Expressly Unallowable Costs
The December guidance states that the attached 32 page listing is just “a Tool” and it is “Not a Comprehensive List” and that “there may be other cost principles not included on the list that are expressly unallowable based on unique facts and circumstances.” The audit teams are told that if a cost is being questioned based on a cost principle not included on this list, but still considered expressly unallowable, for them to apply the penalties as well.
Identifying Expressly Unallowable Costs
The January Alert begins by stating that for a cost to be expressly unallowable, 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. The Alert concludes that a cost principle makes costs expressly unallowable if:
- It states in direct terms that the costs are unallowable, or leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria; and
- It identifies the specific cost or type of costs in a way that leaves little room for interpretation.
The alert also recognizes there are many situations where the auditor will question costs based on cost principles that do not state in direct terms that the cost is unallowable. The guidance state that the mere fact that the cost principle does not include the word “unallowable” or the phrase “not allowable” does not mean that costs should not be considered expressly unallowable by the auditor.
The guidance goes on to provide over 7 pages of examples of cost principles that, in DCAA’s opinion, identify expressly unallowable costs. The examples include cost principles that state in direct terms that the cost is unallowable or not allowable. The examples also include samples of cost principles that do not directly state the cost is unallowable; but, in DCAA’s opinion, the cost principle still identifies an expressly unallowable cost. For those cost principles, the Alert provides DCAA’s interpretation to support its conclusions.
In summary, Contractors – Beware! DCAA auditors have their guidance – go forth to question cost and penalize! Take this time to make sure you are not going to end up on the wrong end of an audit.