January 27, 2015
In a recent Memorandum for Regional Directors (“MRD”), DCAA lists what it believes are the FAR and DFARS “cost principles that identify expressly unallowable costs,” which support imposing penalties on contractors who claim these costs and create the basis for government claims for increased costs under CAS 405.
Unfortunately, a number of the costs included in the list are not “expressly unallowable costs” under the case law definition of the term. This MRD will, therefore, result in even more frequent DCAA assertions that contractors are liable for penalties for claiming expressly unallowable costs. This is another example of DCAA overreaching that will make the audit process even more contentious and costly.
The MRD, entitled “Audit Alert Distributing a Listing of Cost Principles that Identify Expressly Unallowable Costs,” is dated December 18, 2014. See MRD 14-PAC-021(R). Attached to the MRD is a 32-page set of quotations from the FAR and DFARS cost principles, which DCAA states establish that certain costs are expressly unallowable. The MRD also states that the listing is not “comprehensive” and that “[t]here could be situations where costs questioned could be expressly unallowable based on the facts and circumstances of that particular situation. In those situations, the audit team will need to perform additional analysis to determine whether, based on those facts and circumstances, the questioned costs are expressly unallowable.”
The MRD provides no guidance regarding what criteria DCAA applied when concluding that each of the FAR or DFARS quotations establishes a specific expressly unallowable cost and how the results of judgments based on the facts and circumstances could result in other expressly unallowable costs.
One thing that the MRD does make clear is that DCAA’s conclusions are often contrary to the definition of an expressly unallowable cost. Specifically, case law has long established that an expressly unallowable cost is “unmistakable” and “clear beyond cavil” from the regulations. Emerson Elec. Co., ASBCA No. 30090, 87-1 BCA ¶ 19,478; see, e.g., 48 C.F.R. § 9904.405-60(e). For example, entertainment costs and interest are expressly unallowable costs because these costs are unallowable in every instance. FAR §§ 31.205-14, -20. In contrast, the MRD states that excessive pass-through costs are expressly unallowable, even though what is excessive is defined in terms of a value judgment of whether the contractor added “no or negligible value.” See FAR § 52.215-23. Similarly, abnormal or mass severance pay is identified in the MRD as expressly unallowable despite the fact that FAR § 31.205-6(g)(5) provides that the government will recognize “its obligation to participate, to the extent of its fair share, in any specific payment.”
The MRD is clearly overreaching by DCAA. This is important to contractors because it will result in many audit reports asserting significant penalties, which will force contractors to dispute these penalties at the contracting officer level or through costly, time-intensive appeals.