Exploring Unallowable Costs @DHG_GovCon David Eck Mike Mardesich September 22, 2016 The Fundamentals of Government Contracting Webinar Series government contracting 1
Your Presenters @DHG_GovCon David Eck Dixon Hughes Goodman LLP 214.334.3233 david.eck@dhgllp.com Mike Mardesich Dixon Hughes Goodman LLP 703.970.0508 mike.mardesich@dhgllp.com government contracting 2
Fundamentals – Season 1 @DHG_GovCon • Challenges of Contracting with the Federal Government ( November 2015 ) - Completed • Contract Types and Associated Risks ( December 2015 ) – Completed • Year-End Closing (January 2016) - Completed • An Introduction to the Incurred Cost Submission – Part I: Who, What, Where, When, Why, and How? ( February 2016 ) - Completed – Part II: Preparation and Adequacy Review ( March 2016 ) - Completed • Accounting Systems and Setups (April 2016) - Completed • Accounting System Adequacy 101 (May 2016) – Completed • The Composition of Total Cost (June 2016) – Completed • Making Way for 2017 – Budgeting and Provisional Rates (July 2016) – Completed • Procurement Systems: DFARS Business Systems Rule and Criteria (August 2016) - Completed • Exploring Unallowable Costs (September 2016) – You are Here! • Policy and Procedures Manual: What’s In It and Why Do You Need One? ( October 2016 ) government contracting 3
Agenda @DHG_GovCon • Unallowable Cost Background and Guidance – FAR and CAS – Penalties for Unallowable Costs • FAR Cost Principles – Expressly Unallowable Costs – DCAA Commonly Scrutinized Unallowable Costs – Directly Associated Unallowable Costs – Unallowable Cost “Grey” Areas • Best Practices to Identify and Segregate Unallowable Costs • DCAA Guidance government contracting 4
@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Unallowable Cost Background and Guidance government contracting 5
What is Cost? @DHG_GovCon • Total Cost • Direct vs. Indirect Cost • Allowable Cost – Reasonableness – Allocability – Allowability – CAS or GAAP – Contract Terms government contracting 6
Cost Principles - FAR Part 31 @DHG_GovCon • Compliance Obligations – Criteria for allocating costs – Defines allowability of costs – Requires exclusion of unallowable costs • Penalties – Disallowance of costs – Penalties for unallowable costs – Interest penalty government contracting 7
Cost Accounting Standards 405 @DHG_GovCon • CAS 405: Accounting for unallowable costs • Compliance Obligations – Criteria for the assignment and allocation of costs to government contracts – Disclosure of accounting practices – Notification of changes to accounting practices – Requires consistent application • Penalties – Contract price adjustment – No increased cost to government if practices change – Interest penalties – Statute of Limitations government contracting 8
Allowability (FAR 31.201-2) @DHG_GovCon • Definition – Not unallowable – Terms of the contract – Generally Accepted Accounting Principles • Contractor must maintain adequate accounting records – FAR 31.201(2)(c) • Contractor must apply consistent practices – FAR 31.201(2)(b) • Often subject to improper challenges due to poor chart of accounts or inadequate procedures government contracting 9
Accounting for Unallowable Costs (FAR 31.201-6) @DHG_GovCon • Contractor has a responsibility to account for unallowable costs • Must have a mechanism for identifying unallowable costs government contracting 10
Segregation of Unallowable Costs @DHG_GovCon • FAR 31.201-6, CAS 405, FAR 52.216-7, FAR 42.703-2 • Certification Issues: – Directly associated costs – Access to unallowable cost detail – Include unallowables in base government contracting 11
Penalties for Unallowable Cost @DHG_GovCon • If unallowable on clear and convincing evidence: – Disallowed cost plus interest on any paid portion • If known to be unallowable before proposal submission: – Disallowed cost plus interest on any paid portion – Additional two times unallowable cost – Other civil and criminal penalties provided by law government contracting 12
Certificate of Indirect Costs @DHG_GovCon This is to certify that to the BEST OF MY KNOWLEDGE and belief: 1. I have reviewed the indirect cost proposal submitted herewith; 2. All costs included in this proposal [to establish billing or final indirect costs rates for . . .] are ALLOWABLE in accordance with the requirements of contracts to which they apply and with the cost principles of the Department of Defense applicable to those contracts; 3. This proposal DOES NOT INCLUDE ANY COSTS WHICH ARE UNALLOWABLE under applicable cost principles of the Department of Defense, such as (without limitation): advertising and public relations costs, contributions and donations, entertainment costs, fines and penalties, lobbying costs, defense of fraud proceedings, and goodwill; and 4. All costs included in this proposal are PROPERLY ALLOCABLE to defense contracts on the basis of a beneficial or causal relationship between expense incurred and the contracts to which they are allocated in accordance with applicable acquisition regulations. I declare UNDER PENALTY OF PERJURY that the foregoing is true and correct. Firm …………………………………… Title…………………………… Signature ……………………………. Date ………………………….. Corporate Official ………………….. government contracting 13
Unallowable Cost Challenges @DHG_GovCon • Auditor expectation for supporting documentation • DCAA audits in arrears and conflict with record retention requirements • Auditor access to budgeted and incurred cost government contracting 14
@DHG_GovCon The Fundamentals of Government Contracting Webinar Series FAR Cost Principles government contracting 15
@DHG_GovCon The Fundamentals of Government Contracting Webinar Series Personnel Costs government contracting 16
Compensation – FAR 31.205-6 @DHG_GovCon • Allowable Compensation must be reasonable for work performed based on comparisons to: – Firms of the same size – Firms in the same industry – Firms in the same geographic area – Firms engaged in non-Government work • Closely held business scrutinized more closely • When elements are challenged - Offsets may be considered between allowable elements of compensation within same job grade or level government contracting 17
Compensation – Challenges @DHG_GovCon • Reasonableness – overall – Bonuses – Lack of approval from ACO for changes to compensation programs – Lack of wage or salary survey to support • Inconsistency • Dependent Health Care Costs • T&M Contracts - Resume and Labor Category requirements • Bonuses – need written plan that is consistently followed 18 government contracting 18
Benchmark Compensation Cap @DHG_GovCon • The compensation cap is required by Section 39 of the 41 U.S.C. § 1127, and represents the maximum compensation amount that a contractor can include as an allowable cost for covered contracts awarded before June 24, 2014. Statutory Formula Cap Amount Fiscal Year For Costs Incurred After $1,144,888 2014 1-Jan-2014 $980,796 2013 1-Jan-2013 $952,308 2012 1-Jan-2012 $763,029 2011 1-Jan-2011 $693,951 2010 1-Jan-2010 $684,181 2009 1-Jan-2009 $612,196 2008 1-Jan-2008 $597,912 2007 1-Jan-2007 $546,689 2006 1-Jan-2006 $473,318 2005 1-Jan-2005 $432,851 2004 1-Jan-2004 government contracting 19
Benchmark Compensation Cap @DHG_GovCon • Cap rules vary depending on the date of the contract award and the customer agency. • For covered contracts awarded on or after June 24, 2014, a cap of $487,000 applies pursuant to section 702 of the Bipartisan Budget Act (BBA) of 2013. Agency Agency Compensation Cap Rule DOD/NASA/CG Civilian agencies Statutory formula cap, top five Before Dec 31, 2011 Before Jun 24, 2014 senior executives On/after Dec 31, 2011, and Statutory formula cap, all N/A before June 24, 2014 contractor employees $487,000* BBA cap, all contractor On/after Jun 24, 2014 employees (*will adjust for inflation) government contracting 20
Compensation Considerations @DHG_GovCon • The statutory caps will impact those contractors who choose to use a blended rate approach to compensation reimbursement in their blended rate calculations. • The statutory cap does not limit the compensation a contractor may pay an employee, only the amount reimbursable to the contractor. • For cost reimbursement purposes, contractors must also remember that the reasonableness test at FAR 31.205- 6(b) still applies even if total compensation does not exceed the cap. – DCAA Guidance on Surveys and Benchmarking – DCAA Compensation Team – Recent Court Decisions government contracting 21
Employee Morale, Health, Welfare, Food Service, and @DHG_GovCon Dormitory Costs and Credits – FAR 31.205-13 • Aggregate costs are allowable: – Improve working conditions – Improve employee morale – Improve employee performance • Gifts are unallowable – not awards recognizing employee achievements • Recreation is unallowable – except for sponsored teams or organizations • FASA imposed significant changes in 1996 government contracting 22
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