RCGI-Government “Forgive & Forget”—Not Likely Applicable to FAR 52.242-3 Penalties

A recent ASBCA decision (No 61583) confirms that Government benevolence does not extend to penalties associated with a contractor’s final indirect cost rate proposal (FICRP) which included expressly unallowable indirect costs. In one case, the issue was unallowable legal costs incurred as a result of the US Department of Justice (DOJ) investigation of the contractor, which was triggered by information suggesting that the contractor claimed indirect salaries for an individual whose services were as the housekeeper for the owners of the company and thus unallowable as costs allowable to Government contracts. 

The Story of Unallowable Legal Costs

Over a series of years, the contractor’s FICRPs (2010-2013) claimed the legal costs which the Government believed was in non-compliance with FAR 31.205-47(b); thus, expressly unallowable subject to FAR 52.242-3 penalties ($1 penalty for every $1 of expressly unallowable costs). The amount at issue was $53,614; implicating that a like amount of unallowable legal costs had been allocated in 2012-2013 to contracts with FAR 52.242-3.   For reasons never explained in the published decision, the Government ACO did grant a waiver from the penalties for 2010-2011 (the information is sketchy at best given that the Government did not have an audit report for 2010-2011).

“Expressly” Unallowable

The contractor made two assertions: that the legal costs were not expressly unallowable, and that the contractor was entitled to a waiver of the penalties.  Editor’s comment:  To clarify, if the legal costs were not categorically “expressly unallowable”, the issue of a waiver would have been a moot point.  However, the ASBCA concluded that the costs were expressly unallowable (FAR 31.205-47(a)-(b)) and that contractor actions claiming expressly unallowable costs over a four-year period were solid indication that including the costs had not been an inadvertent action on the part of the contractor (a basis for waiving the penalty is inadvertent action by the contractor claiming the cost and contractor actions to minimize the risk of repeat infractions).

Absence of Government Response

Another issue asserted by the contractor was the fact that the Government failed to advise the contractor that the Government was going to disallow the 2010/2011 legal costs before the contractor submitted 2012/2013.   Editor’s comment:  for years this has been an issue of great frustration to contractors with several FICRPs awaiting audit; however, the ASBCA made it clear that it is the contractor’s contractual responsibility to avoid claiming expressly unallowable costs (delayed audits isn’t a good excuse for a contractor’s failure to follow the regulations).

Based upon other published decisions involving FAR 52.242-3, ASBCA No. 61853 comes as no surprise because most decisions have favored the Government interpretations and actions involving the assessment of the penalty.  

Previous Government Decisions

Previous decisions (almost all involving Raytheon) have established the following:

  • Expressly unallowable is a function of the very specific wording in each FAR 31.205 clause. When subjected to legal scrutiny, every word “means something” and not every clause uses identical terminology.
  • Directly associated unallowable costs are expressly unallowable if the association is with an expressly unallowable cost.
  • Incentive compensation (annual bonuses) are partially expressly unallowable if the recipient’s annual activities include expressly unallowable activities (i.e. lobbying)
  • The mandatory waiver is for total amounts claimed of less than $10,000 (of expressly unallowable costs) with absolutely no adjustment for relativity. In other words, the waiver amount does not increase as a function of the relative dollar value of government contracts for a particular government contractor.

Inspector General Reports

One other point of reference, several IG (Inspector General) reports over the years have been critical of Government failures to enforce the penalty clause (in most cases, failure in the context of taking no action and not in the context of issuing an unsupported waiver).   When one considers everything on the table, including the history of and wording in FAR 52.242-3, the published decisions, and continuing IG interests, it simply reinforces the need to avoid claiming expressly unallowable costs in a final indirect cost rate proposal (or even worse, in a continuing series of FICRPs).  Waivers, if any, are more likely accidental than intentional and a contractor simply cannot assume that the Government’s benevolence will result in easily obtainable waivers (from the penalty).

Contractor Bears Responsibility

As clearly stated in ASBCA No. 61583, it is the contractor’s responsibility to comply with the various FAR clauses (52.216-7 which invokes 52.242-3); thus, avoid claiming expressly unallowable indirect costs. This maybe a “latent defect” for hundreds of contractors whose FICRPs have gone unaudited for years (given a “free-pass” attributable to DCAA’s Low Risk Universe policy for eliminating the incurred cost backlog). In other words, the lack of incurred cost audits can have unintended consequences if a contractor becomes complacent and fails to keep up sound internal controls, due diligence and an occasional third-party independent assessment of contract compliance.  

Need Guidance With Unallowable Costs Determination?

If you are looking for support in preparing proposals or need guidance with auditing or other government investigations surrounding your contracts, let the experts at Redstone Government Consulting help you. Our team members have years of experience in representing contractors of all sizes, which is combined with knowledge of working with Government agencies in all types of situations. From training to consulting, Redstone representatives can lead your team in developing contracts and accounting systems which fit government regulations and specific contractor needs.

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Written by Michael Steen

Mike Steen is a Senior Advisor with Redstone Government Consulting, Inc. and a specialist in complex compliance issues to include major contractor cost accounting & business system regulations, financial compliance, resolution of DCAA audit issues, Cost Accounting Standards application, litigation support, and claims preparation. Prior to joining Redstone Government Consulting, Mike served in a number of capacities with DCAA for over thirty years, and upon his retirement, he was one of the top seven senior executives with DCAA. Mike Served as a Regional Director for two DCAA regions, and during that time was responsible for audits of approximately $25B and 800 employees. In October 2001, he was selected for the Senior Executive Service and in 2006 he received the Presidential Rank Award. During Mike’s tenure with DCAA, he was involved in conducting or managing a variety of compliance audits, to include cost proposals, billing systems, Cost Accounting Standards, claims, defective pricing, and then-evolving programs such as restructuring, financial capability and agreed-upon procedures. He directly supported the government litigation team on significant contract disputes and has prepared and presented various lectures and seminars to DCAA staff and business community leaders. Since joining Redstone Government Consulting in June 2007, Mike has developed and presented training and seminars on Government Contracts Compliance to NCMA, Federal Publications Seminars and various clients. Mike also is a prolific contributor of written articles to government contracting publications, as well as to our own Government Insights Newsletter. Mike also serves as the director of our training service offerings, with responsibilities for preparing and developing course content as well as instructing our seminars to clients and general audiences throughout the U.S. Mike also serves as a faculty instructor for the Federal Publications Seminars organization. Education Mike has a BS Degree in Business Administration from Wichita State University. He is also a graduate of the DCAA Director’s Fellowship Program in Management, and has a Masters Degree in Administration from Central Michigan University. Mr. Steen also completed a number of OPM’s management and executive development courses.

About Redstone GCI

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Topics: Small Business Compliance, Government Regulations