Redstone Government Consulting Blog | John C. Shire, CPA (7)

A Little Background

FAR Part 31, Cost Principles, is the regulation that government contractors must follow in order to account for cost on most government contracts. Within FAR Part 31 is FAR 31.205, Selected Costs. This part of the cost principles regulation specifically spells out unallowable cost that the government will not pay for under a government contract. This section starts at FAR 31.205-1 and goes all the way up to FAR 31.205-52. However, it should be noted that FAR 31.205-2, 5, 9, 24, 45, and 50 are “Reserved” – These reserved cost areas went the way of the dinosaur over time, hopefully not to return. For example, FAR 31.204-2, Automatic Data Processing Equipment Leasing Costs, required an annual demonstration that leasing computer equipment was cost-effective, i.e., lowest cost to the Federal Government.

Defense Pricing Memo – September 30, 2020

Acting Principal Director, Defense Pricing and Contracting, Mr. Kim Harrington issued a memo on September 30, 2020 to announce that the Defense Contract Management Agency (DCMA) has a new Defective Pricing Pilot Team to provide support to Procuring Contracting Officers (PCOs) to resolve and disposition Defense Contract Audit Agency (DCAA) Truth in Negotiations Act (TINA) compliance audits. DCAA’s new favorite audit it appears. Reading a little into the memo (ok – not too much reading as the memo uses the word – backlog) DCAA has apparently created a new backlog for DoD of what they affectionately call TiN audits. Not a real surprise as DCAA created a TiN team a few years back. DCAA historically had an extensive workload development process to audit all large fixed priced contracts and sample smaller ones that created more audits than resources could accommodate. As we have reported before, now that DCAA is looking for work, the rush appears to be on for DCAA auditors to get back into more defective pricing audits.

Let us Set the Stage

On June 11, 2020, the Internal Revenue Service (IRS) put out a Notice (2020-46) that allowed employees to donate unused leave to charitable groups supporting the COVID-19 National Emergency. Under the leave-based donation program, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations. The notice provides that employee’s donation of leave will not be taxable income to the employee, however the employer will still treat the cost of the leave granted to the employee as either ordinary and necessary business expense or a charitable contribution. This applies to donations made before the end of the 2020 calendar year.

Where Did This Come From?

National Defense Authorization Act (NDAA) of 2019, required the implementation of a new Federal Acquisition Regulation (FAR) rule barring federal contractors from using telecommunications products or services or video surveillance equipment from certain foreign companies – The People’s Republic of China. As a result, a new contract clause came into place – FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment – effective August 13, 2020.

DCAA Takes the Lead Over Office of Federal Procurement Policy (OFPP)

In 2013, Congress put in place a new process for the calculation and publication of the compensation limitation (Cap) for all federal contractor employees. The process places the responsibility to calculate and publish the cap using the Bureau of Labor Statistics (BLS) Employment Cost Index (ECI) data on the Office of Federal Procurement Policy (OFPP). OFPP has failed in this responsibility for the last few years.

The Financial Accounting Standards Board (FASB) issued Topic 842, Leases, in February 2016 effective for fiscal years beginning after December 15, 2018. The change was “to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.” For the past 40 years or so, operating leases were only required to be presented in the disclosure and were off-balance sheet transactions. Other than the new asset (Right to Use asset) and a related liability on the balance sheet, the impact on the income statement (a single line item for lease expense) and cash flow are unchanged, at least under GAAP. International Financial Reporting Standards (IFRS) now requires all leases be treated similar to capital leases (Topic 842 calls these finance leases). So, under IFRS there will be more unallowable interest to properly account for on Government proposals and contracts incorporating FAR Part 31.

Apportioning the Costs of Buildings

The SBA and Treasury have made it clear that if you own or lease a building that you sublet to another company, the portion of the lease or mortgage expense that can be used as nonpayroll costs for PPP loan forgiveness is limited to the share of the expense applied to the business who’s PPP loan is being forgiven. The simple example is, you lease an office building for $10,000 per month and sublease part of the space to another company for $2,500 per month. Only $7,500 would be used toward your nonpayroll cost for loan forgiveness. This proration applies to utility and other shared costs of the tenants.

On August 17, 2020; Acting Principal Director for Defense Pricing and Contracting issued two memos providing guidance in support of DFARS Class Deviation 2020-O0013 and 2020-O0021 – CARES Act Section 3610 Implementation. There is also a memo providing contracting officers with a template for a Memorandum for Record to document the file for the issuance of the Section 3610 related contract modification.

We Lifted the Vail

A few months back we submitted a request to DCAA under Freedom of Information Act. Based on the DPC guidance referencing both DCAA and DCMA as playing a key role in support of the rest of the DoD Acquisition Community, we expected DCAA would have a significant number of documents disclosing this key role. Turns out, not so much. All we got was a single document listing 13 frequently asked questions (FAQs) DCAA has been fielding from their auditors, dated July 31, 2020.

FAR Subpart 2.1, Definitions, provides the meaning of two general groupings of cost not assignable directly to final cost objectives (i.e., not a direct contract cost):