RGCI - Interest is Unallowable – How is That Possible

FAR 31.205-20 provides that interest is unallowable on Federal Government contracts, no matter how it is calculated or presented in your financial books and records. This means you cannot propose, bill, or claim your interest expense.

Does This Mean All of My Banking Fees are Unallowable?

No, not entirely. FAR 31.205-27(a)(3) – part of the Organization costs principle – provides an exclusion from unallowability for “administrative costs of short-term borrowings for working capital … whether or not additional capital is raised.” This should allow you to include the administrative costs (i.e., banking fees) related to your operating lines of credit and short-term bank loans.

What About DCAA Auditors? They Question Everything.

Even DCAA’s Selected Areas of Cost Chapter 35 – Interest and Other Financial Costs introduces their guidance by stating, “Generally, interest expenses and other financial costs are expressly unallowable.” However, both Section 35-2 Related Cost Principles and 35-3 General Audit Guidelines clearly state the exception under FAR 31.205-27(a)(3) for administrative costs of short-term borrowings. That is not to say an auditor will not question first and review their own guidance later – no reason to let advice get in the way of a good audit finding.

How Does the Government Justify Not Allowing Such a Reasonable Cost Incurred by Almost Every Company?

What they take away with one hand, they give back, at least partially, with the other hand. FAR 31.205-10 makes cost of money, “an imputed cost that is not a form of interest on borrowings,” allowable. FAR 31.205-10(c) goes on to state, “Actual interest cost in lieu of the calculated imputed cost of money is unallowable.” So, play by the Government’s rules or get nothing.

Cost of money is allowable, provided-

(1)  It is measured, assigned, and allocated to contracts in accordance with 48 CFR9904.414 or measured and added to the cost of capital assets under construction in accordance with 48 CFR9904.417, as applicable;

(2)  The requirements of 31.205-52, which limit the allowability of cost of money, are followed; and

(3)  The estimated facilities capital cost of money is specifically identified and proposed in cost proposals relating to the contract under which the cost is to be claimed.

Even a Small Business Trying to Get a Normal Business Expense Recovered Must Understand Cost Accounting Standards

In this case, it is not as bad as you might think. Granted, CAS 414 and 417 are very long-winded and can be a little confusing – that said – if you follow the instructions in the included forms, it is really not that bad.

What is Cost of Money?

Cost of money is an imputed amount based on the average net book value of your tangible capital assets and of those intangible capital assets that are subject to amortization times the rates determined by the Secretary of the Treasury, pursuant to Public Law 92-41. This amount is then recovered over the same base used to recover the deprecation and amortization of the tangible and intangible capital assets. The imputed amount must be a separate and standalone rate that is applied in your proposals, billing, and incurred cost claims – the imputed amount cannot simply be included in the existing indirect expense pools.

Our Takeaway

When interest rates are up, contractors must ensure they are not leaving money on the table. Follow the instructions of CAS Board Cost of Money Form (CASB CMF) within CAS 414 to calculate the imputed amount of cost of money and rates. Ensure you include the cost of money in your cost proposals to ensure you can bill and claim the costs after the award.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractors with the development of cost of money rates. We would be happy to be part of your team.

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Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Compliant Accounting Infrastructure, DCAA Audit Support, Cost Accounting Standards (CAS), Federal Acquisition Regulation (FAR)