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.
So that brings us down to 46 areas of cost (52 parts – 6 reserved parts) to contend with. Now that is not so bad (ok, it’s still bad) – 46 potentially unallowable types of cost for contractors to deal with. Well, not really – there are a few selected cost areas that make declarative statements that a cost is allowable. A great example is FAR 31.205-29, Plant protection costs, which simply states such cost are allowable. Likely, the reason for this area is because auditors were questioning whether protecting a defense plant was reasonable at some point in time. Alright enough with the background.
This section of FAR Part 31 makes it clear that the FAR Council’s failure to address any costs “does not imply that it is either allowable or unallowable.” It goes on to say that you must take the cost at hand and see how a similar or related cost is treated within FAR Part 31.205 to determine whether or not the cost is allowable. One would logically think that any cost incurred, at a reasonable price, that was necessary for the operation of the business, not covered by a Selected Area of Cost (FAR 31.205), would be considered an allowable cost. This is the Government we are talking about, so let us hold off on the logical thinking.
An Auditor’s View Through the Looking Glass
We have seen cases where auditors take the opposite view. They see all incurred cost as unallowable or at least potential unallowable and it is the contractor’s responsibility to document the allowability of all costs incurred (yes – have something in writing to support the expense was allowable). This view of the world creates significant additional compliance effort (and cost) for contractors that we do not believe was the intent of the drafters of the regulations.
We question why auditors have this view when DCAA’s FY 2019 Report to Congress disclosed that auditors took exception to less than 1 cent of every incurred cost dollar they examined (.81%). It would appear that history shows unallowable cost in incurred cost proposals is a very low risk to the Federal Government.
So, What is a Contractor To Do?
While we certainly do not recommend contractors create additional documentation that the FAR clearly does not require (just to make the auditors job of reviewing low risk cost that much easier), we do recommend that when a contractor incurs a significant event or cost that is not clearly addressed by FAR 31.205, they take the time to create a contemporaneous record as to why they believe the cost is allowable. Certainly there will be situations where auditors do not agree with the contractor position, however the auditor will not be able to question the contractor’s accounting system internal controls and issue a potential significant deficiency related to DFARS 252.242-7006(c)(12) requirement to exclude FAR part 31 unallowable costs from contract cost.
Redstone GCI is available to assist contractor’s in assessing their incurred cost as to allowable or unallowable. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying FAR Part 31, Cost Principles.