By Bernard Mustafa, PVBS Chief Executive Officer

bernard mustafa

DCAA Clarifies Expressly Unallowable Costs: What It Means For GovCon

If you do business with the Federal Government, you need to be aware of the potential for more audits. Recently, the DCAA issued an audit alert to enhance its guidance regarding identifying expressly unallowable costs. The DCAA mainly uses Memorandum for Regional Directors (MRD) to distribute audit alerts that could had been inspired in response to litigation or other precedents set to help establish the new audit path to follow. Regardless, in the end it all points to the greater potential for more audit scrutiny in this area and penalties for government contractors found to be non-compliant.

According to the most recent report from the DCAA, the 2013 Year in Review: “In Fiscal Year 2013, DCAA examined $160 billion in contractor costs, conducted 13,600 reviews, and produced over 6,200 audit reports. Overall, DCAA’s efforts resulted in $4.4 billion in net savings to the government—the highest in Agency history and nearly 75 percent higher than the average savings achieved during Fiscal Years 2003-2009. Based on these net savings, the return on taxpayers’ investment in DCAA was approximately $7.30 for each dollar invested.”

So when the DCAA issued new MRDs a few months ago regarding the determination of expressly unallowable costs and the recovery of penalties on those questioned costs (14-PAC-021 and 14-PAC-022), many in the Government Contracting Community took notice. Included in the MRD are 32 pages of cost principle excerpts to provide auditors with a tool that directs them on questionable costs. According to the CAS Board, the unallowability of a cost item must be expressed in either ‘direct or unmistakable terms’.”

However, the fact that the cost principle does not include the word “unallowable” or phrase “not allowable” does not mean that costs questioned are not expressly unallowable. Unfortunately, this means that audit teams will have to make a determination regarding whether the cost principle, used as the basis for questioning the costs, identifies expressly unallowable costs. Which makes determining whether costs are expressly unallowable more of a challenge and open to interpretation and opinion. Something the MRD tries to strengthen while acknowledging that it is not a “comprehensive” list of possibilities.

With regards to penalties, the Armed Services Board of Contract Appeals (ASBCA) ruled that the Government should not assess a penalty where there are reasonable differences of opinion about the “allowability” of costs and that the Government must show that it was “unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable.” Therefore, in situations where a cost principle does not specifically state that the applicable cost is unallowable or not allowable, the audit team will make the determination. The audit team will need to evaluate whether the cost principle identifies a cost or type of cost clearly enough that there cannot be a reasonable difference of opinion.

So, what does this mean for Government Contractors? According to Lemmer and Garehime (2015) at McKenna, Long & Aldridge LLP, “The MRD is clearly overreaching by DCAA. This is important to contractors because it will result in many audit reports asserting significant penalties, which will force contractors to dispute these penalties at the contracting officer level or through costly, time-intensive appeals.”

In my next blog, I will discuss how your accounting system can and should be used to protect your company when the auditors coming knocking.

In the meantime, our friends at Dixon Hughes Goodman will be hosting a webinar on Wednesday, May 13 (click here), as Mr. Mark Burroughs and Ms. Susan Fields of DHG’s Government Contract Advisory Practice discuss factors contractors should consider when addressing allegations of expressly unallowable costs and recommendations for penalties.