Many clients have Department of Defense contracts and are subject to Defense Contracting Auditing Agency (DCAA) audits of incurred costs in accordance with FAR 52.216-7, "Allowable Cost and Payment." An important 2017, 61-page decision by the Armed Services Board of Contract Appeals (ASBCA) addressed the following major government contracting issues:
- Overhead rates and supporting documentation;
- DCAA’s ability to change positions before the six-year statute of limitations expires;
- Accrued Costs crossing fiscal years; and,
- Unapproved subcontractor costs.
The case was Appeal of Technology Systems, Inc. (TSI), ASBCA No. 59577 (January 11, 2017), (http://www.asbca.mil/Decisions/2017/59577%20Technology%20Systems,%20Inc.%201.12.17.pdf). In this case, the ASBCA held that:
DCAA can change its position regarding cost allowability even if the cost was previously included in indirect cost pools without DCAA objection and the contractor may face a penalty for each year the cost was included.
TSI incurred costs in 2007 and claimed the costs in its 2008 incurred cost proposal to establish final indirect cost rates. Three months before the six-year statute of limitations expired in June 2014, the DCAA issued its audit report on the 2008 proposal and the Administrative Contracting Officer (ACO) issued a final decision disallowing questioned costs and establishing final indirect cost rates for 2007. The audit report and final decision questioned many cost elements including consulting costs. The ACO disallowed consulting costs because TSI failed to provide supporting documentation required by FAR 31.205-33(f). TSI argued it used the consultant for several years and the DCAA had not questioned the costs, leading TSI to believe the consultant’s costs were acceptable.
TSI’s Appeal Arguments
TSI appealed the final decision to the ASBCA. TSI argued that its prior course of dealing with the DCAA demonstrated a mutual understanding of contract interpretation that is binding with respect to future contracts. TSI argued DCAA’s failure to question consultant costs resulted in a mutual understanding that TSI had provided satisfactory documentary support.
The ASBCA, however, determined there was no prior course of dealing. The Agency's failure to question costs in prior DCAA audits did not establish a prior course of dealing or a common understanding of what constitutes support for TSI’s incurred costs. DCAA’s failure to question costs only indicates DCAA’s choice to investigate certain issues. Questioning DCAA’s silence was only speculation.
TSI also argued DCAA was prevented from challenging incurred costs when the costs were accepted following a final audit of historical costs (so-called “retroactive disallowance”). The ASBCA rejected this argument. The ASBCA characterized “retroactive disallowance” as a form of estoppel and for estoppel to apply the government must have engaged in misconduct toward the contractor. The ASBCA found no misconduct by the government.
TSI’s Incurred Cost Documentation was Sufficient
Although TSI lost its legal arguments, the ASBCA found TSI was not required to provide consultant work products to justify consultant expenses. The DCAA had argued that FAR 31.205-33(f) required TSI to provide:
[e]vidence necessary to determine that work performed is proper and does not violate law or regulation shall include –[c]onsultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.
DCAA’s audit position was that because TSI did not provide consultant work product to support its costs, the costs were unallowable costs. The ASBCA rejected this argument, “[t]he government labors under the false impression that the FAR requires a consultant to create ‘work product’ merely for the purposes of proving its costs.”
The ASBCA held consultants might not create documents as work product and consultants’ invoices often include data the FAR defines as work product -- such as persons visited, and subjects discussed.
Contractors should create engagement letters addressing what is expected from consultants in terms of work product and invoice content. To avoid government inconsistency, contractors should enter into advance agreements with an ACO in accordance with FAR 31.109. If contractors change cost structures, for example by establishing a bonus plan, the change should be identified and discussed with the auditor or ACO. These discussions should be reflected in letters and emails. If an auditor raises questions concerning costs during an audit but does not question the cost in an audit report, document the discussion and ask for confirmation that because the cost was not questioned in the audit report, there an agreement that the cost is allowable costs, and the supporting documentation is adequate.