Accounting for UnallowableCostsStephanie Widzinski, Sr. Manager, Watkins MeeganKiran Pinto, Manager, Watkins MeeganGC-175
AgendaThe RegulationsThe “Unallowable” ConceptBasic Cost Principles and Unallowable CostsHow to properly account for Unall...
Key Take AwaysProper segregation of unallowable costProper treatment in your indirect rate structureCompliance with regula...
Basic Cost Principles –The Regulations
FAR 31.2 – Contracts with            Commercial OrganizationsFAR 31.201-6, Accounting for Unallowable Costs     Certain c...
FAR 31.2 – Contracts with             Commercial OrganizationsFAR 31.202, Direct Costs     Imposes the consistency requir...
FAR 31.2 – Contracts with            Commercial OrganizationsFAR 31.203, Indirect Costs     Defers to CAS for covered con...
Allowable CostsFor a cost to be allowable, it must be:     Allocable      The cost is assignable or chargeable to one or...
The Unallowable ConceptNo such concept in the commercial                             Costs come in many different varietie...
The Legal Basis for               Unallowable CostUnallowable costs are a cost of doing business, you just can’tcharge the...
Who Really Cares about         Unallowable Cost?Everyone in your organization should careThere are penalties for not carin...
Top Audit Issues for 201112    ©2012 Deltek, Inc. All Rights Reserved
Treatment of Unallowable CostSome unallowable costs are unavoidableVisibility and proper treatment is key      Unallowabl...
Treatment of Unallowable CostCorrectly setting up your system to account for and report onunallowable cost is a key compon...
GCS Premier andUnallowable CostSetup and Treatment
Unallowable Cost and GCSUnallowable cost can come in all shapes and sizes      Direct Labor, ODC’s, Overhead & G&AEach is...
Unallowable Cost and GCSWhat to consider when setting up and capturing unallowablecost:      A separate and distinct numb...
Direct CostUnallowable/Non billable
Direct Unallowable CostTwo basic options to consider for the recording of directunallowable (non billable) costIf you only...
Unallowable ODCUnallowable and non-billable mean the same thing for ourdiscussionThese are costs that belong to the job bu...
Alloc. Flag     “A” means it      will go the                                          SFX 56 is for       to G&A         ...
Unallowable ODCAfter setting up the SFX 56, you must “tell” the system toexclude these charges from billing and revenueOn ...
23   ©2012 Deltek, Inc. All Rights Reserved
This screen is automatically     set up. This is where you can           manage ceilings.                               Ch...
Unallowable ODC“No fee, ceiling” means that no fee is to be applied and aceiling exists      Our ceiling is zero because ...
Unallowable Direct LaborIf you have unallowable direct labor, you must set up aseparate task to capture this costConsider ...
Unallowable Direct LaborThis would also be a non-revenue generating task      Leave the Automatically compute this contra...
In the Contract Master          File, uncheck the “auto                compute” box28   ©2012 Deltek, Inc. All Rights Rese...
Unallowable Direct LaborIf this is a T&M contract, do not set up a T&M Billing rate onthe unallowable labor category     ...
Indirect CostUnallowable Set Up
Unallowable Indirect CostUnallowable indirect cost can be either labor or non-laborUnallowable expense can result from an ...
Unallowable Indirect CostRecording unallowable cost to separately identifiedunallowable accounts will result in the most v...
Unallowable Indirect CostCosts that would be normally included in overhead, but bytheir nature are unallowable, should be ...
How to Capture Unallowable Cost        in GCSTo properly account for unallowable cost, your indirect poolstructure should ...
How to Capture Unallowable Cost        in GCSThe pool will contain all labor and non-labor expense relatedunallowable cost...
Setting Up the PoolAll unallowable accounts must be assigned to the unallowablepoolThe unallowable labor account must have...
Chart of Accounts File-CY                                               Account Type is L37    ©2012 Deltek, Inc. All Righ...
Indirect Pool File                                                Pick a base option                                      ...
Chart of Accounts39    ©2012 Deltek, Inc. All Rights Reserved
Unallowable Pool     No base!40     ©2012 Deltek, Inc. All Rights Reserved
Total     G&A BASE                                                 Unallowable                                            ...
The Consequences of Ignoring             Unallowable CostKnowingly including unallowable direct costs in a publicvoucher s...
The Consequences of Ignoring             Unallowable Cost – continuedUnallowable costs in an indirect claim are also subje...
The Consequences of Ignoring              Unallowable Cost – continuedUnder the new DFARS Business                        ...
Burden of ProofRemember, it is always on you, the contractorWhat should you have in place so that you are prepared todefen...
Selected Costs May Be:           Allowable (A), Unallowable (UA), or Allowable With Restrictions (AWR)       Selected Cost...
Selected Costs May Be:            Allowable (A), Unallowable (UA), or Allowable With Restrictions (AWR)       Selected Cos...
In SummaryCosts that are unallowable by law or regulation and areALWAYS unallowableCosts that are unallowable by amount/ce...
Learn more…     Stephanie Widzinski, CPA     Senior Manager, Government Contracting Group     Stephanie.Widzinski@WatkinsM...
Basic Cost Principles –The Regulations
FAR 31.2 – Contracts with             Commercial OrganizationsFAR 31.201-6, Accounting for Unallowable Costs      Certain...
FAR 31.2 – Contracts with              Commercial OrganizationsFAR 31.202, Direct Costs      Imposes the consistency requ...
FAR 31.2 – Contracts with             Commercial OrganizationsFAR 31.203, Indirect Costs      Defers to CAS for covered c...
Thank You!
Overview of SelectedCost Principles
FAR 31.205-43, Trade, Business, Technical             & Professional Activity CostsAllowable costs are limited to:      (...
More on Conferences and         Seminars… GeneralTrade, Business, Technical and                        The cost principle ...
More on Conferences and               Seminars…Conference Costs versus                                      Business Meals...
More on Conferences and                Seminars…Documentation      Determination of allowability requires knowledge conce...
FAR 31.205-44, Training &              Education CostsExamples of allowable costs follow:      (1) Vocational training;  ...
FAR 31.205-46, Travel CostsThese costs include costs fortransportation, lodging, meals, and incidental expenses andare gen...
31.205-46, Lowest Cost AirfareSubstantiating documentation must be maintained if you aretaking one of the exceptions in FA...
FAR 31.205-13, Employee           Morale, Health, WelfareAggregate costs incurred on activities designed to improve workin...
FAR 31.205-14, Entertainment         CostsCosts of amusement, diversions, social activities, and anydirectly associated co...
FAR 31.205-51, Costs of Alcoholic        BeveragesCosts of alcoholic beverages are unallowable65         ©2012 Deltek, Inc...
FAR 31.205-27, Organization CostsExpenditures in connection with:                      *Note: The cost of activities(1) Pl...
FAR 31.205-28, Other Business             ExpensesThe following types of recurring costs are allowable:      (a) Registry...
FAR 31.205-15, Fines, Penalties &         Mischarging CostsCosts of fines and penalties resulting from violations of, orfa...
FAR 31.205-8, Contributions or        DonationsContributions or donations, including cash, property, andservices, regardle...
FAR 31.205-1,             PR and Advertising CostsPublic Relations (P.R.) includes activities associated withadvertising a...
FAR 31.205-1, PR and Advertising              Costs – (cont.)Advertising means the use of media to promote the sale ofprod...
FAR 31.205-1, PR and Advertising               Costs – (cont.)Unallowable P.R. and advertising costs include the following...
FAR 31.205-22, Lobbying and        Political Activity CostsIn most cases, these cost are unallowable. An example of anallo...
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Deltek Insight 2012: Accounting for Unallowable Costs

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The basic requirement of CAS 405 and FAR 31.201-6 are that unallowable costs be identified and excluded from any billing, claim, or proposal applicable to a Government contract. Accounting for unallowable costs can be a bit more complex. Some of the things to consider... Are the costs unallowable due to FAR or are they unallowable due to contract terms or ceilings? Are you properly accounting for the unallowable directly associated costs? What about unallowable overhead costs? Come learn valuable tips and tricks for GCS Premier to accurately account for unallowable costs and insure your complete compliance with the requirements of CAS 405 and FAR31.201-6. Intermediate Level.

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  • A category of cost may be unbillable to the client…Nothing to prevent the firm from incurring the costsIssue is visibility to the clientUnbillable cost may still be included in contract price as part of markup (burden)
  • Add notes about the types of people responding to the clarity survey.You should worryDCAA cares and they are watching tooWHY….because charging unallowable cost leads to fines, penalties, de-barrmentIs anyone watching?Who worries about them?Why?
  • THESE ARE NOTES FROM THE 2010 SLIDE………..REVIEW AND UPDATE NOTESQuestion:What are your top three audit issues over the last year? Please rank your top three choices.OBSERVATIONSOverall, the top 4 issues have remained in the top 4, shuffling slightly from year to yearLabor & Timekeeping regained its spot as the #1 vote getterInternal Control Systems nudged its way into the top 3, pushing Unallowable Costs into the #4 spotIMPLICATIONSLabor continues to show up as the area needing firms’ most attentionAlthough Executive Compensation appears near the bottom of the ranks, what portion of that compensation falls into Unallowable Costs? Open ended survey comments raised concerns here
  • Unavoidable but a cost of doing business….you must pay taxes!Proper treatment is keyVisibility is essential to proper treatmentDCAA always wants to see CofA for segregation of unallowable costThey want to see your policy on unallowable cost and make sure you train your employees on unallowable costI always had a short blurb about the treatment, segregation and training around unalllowable costDirectly associated cost…”if not for X, then Z would not be incurred”.
  • You need a separate project so that the cost isn’t included in revenue calc.
  • All unallowable cost dilutes your profit
  • You can’t have the same type of cost in both the numerator and denominator
  • It is the set up of the pool that will get the unallowable cost the to base of the G&A pool.If you don’t have an unallowable pool the cost can’t get to the G&A base
  • Maintain training logs….have employees sign that they took the unallowable training, just like ethics or security training
  • Deltek Insight 2012: Accounting for Unallowable Costs

    1. 1. Accounting for UnallowableCostsStephanie Widzinski, Sr. Manager, Watkins MeeganKiran Pinto, Manager, Watkins MeeganGC-175
    2. 2. AgendaThe RegulationsThe “Unallowable” ConceptBasic Cost Principles and Unallowable CostsHow to properly account for Unallowable Cost in GCS Premier2 ©2012 Deltek, Inc. All Rights Reserved
    3. 3. Key Take AwaysProper segregation of unallowable costProper treatment in your indirect rate structureCompliance with regulations3 ©2012 Deltek, Inc. All Rights Reserved
    4. 4. Basic Cost Principles –The Regulations
    5. 5. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.201-6, Accounting for Unallowable Costs  Certain costs may be allocable, but not allowable  Introduces the concept of statistical sampling for quantification of unallowables  Introduces the concept of directly associated unallowable costs5 ©2012 Deltek, Inc. All Rights Reserved
    6. 6. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.202, Direct Costs  Imposes the consistency requirement of CAS 402 to all FAR contracts  Does not define “direct costs”  The term is defined in FAR 31.201-4, Determining Allocability, as one that “is incurred specifically for the contract”  Permits treatment of any cost of a minor amount as indirect if…  Treatment is consistent, and  Effect is substantially the same as charging it direct6 ©2012 Deltek, Inc. All Rights Reserved
    7. 7. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.203, Indirect Costs  Defers to CAS for covered contracts  For all other contracts  Defines indirect as everything not direct (even unallowables)  Mandates pool formation in logical, homogeneous cost groupings  Established requirement for causal/beneficial relationship  Prohibits fragmentation of pool bases  Acknowledges need for “offsite” pools for some contractors  Requires pools to be allocated over contractor’s fiscal year (with some exceptions)  Encourages use of “special allocations” (exception to G&A base) for GOCOs  Establishes “excessive pass-through charges” as unallowable7 ©2012 Deltek, Inc. All Rights Reserved
    8. 8. Allowable CostsFor a cost to be allowable, it must be:  Allocable  The cost is assignable or chargeable to one or more cost objectives on the basis of benefit received  Reasonable  Based on what a prudent person would incur in the ordinary course of business  Think economy and efficiency  Burden of proof is always on the contractorPursuant to FAR 31.201 (Composition of total cost)Pursuant to CAS, if applicablePursuant the terms of the contract8 ©2012 Deltek, Inc. All Rights Reserved
    9. 9. The Unallowable ConceptNo such concept in the commercial Costs come in many different varietiesworld (con’t)  Cost is cost  Some costs may be charged to theGovernment contracting is an entirely Government, but only up to a ceilingdifferent story  Travel, executive compensation  Cost is no longer just cost  Some costs have special restrictions  Is it allowable or unallowable? – sometimes allowable, sometimes  Segregation of allowable and not unallowable costs is required  Advertising, Legal Costs, SalesCosts come in many different varieties Commissions  A cost can be incurred, but never  Some costs should never be incurred charged to the Government, either (these are also illegal) directly (visible on the invoice) or indirectly (buried in the indirects)  Bribes (foreign or domestic)  Interest, Alcohol, Entertainment, etc.9 ©2012 Deltek, Inc. All Rights Reserved
    10. 10. The Legal Basis for Unallowable CostUnallowable costs are a cost of doing business, you just can’tcharge the government for themSome costs are unallowable by their nature (by law orregulation)  Bribes, gifts, and donations  Alcoholic beverages, entertainment  Interest  Federal income taxes  Allowance for bad debtSome costs are intended to regulate or control costs  Excess travel costs  Excess executive compensation  Business combination costs10 ©2012 Deltek, Inc. All Rights Reserved
    11. 11. Who Really Cares about Unallowable Cost?Everyone in your organization should careThere are penalties for not caringUnallowable cost might not be on your radar, but it is on theradar of DCAA11 ©2012 Deltek, Inc. All Rights Reserved
    12. 12. Top Audit Issues for 201112 ©2012 Deltek, Inc. All Rights Reserved
    13. 13. Treatment of Unallowable CostSome unallowable costs are unavoidableVisibility and proper treatment is key  Unallowable direct costs stay with the job, receive all appropriate allocations, but are not billed  Unallowable indirect costs (fringe or overhead) must be removed from their respective pool, but remain in the G&A base  Unallowable G&A (and all statutory unallowable costs) are removed from the G&A poolImportant to remember…one dollar of “directly associated”unallowable costs can become two dollars or more dollars oftotal unallowable costs to your company  If not for cost “A,” cost “B” would not have been incurred13 ©2012 Deltek, Inc. All Rights Reserved
    14. 14. Treatment of Unallowable CostCorrectly setting up your system to account for and report onunallowable cost is a key component in the proper allocationof costDocument your policy on unallowable costMaintain separate unallowable accountsTrain your employees14 ©2012 Deltek, Inc. All Rights Reserved
    15. 15. GCS Premier andUnallowable CostSetup and Treatment
    16. 16. Unallowable Cost and GCSUnallowable cost can come in all shapes and sizes  Direct Labor, ODC’s, Overhead & G&AEach is treated differently in government contractingAnd each requires a different setup in your systemIt is important to understand how your unallowable cost shouldbe recorded16 ©2012 Deltek, Inc. All Rights Reserved
    17. 17. Unallowable Cost and GCSWhat to consider when setting up and capturing unallowablecost:  A separate and distinct numbering scheme for unallowable accounts  Do I have both direct and indirect unallowable cost?  What types of unallowable cost will be incurred?  Labor and non-labor  Will you have unallowable G&A cost?  Should the unallowable cost be in the base of the G&A pool?17 ©2012 Deltek, Inc. All Rights Reserved
    18. 18. Direct CostUnallowable/Non billable
    19. 19. Direct Unallowable CostTwo basic options to consider for the recording of directunallowable (non billable) costIf you only have unallowable/non billable ODC’s, a separateSFX will segregate those costsIf you have unallowable/non billable labor (less likely), you willneed to set up a separate task under your contract19 ©2012 Deltek, Inc. All Rights Reserved
    20. 20. Unallowable ODCUnallowable and non-billable mean the same thing for ourdiscussionThese are costs that belong to the job but cannot be billed orincluded in revenueThink excess per diem….Set up a separate suffix to capture the cost  For example, SFX 56 Non Billable Expense20 ©2012 Deltek, Inc. All Rights Reserved
    21. 21. Alloc. Flag “A” means it will go the SFX 56 is for to G&A Unallowable Direct base Costs21 ©2012 Deltek, Inc. All Rights Reserved
    22. 22. Unallowable ODCAfter setting up the SFX 56, you must “tell” the system toexclude these charges from billing and revenueOn the Summary Budgets & Ceiling screen, bring up theproject with the non-billableChange the code on SFX 56 to “No Fee, ceiling” at the tasklevel22 ©2012 Deltek, Inc. All Rights Reserved
    23. 23. 23 ©2012 Deltek, Inc. All Rights Reserved
    24. 24. This screen is automatically set up. This is where you can manage ceilings. Change24 ©2012 Deltek, Inc. All Rights Reserved default code
    25. 25. Unallowable ODC“No fee, ceiling” means that no fee is to be applied and aceiling exists  Our ceiling is zero because we don’t want to include any of the cost on this SFX in billings or revenue25 ©2012 Deltek, Inc. All Rights Reserved
    26. 26. Unallowable Direct LaborIf you have unallowable direct labor, you must set up aseparate task to capture this costConsider using a consistent numbering scheme across allprojects  This will allow for easy recognition of unallowable/non billable task  3100-U01, 3200-U01To exclude this task from billings, make sure that “AutoCompute Billing” is turned off  Remember…this is a non-billable taskThe objective is to capture the cost correctly but not to bill thecost26 ©2012 Deltek, Inc. All Rights Reserved
    27. 27. Unallowable Direct LaborThis would also be a non-revenue generating task  Leave the Automatically compute this contract’s revenue checkbox blankRemember, you need to capture/segregate the cost so that isit not billed and does not generates revenueIt is, however, a cost to the project  Remember non-billable (unallowable) cost on a project dilutes your profit27 ©2012 Deltek, Inc. All Rights Reserved
    28. 28. In the Contract Master File, uncheck the “auto compute” box28 ©2012 Deltek, Inc. All Rights Reserved
    29. 29. Unallowable Direct LaborIf this is a T&M contract, do not set up a T&M Billing rate onthe unallowable labor category  Yes, you need a separate unallowable labor categoryIf your revenue is at the top level of the project, you will needto set up a separate project to capture the unallowable/non-billable labor29 ©2012 Deltek, Inc. All Rights Reserved
    30. 30. Indirect CostUnallowable Set Up
    31. 31. Unallowable Indirect CostUnallowable indirect cost can be either labor or non-laborUnallowable expense can result from an Overhead activity orfrom a G&A activityThe origin of the expense will determine how it should behandled in the systemThe goal is to properly treat your unallowable cost so that thegovernment is not being allocated any unallowable cost31 ©2012 Deltek, Inc. All Rights Reserved
    32. 32. Unallowable Indirect CostRecording unallowable cost to separately identifiedunallowable accounts will result in the most visible andaccurate portrayal of the costTo properly set up your system for unallowable cost, you mustunderstand the flow of the cost and all related burdensIf you incur unallowable labor incurred, you will incurunallowable fringeWho incurred the unallowable expense? This will determine ifthe expense belongs in the G&A base  Was it part of the Overhead pool?  Was it a G&A type expense?32 ©2012 Deltek, Inc. All Rights Reserved
    33. 33. Unallowable Indirect CostCosts that would be normally included in overhead, but bytheir nature are unallowable, should be excluded from theOverhead pool(s)  Excess per diem on indirect travel  Alcohol at a business meetingThe unallowable “Overhead” cost should be included in theG&A baseThe result is a lower overhead rateContracts cannot be burdened with unallowable overhead costUnallowable G&A costs must also be removed from the G&ApoolThese costs should also be excluded from the G&A base33 ©2012 Deltek, Inc. All Rights Reserved
    34. 34. How to Capture Unallowable Cost in GCSTo properly account for unallowable cost, your indirect poolstructure should include a separate pool for unallowable costsThis pool will not have a baseThis pool will not allocate to projectsThe purpose of the pool is accumulate unallowable cost sothat cost can be properly included in your G&A base andproperly excluded from other pools34 ©2012 Deltek, Inc. All Rights Reserved
    35. 35. How to Capture Unallowable Cost in GCSThe pool will contain all labor and non-labor expense relatedunallowable cost, including the allocation of fringe on theunallowable laborUnallowable labor needs to be included in the base of yourfringe pool35 ©2012 Deltek, Inc. All Rights Reserved
    36. 36. Setting Up the PoolAll unallowable accounts must be assigned to the unallowablepoolThe unallowable labor account must have an account type of“L” so that it will properly be included in the base of the fringepoolAllocation accounts must be set upA base assignedAfter the pool is set up, go to the chart of accounts file tomodify each record to assign to the pool36 ©2012 Deltek, Inc. All Rights Reserved
    37. 37. Chart of Accounts File-CY Account Type is L37 ©2012 Deltek, Inc. All Rights Reserved
    38. 38. Indirect Pool File Pick a base option currently not being used Create an Unallowable pool Create Allocation Accounts Set as Tier 238 ©2012 Deltek, Inc. All Rights Reserved
    39. 39. Chart of Accounts39 ©2012 Deltek, Inc. All Rights Reserved
    40. 40. Unallowable Pool No base!40 ©2012 Deltek, Inc. All Rights Reserved
    41. 41. Total G&A BASE Unallowable Expense per pool G&A allocation to unallowable cost41 ©2012 Deltek, Inc. All Rights Reserved
    42. 42. The Consequences of Ignoring Unallowable CostKnowingly including unallowable direct costs in a publicvoucher submitted to the Government for payment is aviolation of the False Claims Act (31 USC 3729 – 3733)  The act states, in part, “those who knowingly submit, or cause another person or entity to submit, false claims for payment of government funds are liable for three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim”  Each invoice is considered a separate claimKnowingly including unallowable costs in an IncurredCost Submission (a “claim” for final settlement of indirectrates for a year) is also a violation of the False Claims Act42 ©2012 Deltek, Inc. All Rights Reserved
    43. 43. The Consequences of Ignoring Unallowable Cost – continuedUnallowable costs in an indirect claim are also subject toa penalty pursuant to FAR  Penalty amount is equal to “two times the disallowed costs, plus interest”  Penalty is in addition to False Claims Act provisions and disallowed costs  Can be waived upon a showing that the inclusion was inadvertent  Absent such showing, the ACO is required to assess the penalty  Each voucher or payment is considered a separate violation43 ©2012 Deltek, Inc. All Rights Reserved
    44. 44. The Consequences of Ignoring Unallowable Cost – continuedUnder the new DFARS Business Also under the new DFARSSystems Rule… provision, this can also result in  Failure to effectively segregate disqualification from competitive allowable and unallowable costs is a “significant deficiency” and may solicitations lead to disapproval of business systems (Accounting, in this case) Under FAR 16.301-3(a)(1), a and partial suspension of payments contractor whose accounting system under Government contracts has been determined to have one or  Inclusion of unallowable costs in an more significant deficiencies may indirect cost claim and inclusion of not be awarded a cost-type contract. unallowable costs in a public voucher is considered a failure of a control element of the contractor’s internal control system and may lead to…Disapproval of one or morebusiness systems44 ©2012 Deltek, Inc. All Rights Reserved
    45. 45. Burden of ProofRemember, it is always on you, the contractorWhat should you have in place so that you are prepared todefend your position?  System Controls  Policies and Procedures  Adequate Documentation  Knowledge of Regulation(s)  Knowledgeable Employees  Train your employees on the importance of unallowable segregation45 ©2012 Deltek, Inc. All Rights Reserved
    46. 46. Selected Costs May Be: Allowable (A), Unallowable (UA), or Allowable With Restrictions (AWR) Selected Costs FAR A UA AWR Alcoholic Beverages 31.205-51 X Asset Valuations Resulting from Business Combinations 31.205-52 X Bad Debts 31.205-3 X Bonding Costs 31.205-4 X Compensation for Personal Services 31.205-6 X X X Contingencies 31.205-7 X X Contributions or Donations 31.205-8 X Cost of Money 31.205-10 X Deferred Research & Development Costs 31.205-48 X X Depreciation 31.205-11 X Economic Planning Costs 31.205-12 X X Employee Morale, Health, Welfare, Food Service, & Dorm Costs 31.205-13 X X Entertainment Costs 31.205-14 X Fines, Penalties, & Mischarging Costs 31.205-15 X X Gains & Losses on Disposition of Assets 31.205-16 X Goodwill 31.205-49 X Idle Facilities & Idle Capacity Costs 31.205-17 X X Independent Research & Development/ Bid & Proposal Costs 31.205-18 X X Insurance & Indemnification 31.205-19 X X X Interest & Other Financial Costs 31.205-20 X X Labor Relations Costs 31.205-21 X Legal & Other Proceedings Costs 31.205-47 X X Lobbying and Political Activity Costs 31.205-22 X Losses on Other Contracts 31.205-23 X46 ©2012 Deltek, Inc. All Rights Reserved
    47. 47. Selected Costs May Be: Allowable (A), Unallowable (UA), or Allowable With Restrictions (AWR) Selected Costs FAR A UA AWR Maintenance & Repair Costs 31.205-24 X Manufacturing & Production Engineering Costs 31.205-25 X Material Costs 31.205-26 X Organization Costs 31.205-27 X Other Business Expenses 31.205-28 X Plant Protection Costs 31.205-29 X Patent Costs 31.205-30 X X X Plant Reconversion Costs 31.205-31 X X Precontract Costs 31.205-32 X Professional & Consultant Service Costs 31.205-33 X X X Public Relations & Advertising Costs 31.205-1 X X Recruitment Costs 31.205-34 X X X Relocation Costs 31.205-35 X X X Rental Costs 31.205-36 X X Royalties & Other Costs for Use of Patents 31.205-37 X Selling Costs 31.205-38 X X Service & Warranty Costs 31.205-39 X Special Tooling & Special Test Equipment Costs 31.205-40 X Taxes 31.205-41 X X Termination Costs 31.205-42 X X Trade, Business, Technical, and Professional Activity Costs 31.205-43 X X Training & Education Costs 31.205-44 X X X Transportation Costs 31.205-45 X Travel Costs 31.205-46 X47 ©2012 Deltek, Inc. All Rights Reserved
    48. 48. In SummaryCosts that are unallowable by law or regulation and areALWAYS unallowableCosts that are unallowable by amount/ceilings require carefuldocumentation  You need to support your positionSome costs are unallowable by circumstance or contractualprovision and require careful attention and documentationUnderstanding the nature of allowability is very importantVisibility and Documentation are key to proper treatment ofunallowable costs  And success with DCAA48 ©2012 Deltek, Inc. All Rights Reserved
    49. 49. Learn more… Stephanie Widzinski, CPA Senior Manager, Government Contracting Group Stephanie.Widzinski@WatkinsMeegan.com (703) 342-5951 Kiran Pinto, CPA Manager, Government Contracting Group Kiran.Pinto@WatkinsMeegan.com (703) 847-445849 ©2012 Deltek, Inc. All Rights Reserved
    50. 50. Basic Cost Principles –The Regulations
    51. 51. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.201-6, Accounting for Unallowable Costs  Certain costs may be allocable, but not allowable  Introduces the concept of statistical sampling for quantification of unallowables  Introduces the concept of directly associated unallowable costs51 ©2012 Deltek, Inc. All Rights Reserved
    52. 52. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.202, Direct Costs  Imposes the consistency requirement of CAS 402 to all FAR contracts  Does not define “direct costs”  The term is defined in FAR 31.201-4, Determining Allocability, as one that “is incurred specifically for the contract”  Permits treatment of any cost of a minor amount as indirect if…  Treatment is consistent, and  Effect is substantially the same as charging it direct52 ©2012 Deltek, Inc. All Rights Reserved
    53. 53. FAR 31.2 – Contracts with Commercial OrganizationsFAR 31.203, Indirect Costs  Defers to CAS for covered contracts  For all other contracts  Defines indirect as everything not direct (even unallowables)  Mandates pool formation in logical, homogeneous cost groupings  Established requirement for causal/beneficial relationship  Prohibits fragmentation of pool bases  Acknowledges need for “offsite” pools for some contractors  Requires pools to be allocated over contractor’s fiscal year (with some exceptions)  Encourages use of “special allocations” (exception to G&A base) for GOCOs  Establishes “excessive pass-through charges” as unallowable53 ©2012 Deltek, Inc. All Rights Reserved
    54. 54. Thank You!
    55. 55. Overview of SelectedCost Principles
    56. 56. FAR 31.205-43, Trade, Business, Technical & Professional Activity CostsAllowable costs are limited to:  (1) Memberships in trade, business, technical and professional orgs. (subject to limitations);  (2) Subscriptions to trade, business, professional, or other technical periodicals;  (3) When the principal purpose of a meeting, conference or seminar is the dissemination of trade, business, technical or professional information or the stimulation of production or improved productivity.Careful documentation of the purpose of the event is key toestablishing allowability56 ©2012 Deltek, Inc. All Rights Reserved
    57. 57. More on Conferences and Seminars… GeneralTrade, Business, Technical and The cost principle makes theProfessional Activity Costs (FAR following type of professional and technical activity costs expressly31.205-43) states that the cost of allowable:technical or professional  Organizing, setting up, and sponsoringmeetings and conferences are the technical and professional meetings, symposia, seminars, etc., inclallowable when the primary uding rental of meetingpurpose of the meeting is the facilities, transportation, subsistence, an d incidental costs.dissemination of  Attending the meetings by contractortrade, business, technical, or employees, including travel costs (see FAR 31.205-46)professional information, or the  Attending the meetings by individualsstimulation of production or who are not contractorimproved productivity, provided employees, provided the costs are not reimbursed to them by their ownthe costs meet the other employer and their attendance isrequirements controlling essential to achieve the purpose of the meetings.allowability (FAR 31.201-2).57 ©2012 Deltek, Inc. All Rights Reserved
    58. 58. More on Conferences and Seminars…Conference Costs versus Business MealsEntertainment Costs  For individuals on official travel, assure  Determinations as to whether or not the meal expense is not included in both expenses associated with a particular the claimed travel costs and subsistence meeting or conference represent costs included as part of organizing the allowable business expense under FAR meeting. 31.205-43 provisions or unallowable  For individuals not on official social activity under FAR 31.205-14 travel, assure that any meal expense is (Entertainment Costs) should be made an integral part of the meeting as on a case-by-case basis, based on all described in FAR 31.205-43, necessary pertinent facts. for the continuation of official business  Under the provision of FAR 31.205- during the meal period, and not a social 43, costs associated with the spouse of function. an attendee are not allowable because the spouse’s attendance is not essential to achieve the purpose of the meeting.58 ©2012 Deltek, Inc. All Rights Reserved
    59. 59. More on Conferences and Seminars…Documentation  Determination of allowability requires knowledge concerning the purpose and nature of activity at the meeting or conference. The contractor should maintain adequate records supplying the following information on properly prepared travel vouchers or expense records supported by copies of paid invoices, receipts, charge slips, etc.  Date and location of meeting, including the name of the establishment.  Names of employees and guests in attendance.  Purpose of meeting or Agenda.  Cost of the meeting, by item.  The above guidelines closely parallel the current record-keeping requirements in Section 274 of the Internal Revenue Code for entertainment costs as a tax deductible expense. Where satisfactory support assuring the claimed costs are allowable conference expenses is not furnished, the claimed conference/meal costs and directly associated costs should be questioned.59 ©2012 Deltek, Inc. All Rights Reserved
    60. 60. FAR 31.205-44, Training & Education CostsExamples of allowable costs follow:  (1) Vocational training;  (2) Part-time college level education;  (3) Full-time education in employee’s field of work (excluding salary) and not to exceed 2 years;  (4) Specialized programs up to 16 weeks a year.Examples of unallowable costs follow:  (1) Grants to educational or training institutions, including the donation of facilities or other properties; scholarships and fellowships are considered contributions;  (2) Costs of tuition, fees, textbooks, and similar benefits provided for non-employees;  (3) Costs of college plans for employee dependents.60 ©2012 Deltek, Inc. All Rights Reserved
    61. 61. FAR 31.205-46, Travel CostsThese costs include costs fortransportation, lodging, meals, and incidental expenses andare generally allowable subject to maximum per diem rates ineffect at the time of travel as set forth in Federal TravelRegulations (CONUS), Joint Travel Regulation(OCONUS), and Standardized Regulations (foreign travel).Allowable airfare costs are limited to coach, except when thiscauses unreasonable travel hours, circuitous routing, orprolonged ravel. Receipts are required for all carrental, hotel, and airfare expenses, as well as expenses$75.00 or greater. Additional receipts may be required on acontract-specific basis.61 ©2012 Deltek, Inc. All Rights Reserved
    62. 62. 31.205-46, Lowest Cost AirfareSubstantiating documentation must be maintained if you aretaking one of the exceptions in FAR 31.205-46(b).Substantiating documentation should take the form ofquotations from competing airlines or travel service providers.Instances where only one flight is available may besubstantiated by only one quote. Multiple instances of singlequotes should be questioned by the auditor to determine ifpolicies and procedures result in possible unreasonableairfare costs.62 ©2012 Deltek, Inc. All Rights Reserved
    63. 63. FAR 31.205-13, Employee Morale, Health, WelfareAggregate costs incurred on activities designed to improve workingconditions, employer-employee relations, employee morale, and employeeperformance (less income generated by these activities) areallowable, subject to limitations contained in this cost principle. Examplesof allowable activity include: House publications, healthclinics, wellness/fitness centers, employee counseling services, and foodservices for the contractor’s employees at or near the contractor’s facilities.Examples of unallowable activity include: costs of gifts (gifts do not includeawards for performance made pursuant to 31.205-6(f) or awards made inrecognition of employee achievements pursuant to an establishedcontractor plan or policy). Costs of recreation are unallowable, except forthe cost of employees’ participation in company sponsored orgs. designedto improve company loyalty, team work, or physical fitness. Losses fromoperating food services are allowable only if the contractor’s objective is tooperate such services on a break-even basis. * Refreshments, such items as coffee or tea, to employees are allowable.Flowers sent for bereavement is a gray area, but most companies do notclaim the cost.63 ©2012 Deltek, Inc. All Rights Reserved
    64. 64. FAR 31.205-14, Entertainment CostsCosts of amusement, diversions, social activities, and anydirectly associated costs such as tickets to shows or sportsevents, meals, lodging, rentals, transportation, and gratuitiesare unallowable.Costs of membership in social, dining, or country clubs orother organizations having the same purposes are alsounallowable, regardless of whether the cost is reported astaxable income to the employees.Attendees at an event should be careful to document thebusiness purpose of the seminar or conference to avoidhaving the costs later determined to be in the nature ofentertainment.64 ©2012 Deltek, Inc. All Rights Reserved
    65. 65. FAR 31.205-51, Costs of Alcoholic BeveragesCosts of alcoholic beverages are unallowable65 ©2012 Deltek, Inc. All Rights Reserved
    66. 66. FAR 31.205-27, Organization CostsExpenditures in connection with: *Note: The cost of activities(1) Planning or executing the primarily intended to provideorganization or reorganization of compensation will not bethe corporate structure of a considered organizationalbusiness, including mergers and costs subject to thisacquisitions; (2) Resisting orplanning to resist the subsection, but will bereorganization of the corporate governed by 31.205-6. Thesestructure of a business or a activities include acquiringchange in the controlling interest stock for (i) Executivein the ownership of a business; bonuses (ii) Employeeand (3) Raising capital (net worth savings plans, and (iii)plus long-term liabilities) are Employee stock ownershipunallowable. plans.66 ©2012 Deltek, Inc. All Rights Reserved
    67. 67. FAR 31.205-28, Other Business ExpensesThe following types of recurring costs are allowable:  (a) Registry and transfer charges resulting from changes in ownership of securities issued by the contractor;  (b) Cost of shareholders’ meetings;  (c) Normal proxy solicitations;  (d) Preparing and publishing reports to shareholders;  (e) Preparing and submitting required reports and forms to taxing and other regulatory bodies;  (f) Incidental costs of directors’ and committee meetings; and  (g) Other similar costs.67 ©2012 Deltek, Inc. All Rights Reserved
    68. 68. FAR 31.205-15, Fines, Penalties & Mischarging CostsCosts of fines and penalties resulting from violations of, orfailure of the contractor to comply with federal, state, local, orforeign laws and regulations, are unallowable except whenincurred as a result of compliance with specific terms andconditions of the contract or written instructions from thecontracting officer.Costs incurred in connection with, or related to, themischarging of costs on Gov’t. contracts are unallowable whenthe costs are caused by, or result from, alteration ordestruction of records, or other false or improper charging orrecording of costs.68 ©2012 Deltek, Inc. All Rights Reserved
    69. 69. FAR 31.205-8, Contributions or DonationsContributions or donations, including cash, property, andservices, regardless of recipient, are unallowable, except aspreviously discussed in the community services portion of costprinciple 31.205-1.69 ©2012 Deltek, Inc. All Rights Reserved
    70. 70. FAR 31.205-1, PR and Advertising CostsPublic Relations (P.R.) includes activities associated withadvertising and customer relationsAllowable P.R. costs include the following:  (1) Costs specifically required by contract (Direct)  (2) Costs of: (i) Responding to inquiries on company policies and activities; (ii) Communicating with the public, press, stockholders, creditors and customers; (iii) Conducting general liaison with news media and Gov’t P.R. officers, to the extent that such activities are limited to communication necessary to keep the public informed on matters of public concern such as contract awards, plant closings and openings, employee layoffs, financial information, etc.  (3) Costs of participating in community service activities (e.g., blood bank drives, charity drives, savings bond drives, disaster assistance, etc.)  (4) Costs of plant tours and open houses70 ©2012 Deltek, Inc. All Rights Reserved
    71. 71. FAR 31.205-1, PR and Advertising Costs – (cont.)Advertising means the use of media to promote the sale ofproducts/servicesThe only allowable advertising costs are those that are:  Specifically required by contract or that arise from requirements of gov’t contracts, and that are exclusively for: (i) acquiring scarce items for contract performance; or (ii) disposing of scrap or surplus materials acquired for contract performance.  Costs of activities to promote sales of products normally sold to the U.S. Government, including trade shows, which contain a significant effort to promote exports from the U.S.  Note: Such costs do not include the costs of memorabilia (e.g., models, gifts, and souvenirs), alcoholic beverages, entertainment, and facilities used primarily for entertainment rather than product promotion – unallowable.  And, those costs allowable in accordance with 31.205.34 (Recruitment costs).71 ©2012 Deltek, Inc. All Rights Reserved
    72. 72. FAR 31.205-1, PR and Advertising Costs – (cont.)Unallowable P.R. and advertising costs include the following:  (1) All P.R. and advertising whose primary purpose is to promote the sale of products or services by stimulating interest in a product line (except allowable directly selling costs later discussed in 31.205-38) or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company’s product or services.  (2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Gov’t (can be allowable or unallowable).  (3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production.  (4) Costs of ceremonies such as: (i) Corporate celebrations; (ii) New product announcements.  (5) Costs of promotional material, motion pictures, videos, brochures, handouts, and other media that are designed to call favorable attention to the contractor.  (6) Costs of souvenirs and other mementos provided to the public or customers.  (7) Costs of memberships in civic and community organizations (certain types of membership fees are allowable, e.g., American Payroll Association).72 ©2012 Deltek, Inc. All Rights Reserved
    73. 73. FAR 31.205-22, Lobbying and Political Activity CostsIn most cases, these cost are unallowable. An example of anallowable cost in this area would be providing technical orfactual presentations of information on matters related tocontract performance.Attendees at seminars and conferences should be cautionedto be certain the event is not considered “lobbying.”73 ©2012 Deltek, Inc. All Rights Reserved
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