1.
UNDERSTANDING
UNALLOWABLE COSTS:
THE ACCOUNTING AND
LEGAL PERSPECTIVES
Presenters
Robert E. Jones, CPA, CPCM, Fellow
Left Brain Professionals, Inc.
Matthew Schoonover, JD
Koprince Law LLC

2.
The Presentation will Begin at Noon
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3.
This presentation is for informational
purposes only and does not
constitute legal advice. For legal
advice on any issue, you should
consult with an attorney.
Disclaimer

4.
Robert E. Jones, CPA, CPCM, Fellow
Left Brain Professionals, Inc.
Matthew Schoonover, JD
Koprince Law LLC
November 14, 2019
Noon–1:30pm (Eastern)
UNDERSTANDING UNALLOWABLE COSTS: THE
ACCOUNTING AND LEGAL PERSPECTIVES

5.
Commerciality & Acquisition Planning
CMBOK Competency
CMBOK Competencies
•5.1.2 Cost Analysis
5

6.
• Locate regulations and audit guidance for unallowable costs
• Differentiate between unallowable and expressly unallowable costs
• List best practices for accounting for unallowable costs
• Assess and consider legal issues relating to unallowable costs, as discussed
in recent decisions
Learning Objectives

7.
• FAR 31 Contract Cost Principles
• DCAA Audit Guidance Memos (MRDs)
• DCAA Selected Areas of Cost Guidebook
• FAR Cost Principles Guide
Locate Regulations & Audit Guidance

8.
• When in doubt
• Do your homework
• Ask a professional
• Do not guess!
Locate Regulations & Audit Guidance

9.
“
Polling
Question
Which of the following is not a way
to find information on unallowable
costs?
A. FAR 31
B. DCAA.mil
C. Facebook
D. Ask a professional

10.
• Determine Allowability
• Reasonableness
• Allocability
• CAS/GAAP
• Terms of contract
• FAR 31 limitations
Allowable vs Unallowable

11.
• Determine Reasonableness
• Generally recognized as ordinary
• Arm’s length and in accord with laws & regulations
• Contractor’s responsibilities
• Significant deviations from established practices
Allowable vs Unallowable

12.
• Determine Allocability
• Incurred specifically for the contract (Direct)
• Benefits both the contract and other work (Overhead)
• Necessary for the overall operation of the business (G&A)
Allowable vs Unallowable

13.
• What are “Unallowable Costs?”
• Costs government deems not necessary for performance of the contract
• Some costs related to choices made by the contractor such as how to finance the
company
Allowable vs Unallowable

14.
• Most of these are deductible for tax purposes – otherwise ordinary business
expense
• Always consult a tax professional!
Unallowable vs Tax Deductible

15.
• Direct costs may be incurred for a project, but deemed unbillable because:
• Occurred outside the period of performance
• Not allowed per terms of the contract
• Improper labor category
• Costs exceeding the ceiling
• These are still direct costs and must be not be treated as indirect
Unallowable vs Non-Billable

16.
• FAR and DCAA guidance identify certain costs (clearly enumerated) as
expressly unallowable
• Basically non-negotiable
• DCAA provides two sources of guidance
• Selected Areas of Cost Guidebook
• Audit Alert on Expressly Unallowable Costs (19-PAC-002)
Unallowable vs Expressly Unallowable

17.
• Amount claimed that are expressly unallowable
• Penalty equals amount disallowed
• $25,000 disallowed + $25,000 penalty + interest
• If determined expressly unallowable for that contractor prior to proposal
submittal
• Penalty equals 2X amount disallowed
• $25,000 disallowed + $50,000 penalty + interest
Penalties

18.
Penalties
Principle Period Interest Rate Amount
$ 50,000.00 7/1/2013 - 12/31/2013 1.750% $ 50,875.00
$ 50,875.00 1/1/2014 - 6/30/2014 2.125% $ 51,956.09
$ 51,956.09 7/1/2014 - 12/31/2014 2.000% $ 52,995.22
$ 52,995.22 1/1/2015 - 6/30/2015 2.125% $ 54,121.36
$ 54,121.36 7/1/2015 - 12/31/2015 2.375% $ 55,406.75
$ 55,406.75 1/1/2016 - 6/30/2016 2.500% $ 56,791.92
$ 56,791.92 7/1/2016 - 12/31/2016 1.875% $ 57,856.76
$ 57,856.76 1/1/2017 - 6/30/2017 2.500% $ 59,303.18
$ 59,303.18 7/1/2017 - 12/31/2017 2.375% $ 60,711.63
$ 60,711.63 1/1/2018 - 6/30/2018 2.625% $ 62,305.31
$ 62,305.31 7/1/2018 - 12/31/2018 3.500% $ 64,486.00
$ 64,486.00 1/1/2019 - 6/30/2019 3.625% $ 66,823.62
$ 66,823.62 7/1/2019 - 12/31/2019 2.625% $ 68,577.74
Interest $ 18,577.74
Unallowable Cost $ 25,000.00
Penalty $ 25,000.00
Total $ 68,577.74

19.
“
Polling
Question
Which of the following is a
consideration when determining
allowability?
A. The PM said it was OK
B. Reasonableness of the cost
C. We paid it, so it must be OK
D. I read it on Facebook

20.
Best Accounting Practices
• Segregate chart of accounts
• Identify on expense reports, requisitions, and purchase orders
• Track directly associated costs
• Report of unallowable costs
• Part of expense report policy
• Annual training

21.
Best Accounting Practices
• Eliminate low-hanging fruit before audit
• Alcohol
• Travel
• Charitable Contributions
• Interest Expense/Finance Charges
• Related PartyTransactions

22.
“
Polling
Question
True or False, charitable
contributions are expressly
unallowable.

23.
• Contractors should be wary of issues relating to unallowable costs to prevent
potential legal issues
• Contract disputes relating to costs
• Performance disputes (claims against government)
• Penalties by the government for expressly unallowable costs
• Acceptability of proposals
• Bid protests challenging the acceptability of an accounting system
Legal Issues Relating to Unallowable Costs

24.
• Two main categories of costs under the FAR
• Allowable
• Unallowable
• Expressly unallowable
• How do recent decisions impact this analysis?
Legal Issues: unallowable costs

25.
• FAR 31.201-2: a cost is allowable if it is—
• Reasonable
• Allocable (i.e., directly related to the contract)
• Compliant with applicable accounting standards (CAS or GAAP)
• Allowed under the contract
• Not in violation of the FAR
• A cost is unallowable if it’s not allowable
• Expressly unallowable costs are costs that are “specifically named and stated to be
stated to be unallowable” under any applicable law, regulation, or contract
• FAR 31.110: agency can issue a penalty if a contractor includes expressly unallowable costs in its final
proposal or final statement of costs
• FAR 42.709-2: amount of disallowed costs + interest
• If stated unallowed before charge, 2x penalty
• May be subject to criminal, civil, administrative penalties
• CO may waive penalty if contractor has adequate safeguards and inclusion was just an unintentional
error
Legal Issues: allowable v. unallowable costs

26.
• Cybersecurity
• Contractors face an ever-evolving cybersecurity landscape
• Implementation of new CMMC standards (2020?)
• Costs are allowable
• Really, always have been (if under your contract)
• July 2019: DoD made waves by affirming that cybersecurity costs are allowable
• Issue: how to allocate cybersecurity compliance costs?
• Single contract? Split across contracts?
• G&A/overhead?
Legal Issues: unallowable costs

27.
• Lebolo-Watts Constructors 01 JV, LLC, ASBCA No. 59738, 19-1 BCA ¶ 37301
¶ 37301
• Joint venture sought compensation for costs associated with a supposed change under
the contract
• Electrical subcontractor: wired building, then agency said wiring was incorrect; sub had to rip out
wiring and replace with correct wiring
• Request denied; in fact, ASBCA said contractor had already recovered too much and
deducted amounts from the CO’s decision
• JV proceeded with work despite warnings from agency
• JV could not establish many elements of its supposed costs
Legal Issues: unallowable costs

28.
• Raytheon Co. v. Secretary of Defense, __ F.3d __, 2019WL 5280873 (Fed. Cir.
(Fed. Cir. 2019)
• Raytheon charged $220,000 + interest for including salary of in-house lobbyist in cost
proposal
• Costs incurred to influence legislative action on any matter pending in Congress are expressly
unallowable, under federal statute and the FAR
• But! FAR 31.001 defines expressly unallowable costs as a “particular item or type of cost” that is
“specifically named and stated to be unallowable”
• Are salaries of lobbyists included in this broad definition?
• Federal Circuit: Costs falling within a generic description of a “type” of unallowable
costs are also expressly unallowable
• Salaries of in-house lobbyists are a prototypical lobbying expense
Legal Issues: unallowable costs

29.
• Bechtel Nat’l, Inc. v. United States, 929 F.3d 1375 (Fed. Cir. 2019)
• Contractor sought reimbursement for defense costs associated with
retaliation lawsuits
• DEAR 970.5204-31 says that costs for liabilities to third persons not compensated by
presumptively allowable
• Subject to exceptions, including whether costs are expressly unallowable under the
• Contract included FAR 52.222-46, which prohibits discrimination
• Allowability of defense/settlement costs:
• If an adverse judgment was reached, would costs be allowable?
• If not, are costs of settlement allowable?
• Only if plaintiff had very little likelihood of success on the merits
• Federal Circuit: not allowable
• Discrimination prohibited by the FAR and by contract
• Bechtel abandoned arguments about likelihood of success
Legal Issues: unallowable costs

30.
• Energy Matter Conversion Corp., ASBCA No. 61583, 19-1 ASBCA ¶ 37225
37225
• Contractor sought recovery of legal costs associated with a prior cost investigation
• CO denied, and assessed a penalty (approx. $54,000)
• Costs incurred in any proceedings, including investigations, are unallowable if action could
have resulted in debarment (FAR 31.205-47(a)-(b))
• ASBCA: costs are not allowable
• Could have led to debarment—contractor’s decision to settle calls into question whether it would have
prevailed
• Action does not have to lead to debarment, just possible that it might
• Not entitled to penalty waiver
• No procedures in place—at time of action—to prevent inclusion of unallowable costs
• Government need not inform of unallowable nature of costs to assess penalty
• Penalties designed to place burden on contractors to not include unallowable costs
Legal Issues: unallowable costs

31.
“
Polling
Question
Who decides whether to waive the
penalty for asserting expressly
unallowable costs?
A. A judge
B. The contractor
C. The Contracting Officer
D. Nobody—penalties are never
waivable

32.
• FAR 16.301-3(a): agency can only award cost-reimbursable contract if offeror
has an approved accounting system
• FAR doesn’t give standards as to how an agency should evaluate an offeror’s
accounting system
• An approved accounting system must, among other things, segregate and exclude unallowable
costs
• Contractor must know which costs are allowable and unallowable, and design an appropriate system
• Contractor must have written policies designed to identify and exclude unallowable costs
• Agencies may accept:
• Evidence from DCAA
• Evidence from DCMA or another federal agency
• Certification from third party accountant
Legal Issues: proposal evaluations

33.
• Adequacy of accounting system is a matter of responsibility
• FAR 9.104-1(e)
• If an offeror doesn’t have an approved accounting system, refer to the SBA for a
Certificate of Competency
• AttainX, Inc.; FreeAlliance.com, LLC, B-413104.5 et al., 2016 CPD ¶ 330 (Comp. Gen. Nov. 10, 2016)
Nov. 10, 2016)
• Not providing documentation needed to establish approved accounting system justified exclusion from
competition
• Citizant, Inc. v. United States, 142 Fed. Cl. 260 (2019)
• Evaluation of awardee’s accounting system was arbitrary and capricious
• Only evaluated DCAA’s review of an incurred cost proposal
• No evidence it was on a cost-reimbursable contract
• Information contained in wrong proposal volume
• Evaluation was not adequately documented
Legal Issues: proposal evaluations

34.
• Download this presentation and access additional resources
www.LeftBrainPro.com/presentations
Download

35.
Questions

36.
Robert E. Jones
Left Brain Professionals Inc.
Robert@LeftBrainPro.com
(614) 556-4415
• Matthew Schoonover
• Koprince Law
• mschoonover@KoprinceLaw.co
m
• (785) 200-8919
Contact Info