From time to time given the nature of our business, we receive inquiries about whether a specific cost is allowable (billable/recoverable) under a federal contract. While it makes sense for contractors to familiarize themselves with the Federal Acquisition Regulations Part 31.205, it is often easier to ask around to find an answer. The Defense Contract Audit Agency (DCAA) has taken notice, and has published a Guidebook that is designed to better explain "allowability" of costs in a well organized, 75 chapter document with each chapter dedicated to a specific cost type and with a narrative as to if whether or not it is considered to be allowable. While this does not completely eliminate questions since there remain several clauses that could be subject to interpretation, this formatted guidebook sure beats sifting through the disorganized FAR 31.205 in an attempt to get at least some of your questions answered.
As we have learned, DCAA will adhere to what is considered to be reasonable, consistent and allocable costs incurred. I always tell those who might ask whether a certain cost is allowable to put themselves in their federal government customer's shoes. Would you be okay if a client of yours passed along their entertainment costs to you in their invoices, even if those costs were "buried" within a line item not expressly labeled as "entertainment"? Such costs would not fit the description of "reasonable" by any stretch.
We have also learned that DCAA will challenge allowable costs if they find something that looks amiss. For example, a client informed us that during the course of their DCAA ICE audit, their bank service charge account came under scrutiny due to what appeared to be unusually high fees. The auditors suspected that unallowable interest and finance charges were being buried in the bank service charge general ledger account. As it turned out, the contractor had incurred such higher than normal fees due to numerous international wire transfers while paying subcontractors in far-flung places around the globe, and no unallowable costs were identified in this case.
We promote SYMPAQ as being a fully-compliant, DCAA accepted cost accounting system. We make it easy for a user to mark a particular general ledger account as unallowable when defining the Chart of Accounts by simply checking a box. When indirect rates are calculated, unallowable items are automatically excluded from the expense pool for comparison with your provisional billing rates.
To conclude, we'll leave you with two tips:
- Avail yourself to the resources such as the aforementioned guidebook to become familiar with FAR 31.205.
- Invest in cost accounting software that offers built-in compliance with its handling of unallowable costs with respect to identifying, calculating and allocating.
You'll go a long ways to keeping your company out of trouble with DCAA if you play by the rules and install an accounting system that can provide detailed visibility on all costs incurred.