DCAA Policy Shift: Consultant costs?

Sometimes the government either enforces a rule in a different manner than in the past or they may all of a sudden enforce a regulation that previously was overlooked or they might just install a brand new regulation.  In all three of these scenarios the awardee is subject to similar pain.  That pain is that what they have done in the past is no longer acceptable and they will have to change their habits.  In some cases, the government may apply these changes retroactively.  This is especially true, for instance, when the DCAA is behind by 5 years or more in audits of companies Incurred Cost Proposals (ICP).  This is just one example of what we call the government’s discrimination against small business. 

Let me spell out a scenario to illustrate the point.  Recently we have seen the DCAA become very particular about consulting expenses.  Normally, the government requires backup to support most allowable costs.  This includes details of what was provided, how much was provided, is the cost reasonable and is the cost allocable to either a specific job or to a specific allowable indirect pool.  There are isolated examples where  there has been some abuse of consultant costs by contractors.  A contractor may have paid a monthly fee to a consultant, like a retainer, and not received any tangible benefits from that consultant during the period but still billed this expense to the government.  In a recent ICP audit of one of our clients, the DCAA requested backup for consulting expenses for an ICP that was 5 years old.  These records may not have been as thorough as they should be (from 5 years ago) and also, some detail in some of these consulting expense records were either misplaced or lost over this time.  Although the client was documenting the consultant costs the same way they had been for nearly 20 year with numerous DCAA auditors finding no exceptions, Tte result this time was the auditor disallowed the expenses.  The implications of this action are that the company is now facing a financial outlay back to the government of several hundred thousand dollars!  This type of penalty can destroy a small business.  A large business would have a more sophisticated record keeping system and be able to supply more detail on the 5 year old records.  Not to mention, the larger company have specialists to watch this type of transaction at the time to make sure the company is obtaining enough backup on the expenses.  Small businesses sometimes do not know,simply don’t understand why they need this type of detail or a new auditor takes a different position than auditors in the past.  Since the DCAA is delinquent on their incurred cost audits, the company continues this same action on this, and other contracts, for many years before being brought to their attention.   The compound effect of this could be devastating. 

So what can we learn from all this?  For one thing, there are a lot of small rules contained in the FAR, the Code of Federal Regulations and other regulations that a small business might overlook.  It could take years of thinking they are doing the right thing, only to find out that they were in fact in violation of a regulation.  By the time they find out it may be costly.  By hiring a contracts specialist as a consultant, you can make sure your company is not at risk for this type of problem.  The time to find these type of issues is now, while you think everything is good, rather than 5 years down the road when penalties can be compounded.


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