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Indirect Rates Are Not Hard But Ignorance Makes It So

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Homine imperito nunquam quidquid injustius,
Qui nisi quod ipse facit nihil rectum putat.


The NASA Contracting Officer’s Story:

On December 21, 2007, I awarded a small business contractor named L&M Technologies (L&M) a huge contract for logistics support services at the Johnson Space Center (JSC), in Houston, Texas. The contract contemplated up to 10 Contract Years of performance and included a combination of CPFF, CPAF, and Award Term options. L&M used a Calendar Year for its fiscal year, but the Contract Years were not calendar years. They were both abbreviated CY though. In hindsight, this may have caused some confusion. To keep things simple, I’m going to use FY to indicate the contractor’s Fiscal Year and CY to indicate the Contract Year.

To further make things clear: CY1 ran from March 1, 2008 through February 28, 2009 and CY2 ran from March 1, 2009 through February 28, 2010.

In April, 2008, L&M informed me that DCAA had approved its FY2008 provisional billing rates. Those provisional billing rates covered most—but not all—of CY 1. I still needed DCAA-approved provisional billing rates for January and February, 2009.

Why didn’t I let the contractor bill its fiscal year rates for the months of performance for which it had approved rates? In hindsight, perhaps I should have considered that approach. Regardless, that’s not the approach I took.

For some reason, L&M was slow to submit a provisional billing rate proposal to DCAA for its FY2009. It wasn’t until May, 2009, that the proposal was submitted. That’s on L&M, not on me. Anyway, right after they submitted their 2009 provisional billing rates to DCAA, they called me and asked to process indirect rate adjustment invoices for CY 1. I assumed they were going to bill everything at the approved FY2008 rates but for some reason they billed FY2008 costs at FY2008 rates and FY2009 (January and February) costs at FY2009 provisional billing rates—even though DCAA had not yet approved those FY2009 rates. Naturally, I rejected the invoice.

But then DCAA told me that the contractor could bill me at the submitted rates prior to DCAA approving them. That part surprised me—though in hindsight I could have read the Allowable Cost and Payment clause (52.216-7) in the contract and seen that provisional billing rates were supposed to be as close to estimated final rates as possible, and then I might have taken a different tack. But that’s what hindsight is for, I guess.

L&M submitted NASA Form 533, as required by the contract. But there was some confusion, because Form 533 requires reporting of “actual costs incurred” and “estimated cost to complete” but L&M seemed to be reporting its costs as billed rather than as incurred. More confusion was caused because L&M was reporting costs at its FY2008 DCAA-approved provisional billing rates and was not reporting costs at the FY2009 rates because—get this—they said we had directed them not to use those rates. They sent me a letter that said “In … June … we were directed to remove 2009 rate true-ups from our 533. Since then we understood from a number of conversations that the rate adjustments would be dealt with after the REA was resolved.” So now somehow this was all my fault, when of course the contractor is responsible for accurate reporting, not me. Can you believe it?

I told L&M in no uncertain terms that this situation needed to be corrected. I wrote them and said—

L&M's 2009 provisional rates were not even approved by DCAA at the time of May 2009 (Invoice 67 dated 5/14/09 and 70 dated 5/18/09) yet L&M attempted to bill them and include them in the REA and I took exception to that. So do you concur that you are reporting on the 533 and invoicing for provisional rates ('08) just not '09 rates? What are L&M's '09 provisional rates?

Not much happened for a few months. We finalized the REA and then, in September, 2010, L&M submitted a “contract-to-date adjusting invoice for the period of 03/01/2008 – 08/27/2010” in the amount of $433,839. According to the letter of transmittal, L&M was now billing its FY2009 costs at DCAA-approved FY2009 provisional billing rates.

Then I found out that DCAA has a disagreement with L&M over its indirect cost allocation bases, and that if L&M were to invoice at the rates DCAA wanted them to use, then it would blow through some contract “cost gates” and would result in some negative incentives. L&M told me it wanted to establish contract indirect cost rate ceilings that would prevent this from happening. So even if L&M’s rates went up over the ceilings, the resulting costs would be unallowable for the contract.

I didn’t go for it; and why should I have? Instead, we submitted a draft Clause B.8 that would allow L&M to bill at rates less than DCAA calculated as the correct rates. It said—

For contract years 1 through 5 that the Contractor invoiced at indirect rates below the provisional billing rates approved by the DCAA, the Contractor shall assume all costs in excess of the indirect rates in the table below. Any costs incurred above these amounts shall be unallowable costs and shall not be billed to the Government under this or any other Government contract.

Pretty good, huh?

In hindsight, I might have wondered how the agreement would affect the Form 533 reporting. Would L&M report at actual indirect rates, or at the provisional billing rates, or at the contract ceiling rates? I’ve got to be honest here and tell you nobody asked those questions at the time.

In any case, all was seemingly fine for years, until December, 2016, when L&M and DCAA entered into a final indirect cost rate agreement for L&M’s FY2009. A few months later—in January, 2017, L&M submitted another series of rate adjustment invoices for costs incurred in its FY2009, and this time they wanted an additional $683,739! Naturally, I rejected those invoices because the rates agreed-to between DCAA and L&M were in excess of the rates established by contract clause B.8—which was the clause that L&M had asked for in the first place. Can you believe the nerve of those guys?

L&M argued that the clause only applied if they invoiced at “indirect rates below the provisional billing rates approved by DCAA,” and if they billed at DCAA-approved provisional billing rates then the clause was not applicable. That was clearly not the intent of my clause, and I told them so.

L&M filed a certified claim for the $683,739, which I denied. Then they appealed to the ASBCA.

Great; more work for me. But I know I’m right on this.

L&M Technologies’ Story:

There’s always a balance between telling the customer it is wrong and giving in on a point in the name of customer relations. In this case, we gave in and it cost us a ton of lost cash flow. As a small business, that really hurt us.

The CO kept insisting that we needed DCAA-approved provisional billing rates. Even when DCAA told the CO that we could bill without a DCAA approval, the CO didn’t budge. As a result, we kept billing at FY2008 rates even though we knew that FY2009 rates were higher.

In hindsight, we should have done a better job of helping the CO to understand how the lifecycle of billing rates under 52.216-7 works. We should have explained that the rates were going to be trued-up eventually, and it was in both parties’ best interests to make sure they were trued-up as the work was performed and costs were incurred. We didn’t do a great job there, and it cost us—not only in lost cash flow but also in unallowable legal fees as we appealed that CO’s final decision denying our rightful costs. But what do you expect from us? We’re a small business. We don’t know everything like the big contractors do.

What was that? No, we didn’t really think too much about the Form 533. We made sure it accurately reported the costs we had billed. The Form was as accurate as we could make it. When NASA told us to keep billing at FY2008 provisional billing rates, we kept reporting at FY2008 provisional billing rates on the Form. I told you, it was accurate. We did our job.

What do you mean that there’s a difference between actual cost rates and provisional billing rates? I told you we should have done a better job with the 52.216-7 clause. Maybe we should have made sure we fully understood it, as well. But we can’t be expected to know everything: I told you, we are a small business.

Those contract “cost gates” were really important and so when DCAA recalculated our rates higher based on a change in allocation base, we had a problem. We had to keep our rates low; that was an investment we needed to make to retain the contract work.

What do you mean we didn’t need anybody’s approval to bill at rates below the ones that DCAA calculated? The CO wouldn’t let us bill at anything other than DCAA-approved rates, and we needed to stay below those rates. What do you mean, we could have self-disallowed the costs rather than dealing with a contract mod? Well, now you tell us. At the time, we didn’t think of that. I told you, we are a small business.

Anyway, we know we are right on this and we’re appealing the decision.

The Armed Services Board of Contract Appeals’ Story:

Clause B.8 is silent about when the contractor's invoice must be submitted, ‘For contract years 1 through 5 that the Contractor invoiced at indirect rates below the provisional billing rates approved by the DCAA’ (finding 15). Nothing in the clause directs us to consider the invoices itemized in the NF 533s (finding 8) to take precedence over Invoice No. 200 that bills at the higher 2009 rates and was paid by NASA (finding 12). Taking into consideration that it was NASA's direction that prevented L&M from invoicing at the 2009 rates earlier, we hold that Invoice No. 200 satisfies the B.8 requirement that L&M invoice at the approved provisional rate[s] listed in the clause in order to receive any increase in rates when DCAA approve[d] the final indirect rates. For that reason we conclude that the rate cap in Clause B.8 does not apply and L&M may recover any increase in its final rates over approved provisional rates.

In accordance with the above, L&M's appeal is sustained. The matter is remanded to the parties to determine quantum.

For those interested in the decision that sparked this fictional story, here is a link.

Last Updated on Monday, 10 December 2018 21:15

Charitable Fraud

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My parents were the victims of a fraudster, somebody who took advantage of a position of trust to take money that was rightfully theirs. I found out about it and pursued the individual all the way to the California Supreme Court. (It wasn’t my decision to take it there; the individual kept losing and appealing. He lost at the California Supreme Court as well. The decisions/opinions are a matter of public record.)

Do you know a victim of fraud? Was it you, or perhaps somebody close to you? Somebody you cared about? Then you know how it feels to be betrayed. And even if you don’t know somebody who was scammed, I’m pretty sure you’ve read about scams in the news. How did the reports of fraud make you feel?

  • Scammers who conned people into contributing to GoFundMe campaigns and then spent the proceeds on themselves

  • Fraudsters who looted funds held in trust

  • Fake charities

And among the lowest form of fraud I can write about are the charities established in the name of military veterans, the ones that turn out to be opportunities to skim donated funds for the personal expenses of the people running the ostensible charity.

Most of us—I daresay all of us—know that our military veterans aren’t treated the way they should be. Their healthcare isn’t what was promised to them when they enlisted. The news has recently been filled with reports of a Department of Veterans Affairs policy that would deny veterans their full GI Bill benefits—benefits that were guaranteed by law. That policy was established by the “top benefits official” of the VA (according to this report) but it may have been “overruled” by the Department’s Secretary. Things are a bit unclear at the moment. The report stated:

The VA was supposed to begin granting expanded benefits in August under a law passed last year known as the Forever GI Bill. The law required the VA to change the way it calculated housing stipends, among other changes. But the agency blew through that deadline because it couldn’t get software in place to make the calculations and said this week it wouldn’t be up and running for another year.

Thus, even if the Department Secretary directs that his Department follow the law, it’s not clear that the Department actually can do so.

But what about a charity, a certified non-profit entity with the expressed mission “to protect and promote the physical, mental, and emotional wellness of military service members, veterans, and their families.” How would you feel if you knew that charity wasn’t fulfilling its expressed mission, or if you knew that some of the contributions from people such as yourself were being siphoned-off by at least one organization leader?

Would it make you sad, or would it piss you off?

Anyway: this Department of Justice press release.

Patricia Pauline Driscoll, the former executive director of the Armed Forces Foundation, was found guilty by a jury today of charges stemming from a scheme in which she stole from the non-profit charity, defrauded donors, and lied to the Internal Revenue Service and the public about her salary and benefits. … Driscoll, 40, of Ellicott City, Maryland, was found guilty of two counts of wire fraud and two counts of tax evasion, all federal offenses, and one count of first-degree fraud, a District of Columbia offense. The verdict followed a trial in the U.S. District Court for the District of Columbia.

Here are some of the details:

According to the evidence, Driscoll caused false reports to be filed on the Form 990s in a number of ways. For example, she failed to include the fact that she received commissions from fundraising, the amounts of commissions that she received from fundraising, and the other benefits that she received. Driscoll also falsely categorized and caused others to falsely categorize expenses in the Armed Forces Foundation’s books and records as being for the benefit of the veterans, troops, and their families, when, in fact, they were for her own private benefit. Driscoll also concealed from the foundation’s accountants the money she took from the charity, such as rent that was paid for the use of office space in a building that she co-owned.

Additionally, Driscoll falsely reported and caused others to falsely report the amount of donations received by the foundation on Forms 990, by inflating the amounts of donations and incorrectly listing the types of donations. According to the evidence, she sent false and fraudulent Forms 990 to members of the foundation’s Board of Directors and to the IRS, and caused to be published Forms 990, containing false and fraudulent information.

The jury found that Driscoll took the foundation’s money for her own personal use and to pay her for-profit business expenses.

(Emphasis added.)

A story from the San Diego Union-Tribune had this quote from Driscoll’s attorney:

“The jury did not get it right — Patricia Driscoll is innocent,” attorney Brian W. Stolarz said in a statement. “We are very disappointed by the verdict and the government’s misconduct in this case. We will appeal. This is not the final chapter to this story.”

That same Union-Tribune story, written by Morgan Cook, also added some details not found in the DoJ press release. It reported—

The charity was established in 2001 to promote veterans’ emotional and physical health through outdoor activities and small grants to help needy military families pay bills. On its 2015 federal tax filing, it disclosed that it had found evidence that Driscoll had misspent more than $900,000 for personal purposes, starting in 2006. … Some of [Driscoll’s] suspect spending included a trip to a jewelry store, a grocery, a dermatologist and more than $65,000 in legal fees related to her accusations of domestic violence against her ex-boyfriend … according to court records.

Shortly after Driscoll was indicted, the Armed Forces Foundation announced it was suspending operations and planned to shut down.

According to the Union-Tribune story, the charity was “co-founded by former Rep. Hunter, R-Alpine, who helped recruit Driscoll to run day-to-day operations. The mission was to support veterans by hosting events and awarding grants to needy servicemembers. Hunter was succeeded in the House by his son, Rep. Duncan D. Hunter, R-Alpine, who promoted the organization and attended charity events after he was elected to Congress in 2008.” Importantly, there is no evidence that either of the two Hunters benefited from—or were even aware of—Driscoll’s fraud.

That said, the Union-Tribune story also noted that the younger Hunter has his own legal problems. It reported—

In an unrelated criminal proceeding, the younger Hunter and his wife and former campaign manager, Margaret, were indicted in August on 60 counts of felony crimes stemming from their alleged personal use of more than $250,000 from the coffers of Hunter’s political campaign. Both Duncan and Margaret Hunter have pleaded not guilty to all charges. Duncan Hunter was re-elected to a sixth term earlier this month and faces trial next year.

So, while we continue to hear and read about contractor fraud, let’s not forget that fraud can be found anywhere. There is no evidence that shows fraud is any more prevalent in government contracting than, say, in the world of not-for-profit charitable organizations.

All we can do is be on the lookout for fraudsters and, when we catch them, prosecute the hell out of ‘em.


Lack of Adequate Accounting System Costs Contract Award

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Two things about this article that are not new: (1) Courts (and too many contracting officers) think DCAA approves a contractor’s accounting system; and (2) joint ventures are at competitive risk if they do not clearly explain how they will operate after contract award. We’ve discussed these issues before, notably in this article and in our lengthy analysis article available to site members. (Membership costs nothing, poses no risk, and has benefits!)

The new thing is a recent bid protest decision at the Court of Federal Claims, in the matter of Metrica Team Venture (MTV). MTV was a joint venture of six team members, led by Metrica. MTV was bidding on the Alliant 2 Small Business GWAC. The solicitation required bidders to submit a “self-scoring worksheet” in which bidders were permitted to claim points for meeting specific criteria. Among the points available, bidders could claim 5,500 points for having a “certified Cost Accounting System” (called a certified “CAS” in the judicial decision—but not to be confused with the Federal Cost Accounting Standards).

According to the bid protest decision, the Alliant 2 solicitation stated that, in order to claim the points, bidders were required to—

… provide verification from the Defense Contract Audit Agency [‘DCAA’], Defense Contract Management Agency, or any Cognizant Federal Agency of an acceptable accounting system that has been audited and determined adequate for determining costs applicable to the contract or order in accordance with [Federal Acquisition Regulation (‘FAR’)] 16.301-3(a)(3).

Metrica was the leader of the JV and it did have a certified CAS. Unfortunately, however, none of the other five team members met the requirement. No problem! The JV team executed an agreement that stated that Metrica would do the accounting for the JV. That would solve the problem, right?


As Chief Judge Sweeney explained in her decision—

… the CO deducted 5500 points from the total claimed by MTV because it only provided evidence that one member—Metrica—had a certified CAS, and those points were available only if the offeror provided evidence of a certified CAS in the name of each member or the name of the joint venture. At the end of his review, the CO concluded that MTV’s validated score was 62,700, which was 5100 points below the cutoff.

(Internal citations omitted.)

Had MTV been allowed to claim the 5,500 points associated with a certified CAS, it was probable that it would have been awarded an Alliant 2 GWAC; but because it wasn’t granted those points, the JV lost out on a potentially lucrative contract award.

MTV protested but Judge Sweeney didn’t buy it. She wrote: “The crux of the parties’ disagreement is whether, under the terms of the solicitation, a joint venture possesses a certified CAS in its name when one member has such a CAS and is contracted to perform accounting for all of the other members.” In this situation, she found that the Alliant 2 solicitation was unambiguous and required that “… the credential must be issued to the joint venture—not one member acting on behalf of the other members.” She concluded that—

… offerors are only entitled to points for having a certified CAS if that credential is possessed by the joint venture or each member of the joint venture. Because neither MTV nor each member possessed a certified CAS, the CO did not err when he deducted points from the total claimed by MTV for MTV not substantiating the points it claimed for having such a CAS.

Clearly, the decision turned on the language of the solicitation. Another solicitation with different language may have not been as restrictive, and may have permitted the approach to accounting system adequacy envisioned by Metrica. On the other hand, why would you risk it?

The message here is clear. If you are a Federal contractor and you want to grow your business, one of the most important needs you have is an accounting system that DCAA (or DCMA) can determine to be adequate. We are at a loss to understand why any business—large or small—would conclude otherwise. Yet, as shown by this bid protest decision, five out of six Federal contractors didn’t have the necessary policies, procedures, and/or controls. Five out of six is 83 percent. That’s a high percentage.

So our advice now is the same as it’s always been. If you are a Federal contractor (or want to be one) then you really must invest in your accounting system. It’s not sexy. It’s not immediately revenue-generating. It may require spending money at a time when cash is tight. We get all that. Those are great reasons for procrastinating in this area. But then again, if you procrastinate for too long, then you risk running into a situation where you don’t have what you need when you need it. And then you lose a major contract award and you’ll get to see all that potential revenue go to your competitors.

At that point, all those rationalizations for putting off the investment in your back office are going to ring hollow. They are not going to seem like smart cash flow or management focus decisions; they are going to look like failed leadership.

At that point: it’s on you.


CAS Board Meets! Has Agenda!

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Recently we published some blog pieces that were mildly critical of the current CAS Board. One of our criticisms was about the lack of CASB transparency. In September, we wrote, “There is no coherent messaging, no overall communication strategy. Part of this obviously stems from the Trump Administration’s focus on things other than CAS (or even reform of CAS administration). But we suspect that the remainder of the gap comes from a loss of focus on transparency.”

Those articles about the CAS Board have proven to be among our most popular this year, as best we can tell. (It’s tough to separate the “hits” from bots or hack attempts from the legitimate downloads.) Which, of course, proves our point that people are getting desperate for news about what the CAS Board is up to. If the CAS Board was more forthcoming then people wouldn’t need to use our site for CAS-related news.

Now, we are not saying that members or staff of the CAS Board read our website. That would be ridiculous. And we are not saying that, even if somebody related to the CAS Board did read our site and heard our criticisms about the lack of transparency, they would care enough to do anything about those criticisms. We aren’t that full of ourselves. Really.

But what we are saying is that on November 23, 2018, the CAS Board published in the Federal Register its agenda for the next two meetings.

According to the Federal Register notice, the next two meetings of the CAS Board will be taking place 27 November 2018 and 24 January 2019. The notice is careful to point out that the same agenda will be used for both meetings, and that the meetings themselves are closed to the public.

The notice also stated that “The CAS Board will discuss its accomplishments and activities for FY 2019 in its annual report to Congress, which will be transmitted after the end of the fiscal year ….” (Presumably that’s the Government Fiscal Year (GFY), which ends 30 September. That statement implies that we should expect a FY 2018 annual report to Congress, covering “accomplishments and activities” for the GFY that ended 30 September 2018 sometime in the near future.

The planned agenda for the next two meetings is deceptively simple. What makes the agenda deceptive is that the topics are really not simple at all: they are wickedly complex. The agenda includes:

  1. Review of Advanced Notice of Proposed Rulemaking (ANPR) for Pension Adjustments for Extraordinary Events. “The CAS Board contemplates it will also issue a Staff Discussion Paper (SDP), the first step of the four-step process, addressing fact-finding that was made by the working group and public outreach conducted subsequent to the issuance of the 2011 final rule to help inform the CAS Board in its deliberations.”

  2. Conformance of CAS to Generally Accepted Accounting Principles (GAAP). As part of this effort, the Board forewarns the public of at least two SDPs related to “conformance of CAS 404, Capitalization of Tangible Assets, and CAS 411, Accounting for Acquisition Costs of Material, to GAAP.”

  3. CAS Applicability Thresholds. The Board will discuss the Section 809 Panel’s recommendations to increase the thresholds at which CAS coverage applies.

  4. Review of Section 809 Panel Recommendation on Defense Cost Accounting Standards Board (Defense CAS Board). The Board will discuss the Section 809 Panel’s recommendations to eliminate the second (and superfluous) CAS Board by “repeal [of] the provisions in section 820 of the FY 2017 NDAA that created the Defense CAS Board.”

There you have it. The CAS Board is active and its members and staff want you to know they are active. Stay tuned for further developments, including Staff Discussion Papers (for which public input will be solicited) and for annual reports to Congress.


Allowability of Precontract Costs

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Precontract costs are not preproduction costs. Let’s get that out of the way first. The SF-1408 requires, as a condition of having an adequate accounting system, that a contractor must be able to segregate preproduction costs from production costs.

According to the DoD’s Contract Pricing/Finance Guide (Volume 3, Chapter 8)—

Preproduction costs, also known as start-up or non-recurring costs, can be characterized as out of the ordinary costs associated with the initiation of production under a particular contract or program. Examples of preproduction costs include:

  • Preproduction engineering;
  • Special tooling;
  • Special plant rearrangement;
  • Training programs;
  • Initial rework or spoilage; and
  • Pilot production runs.

There is really no question but that the foregoing costs are allowable; the issue is that contractors have to be able to segregate those costs from their recurring production costs. (Exactly why that ability is so critically important to the government has never been explained to my satisfaction.) Interestingly, the Guide assumes that the costs will be proposed as Other Direct Costs (ODCs), not as the constituent cost elements that may comprise the efforts (e.g., labor, materials, subcontractor costs, etc.). The Guide also states that such costs may be deferred and recognized over the life of production, which is something to keep in mind for future competitive proposals—not to mention Boeing’s EELV litigation.

But this article isn’t about preproduction costs; it’s about precontract costs, which are something else entirely.

The FAR cost principle at 31.205-32 is remarkably brief and to the point. It states—

Precontract costs means costs incurred before the effective date of the contract directly pursuant to the negotiation and in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule. These costs are allowable to the extent that they would have been allowable if incurred after the date of the contract (see 31.109).

Right away, precontract costs are defined broadly, as any costs that were incurred by the contractor “before the effective date of the contract.” Period. Labor, materials, subcontractor costs, preproduction costs—whatever. Any costs incurred before the effective date of the contract (which may be different from the date upon which the contract was executed) are precontract costs.

If those precontract costs were incurred by the contractor “directly pursuant” to the contract’s negotiations and if those precontract costs were incurred by the contractor “in the anticipation of the contract award” and if those precontract costs were incurred by the contractor “when such incurrence [was] necessary to comply with the proposed contract delivery schedule,” then the precontract costs are allowable.

But they are allowable only to the extent they would have been allowable if incurred after the date of the contract. In other words, an otherwise unallowable cost cannot be made allowable by virtue of it having been incurred before the effective date of the contract.

What does that reference to 31.109 mean? As we all know, FAR 31.109 refers to Advance Agreements, which is where the contractor and government enter into an agreement that establishes the treatment of certain costs. We discussed the topic of Advance Agreements in this article. If you mosey over to 31.109, you will see that use of Advance Agreements is recommended with respect to treatment of precontract costs; or, at least, precontract costa are one of the listed topics for which an Advance Agreement might be considered by the contracting parties.

We touched on Advance Agreements in the context of precontract costs in this article. But note that article was hardly a “deep dive” into the topic we are discussing today. It was more a discussion of the allowability of costs incurred either before, or after, the contract’s official period of performance.

Getting back to this topic, we need to ask whether the allowability of precontract costs conditioned upon an executed Advance Agreement? No. Absolutely not. Whether an Advance Agreement exists does not impact the allowability of precontract costs in the slightest. Having one may be helpful in terms of avoiding disputes (or audit findings), but it is not a requirement.

In summary, precontract costs are allowable if (1) the costs were incurred directly pursuant to negotiation of the contract and in anticipation of award, (2) the costs were necessarily incurred in order to comply with the proposed contract delivery schedule, and (3) the costs would have been allowable if incurred after the date of the contract.

Some court cases seem to indicate that allowability turns on whether or not the government has provided prior approval for the contractor to incur its precontract costs. That finding would seem to add a fourth requirement to the three listed above; a requirement not found in the FAR nor in the Radant Technologies line of cases at the ASBCA. Our layperson’s understanding is that those contrary decisions are found at the Court of Federal Claims. Karen Manos has a 2013 article that discusses those other cases, and we suggest readers seek it out. In the meantime, if you have a dispute that involves precontract costs, you may have a better outcome at the ASBCA, if you can file there.

What does DCAA say about precontract costs? Not much, it seems.

The Selected Areas of Cost Guidebook, Chapter 57 (“Pre-contract Costs”) is empty. All it says is “Refer to authoritative source.” We are not suggesting that this article is that authoritative source!

The Contract Audit Manual (at 6.202) discusses audit procedures related to precontract costs. It states—

Precontract costs are defined in FAR 31.205-32. Such costs, which otherwise meet the tests of allowability, may be approved for reimbursement by the auditor. If the precontract costs are subject to an advance agreement, the auditor should determine whether the costs incurred meet the conditions of the agreement. However, if there is no advance agreement, the auditor should ascertain whether the precontract costs meet all the tests of FAR 31.205-32 and are allowable to the same extent they would have been allowable if incurred after the effective date of the contract. The auditor should obtain the assistance of the Plant Representative/ACO and, where appropriate, the PCO in reaching this decision whenever necessary to clarify the facts and conditions for incurring precontract costs.

We are pleased to see that the DCAA audit guidance agrees with the decisions at the ASBCA.

Let’s wrap this up. If you are a contractor with a contract award pending, or in negotiations, you can incur precontract costs with an expectation of having them reimbursed or included in the contract price. You don’t need an Advance Agreement nor do you need express permission from the cognizant contracting officer. You need to meet the three tests we discussed in this article. However, if you have a dispute about the allowability of your precontract costs, and you want to litigate, best you take your appeal to the ASBCA.


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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.