Can Contractors Rely on Previous DCAA Audit Findings?
By: John Ford, Senior Consultant, Government Contractor Services Group
One of the more frustrating things that contractors face is Defense Contract Audit Agency (“DCAA”) auditors changing their minds about the allowability of costs. This is particularly troublesome if the contractor has been including the cost in its indirect cost pools for years without DCAA questioning the allowability of the cost, then, without warning, DCAA questions the cost and alleges that the cost is expressly unallowable.
Compounding this is the fact that the claim by DCAA is asserted several years after the cost was incurred. In the meantime, the contractor has included the same cost in its indirect cost pools for the intervening several years. In this circumstance, the contractor may face a penalty for each of the years.
For many people, this may seem like an unfair way to conduct business, but is it permissible. In a recent decision, Technology Systems, Inc., ASBCA No. 59577 (January 11, 2017) (“TSI”), the Armed Services Board of Contract Appeals (“ASBCA”) has held that, as a general matter, it is permissible.
At issue in TSI were costs incurred in 2007 and claimed in its July 2008 proposal to establish final indirect cost rates. Three months before the six-year statute of limitations on the assertion of government claims expired, DCAA issued its audit report on that proposal. In that report, DCAA questioned amounts for several cost elements. The administrative contracting officer (“ACO”) accepted most of the questioned costs, but TSI and the ACO were not able to reach agreement on the allowability of the questioned costs. Consequently in June 2014, the ACO issued a final decision under the Disputes clause disallowing most of the questioned costs and establishing final indirect cost rates for 2007. TSI then appealed that decision to the ASBCA.
Among the costs DCAA questioned and the ACO disallowed were consulting costs. These costs were disallowed because TSI allegedly did not provide the support called for by FAR 31.205-33(f). TSI asserted that it had used the same consultant for several years, and that DCAA had not questioned the costs before. This led TSI to believe that the support for the consultant’s costs was acceptable. TSI relied upon two legal theories to support its challenge to the disallowance of these costs – prior course of dealing and retroactive disallowance.
The prior course of dealing theory is a contract interpretation tool. It is used to demonstrate that the parties have had a mutual understanding of the same language used in a series of contracts. This mutual understanding reflects the parties’ interpretation of that language, and is considered to be binding on the parties when the same language is used in future contracts. In this case, TSI argued that DCAA’s failure to question consultant costs in the past resulted in a prior mutual understanding that TSI had provided support satisfying FAR 31.205-33(f).
Under the facts of this case, the ASBCA determined that there was no prior course of dealing showing a mutual understanding of 33.205-33(f). In rejecting TSI’s argument, the Board observed that DCAA’s failure to question costs in prior audits, without more, does not establish a common basis of understanding of what would constitute adequate support for TSI’s incurred costs. The ASBCA went on to say that under the circumstances presented in this case, the failure to question certain costs could mean more than one thing: either the government is satisfied with the proof offered by TSI or the auditor chose to investigate certain issues in some years, but not in other years. Thus, without more information, a contractor could only speculate as to why the government chose not to question costs. When there is only speculation as to the meaning of an auditor’s silence, such silence is not indicative of the parties’ intentions or their joint understanding of what was required by FAR 31.205-33.
Turning to TSI’s retroactive disallowance argument, as described by the ASBCA, the doctrine of retroactive disallowance prevents the government from challenging costs already incurred when the cost in question previously had been accepted following final audit of historical costs; the contractor reasonably believed that it would continue to be approved; and it detrimentally relied on the prior acceptance. The ASBCA rejected TSI’s retroactive disallowance argument, asserting that it was a doctrine “whose heyday has come and gone.” This was because the ASBCA characterized “retroactive disallowance” as a form of estoppel (a legal doctrine that bars a party from denying a fact or engaging in certain conduct.) Under recent court decisions binding on the ASBCA, in order for estoppel to apply against the government, the government must have engaged in some misconduct toward the contractor. Here, the Board could find no misconduct by the government that would have misled TSI into believing that it had provided adequate support for the consultant’s costs.
While TSI lost on these procedural arguments, it won on the merits of the case regarding consultant costs. The government’s primary position concerning those costs was that TSI did not provide any consultant work product in support of the costs. This position was based on FAR 31.205-33(f), which states in pertinent part:
[e]vidence necessary to determine that work performed is proper and does not violate law or regulation shall include –[c]onsultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.
The ASBCA rejected this argument, noting that “[t]he government labors under the false impression that the FAR requires a consultant to create ‘work product’ merely for the purposes of proving its costs.” The ASBCA observed that the problem with the government’s interpretation was that it did not account for the case in which such documents were never created by the consultant.
Further, it did not account for the case where, as in TSI, the consultant’s invoices included the data that the FAR defines as work product, such as persons visited and subjects discussed. The ASBCA concluded by stating that FAR 31.205-33(f) may require the provision of a consultant’s work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. This should not be read as an invitation to write consultant engagements that do not require work products when they would otherwise be expected. While TSI was successful in this case, it is a best practice for engagement letters to spell out what is expected from consultants in the way of work product and the content of invoices even if the consultant is to be paid on a retainer basis.
As for mechanisms to avoid the government being inconsistent in its determination of cost allowability from one year to the next, the best avenue is to enter into an advance agreement with the ACO in accordance with FAR 31.109. Also, if you have a change in your cost structure such as the initiation of a bonus plan, it is best to specifically identify this to the government and discuss the plan with the auditor or ACO. Memorialize this discussion in a letter or email sent to the government describing the discussions you had. Similarly, if an auditor raises questions concerning a cost during an audit, but does not question that cost in an audit report, follow up with the auditor reminding him/her of your discussions. Also mention that since the cost was not questioned in the audit report, you believe that the auditor agrees the cost is allowable and that the support for the cost is adequate.
If you have any problems in this area, our staff of experienced GovCon consultants will be glad to assist you in resolving the matter.