Defense Contract Audit Agency Issues Guidance on Professional and Consulting Costs
The Defense Contract Audit Agency (“DCAA”) recently released a Memorandum for Regional Directors entitled, “Audit Alert on Professional and Consultant Service Costs (FAR 31.205-33) and Purchased Labor”. The intent of the memorandum is to ensure that auditors are testing the transaction based on the nature of the claimed cost, and not on the account nomenclature in which the contractor recorded the cost.
Federal Acquisition Regulation (“FAR”) 31.205-33(a) defines professional and consulting services costs as services rendered by persons who are members of a particular profession, or possess a special skill, and who are not officers or employees of the contractor. Examples include those services acquired by contractors to enhance their legal, economic, financial or technical position. Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions, recommendations, training or direct assistance. In comparison, purchased labor is defined in more general terms, such as janitorial, clerical or security labor.
FAR 31.205-33(f) contains three documentation requirements to ensure that professional and consultant service costs can be determined allowable:
(1) details of all agreements;
(2) invoices or billings; and
(3) consultant work product and related documents.
An auditor must be able to evaluate the agreement between the contractor and the consultant, the invoice for services provided and should be able to understand the output (what was accomplished for the fees paid) from the consultant. According to DCAA, the claimed costs will be considered unallowable if there is no evidence of an agreement, invoice and evidence of performance. The memorandum is quick to point out that it is not expecting contractors to have to create any documentation to satisfy this level of understanding, it should result from evidence that a prudent person would already possess (i.e. understand what they are buying, how much they will pay, and ensure they receive what they paid for).
Satisfying the work product requirement seems to be the biggest cause for concern for contractors. Oftentimes fees paid for professional and consulting services can be in the form of advice and discussions on pending matters. In the past, DCAA auditors would apply a hard test for documentation and disallow any costs that didn’t result in a written product. DCAA agreed that this was an area that needed to be addressed and this memorandum, as well as additional training and guidance, is meant to resolve this problem. The auditor should not insist on a tangible work product if other sufficient evidence exists (such as emails, presentations, sign-in sheets showing the consultant was onsite, or after-the-fact testimony confirmation) that can be used to determine the nature and scope of what was performed by the professional. DCAA often relies on the detail in the invoice, particularly when there has been no work product produced.
So what does this mean for you, the contractor? It is important for you to know how an auditor is evaluating the costs you incur. If you understand how the cost is defined and the criteria that an auditor will use to assess that cost, then you are more likely to classify it correctly the first time and ensure the cost will be deemed allowable. In addition, if you understand the procedures and criteria the auditor is expected to follow or run into any allowability questions regarding your incurred costs, you will be more knowledgeable about the issue and will be able to put yourself in a stronger position to negotiate and explain your case to the auditor.