Required Documentation in Support of Consultant Costs
By: Curt Smith, Manager, Government Contractor Services Group
The allowability of consultant costs is sometimes a point of contention between contractors and Defense Contract Audit Agency (“DCAA”) auditors, and often the issue is insufficient documentation. What evidence is required by the Federal Acquisition Regulation (“FAR”) to document consultant costs sufficiently and how do auditors determine allowability given this requirement? A quick review of FAR and guidance for DCAA auditors concerning consultant costs will greatly help answer these questions.
The general parameters of allowability for consultant costs are described in FAR 31.205-33 — Professional and Consultant Service Costs. However, other cost principles, such as FAR 31.205-30 and 31.205-47, contain rules that impact the allowability of costs that are considered “consultant” costs. FAR 31.205-33(a) defines consultants as “persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor”. They are therefore distinct from employees, including officers, of the contractor (see FAR 31.205-6 — Compensation for Personal Services regarding allowability of costs for these individuals). FAR 33.205-33(b) describes consultant services as allowable when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the government. FAR 31.205-33(c) lists four instances when consultant costs would be unallowable, including costs for services to improperly obtain information protected by law or to improperly influence the source selection process. FAR 31.205-33(d) lists eight parameters for contracting officers to consider when determining allowability including the nature and scope of the service rendered, the necessity of contracting for the service, the qualifications of the individual or concern rendering the service, and the adequacy of the contractual agreement for the service.
FAR 31.205-33(f) lists documentation requirements “to determine that work performed is proper and does not violate law or regulation.” These include:
(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;
(2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and
(3) Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.
Given the amount of information contractors must have on hand to support consultant costs, it is not surprising that questions will arise as to whether contractors have met these evidence requirements and that DCAA will question a portion or all of the contractor’s consultant costs.
If DCAA questions claimed consultant costs, is there further recourse? Actually there is. In Chapter 58 of the recently published DCAA Selected Areas of Cost Guidebook (“the Guidebook”), DCAA encourages auditors to gain further corroborating evidence when documentation is insufficient but the costs appear to be allowable. In the FAQ section of the chapter, the Guidebook lists scenarios (questions 7, 8, and 9) where the contractor does not have all of the necessary documentation but the auditor may be able to obtain sufficient evidence otherwise.
DCAA’s practice in these cases will be to question the costs but to make the case for allowability in the audit report. In Section 58-1, Documentation Requirements and Audit Evidence, the Guidebook states:
In cases where the audit team cannot gather sufficient documentation to support the evidence requirements of FAR 31.205-33(f), but other evidence leads the team to conclude the activity is an otherwise allowable activity and reasonable in amount, the team should cite the FAR 31.205-33(f) non-compliance and question the cost. In the audit report note, the team should include a discussion of the evidence supporting why the activity is otherwise allowable and reasonable in amount, so that the contracting officer can make a fully informed business decision.
In a recent decision involving Technology Systems, Inc. (“TSI”), ASBCA No. 59577, the Armed Services Board of Contract Appeals (“the Board”) partially relied upon this guidance to support the contractor’s appeal against a government disallowance of consultant costs because of an alleged lack of adequate documentation. In TSI, DCAA questioned costs because of an alleged lack of consultant work product. The Board rejected this argument, stating:
The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed.
The Board went on to hold 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. . . . As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR intended to impose “make work” upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.
A note of caution is important. As noted above, FAR 31.205-33(d) requires auditors to review the nature of the service provided by the consultant to determine allowability. For example, consulting services provided by a public relations firm may not be allowable under FAR 31.205-1 — Public Relations and Advertising Costs, and those provided by a lobbying firm may not be allowable under FAR 31.205-22 — Lobbying Costs. Contractors must make sure that the nature of the service provided is allowable in all aspects of FAR 31.2. This was also an issue in the TSI case where the company had agreements with the same consultant for consulting services and lobbying. TSI had separate agreements with the consultant for each type of service, and the consultant billed TSI separately under each agreement.
If you have any questions or concerns about the information discussed above, please do not hesitate to contact one of our experienced GovCon professionals for assistance.