Expressly Unallowable Costs - Aronson LLC...Costs of self-insurance in excess of the costs of comparable purchased insurance 2. Self-insurance for risk of catastrophic losses 3. Costs

Expressly Unallowable

Costs

It doesn’t hurt to ask, the worst they can say is “no.” Most of us have all been told that or said that many times. While that philosophy works in some circumstances, it is quite risky in the context of government contracting. This is because when a contractor claims an “expressly unallowable cost,” the government can say something much worse than “no.”

The “cost principles” set forth in FAR Part 31 describe what costs the government will and will not reimburse on cost type government contracts. In some cases, the cost principles are general and require judgement and discretion to apply to specific costs and circumstances. In other cases, the cost principles are clear and the costs are described with certainty as either allowable or unallowable. Unallowable costs in this category are called “expressly unallowable costs.”

Human nature being what it is, contractors might be tempted to claim any cost that could conceivably be allowable on the theory the worst the government can say is “no.” However if the government views the claimed costs as expressly unallowable, the contractor will have to refund double the claimed cost and if claimed again, triple the amount.

THE DIFFERENCE IN TREATMENT BETWEEN AN UNALLOWABLE COST AND AN EXPRESSLY UNALLOWABLE COST IS SHOWN IN THE FOLLOWING EXAMPLE.

A contractor claimed a salary of $300K for their CFO. The DCAA executive compensation team determined a reasonable salary for the CFO was $250K and questioned $50K of salary. This is not an expressly unallowable costs because the applicable cost principle does not state that any CFO salary in excess of $250K is unallowable. So the contractor would only have to refund the $50K. This might be an example of where the “It doesn’t hurt to ask” philosophy works.

Conversely, the cost principle limits executive compensation to no more than the ceiling set by the Office of Federal Procurement Policy, which for 2018 is $525K. Suppose a contractor claims total compensation of $575K for an executive. In that case, since executive compensation over $525K is expressly unallowable, the government would demand a $100K refund, (double the claimed cost) plus interest. In other words, it does hurt to ask, when claiming expressly unallowable costs.

Unfortunately, it can be challenging to distinguish between unallowable costs and expressly unallowable costs because the cost principles are not always clear in that regard. In addition, many of the cost principles are multi-faceted and address allowable, unallowable and expressly unallowable costs. Predictably, historically the government has aggressively classified costs as expressly unallowable. However, due to some recent court decisions, in May of 2019, DCAA issued revised guidance that slightly reduced the types of cost that DCAA considers to be expressly unallowable. That said, the revised guidance identifies 123 types of costs involving 23 cost principles as expressly unallowable.

In order to support our clients, Aronson has developed the attached Expressly Unallowable Cost Matrix. There are many costs not on the matrix that the government could disallow but unless the auditor cites one the 123 costs listed on the matrix, there shouldn’t be any double or triple penalty.

EXPRESSLY UNALLOWABLE COSTS | 1

FAR/DFAR CITATION

TITLE EXPRESSLY UNALLOWABLE COSTS SUBJECT TO PENALTY

31.105(d)(2)(ii)(B) A&E Contracts Major repaid & overhaul of rented construction equipment

31.205-1(f) Public Relations & Advertising

1. Promoting sales / Bring favorable attention to company

2. Trade Shows / Special Events (unless intended to promote exports)

3. Sponsoring meetings, conventions, seminars, etc. (Unless the purpose is to disseminate technical information or stimulate production)

4. Corporate ceremonies

5. “Swag” provided to employees or the public

6. Membership in civic or community organizations

7. Donating excess food per the Federal Food Donation Act

31.205-3 Bad Debts Uncollectible debts including costs of collection efforts

31.205-4 Bonding Costs None

31.205-6 Compensation for Personal Services

1. Distribution of profits to business owners & immediate family & to others committed to acquire a substantial financial interest in the company

2. For owners of closely-held companies, compensation in excess of what is deductible under the IRS Regulations

3. Differential allowances for additional Income taxes resulting from a domes-tic assignment

4. Severance pay when continuity of employment with the successor contractor is preserved or the employee is assigned to other work by the contractor

5. Accruals for abnormal or mass severance pay

6. Severance pay for foreign nationals working outside the US to the extent the pay exceeds typical severance pay for the same work in the US or if the termination of employment is due to the closing of a facility or activity at the request of the host country

7. Backpay (a retroactive adjustment to salaries or wages) is unallowable except when legally required by a court decree or collective bargaining agreement

8. Compensation that is calculated based on the price of corporate securities or on dividend payments or other payments made in lieu of compensation made unallowable by the principle

9. Pension costs assigned to the current year but not funded by tax return time are not allowable in any subsequent year (Except for non-qualified pension plans using the “pay-as-you-go” cost method)

10. Changes to pensions plans that are discriminatory to the government or are not intended to be applied to all employees under similar circumstances in the future

11. One-time only pension supplements not available to all participants of the ba-sic plan unless a separate pension plan is established or the payments qualify as “early retirement” incentives.

Expressly Unallowable Cost Matrix


FAR/DFAR CITATION


31.205-6 Compensation for Personal Services

12. Increased pension costs if the increase is caused by a delay in funding beyond 30 days after each quarter to which they are assigned or by a withdrawal from a pension fund for transfer to another benefit plan or to other accounts within the same fund.

13. Excise taxes on pension plan asset reversions or withdrawals

14. Retirement incentives offered to employees who retired or terminated before adoption of the plan

15. The present value of the retirement incentive in excess of the employee’s salary for the previous year

16. Deferred compensation when the awards are made in period subsequent to the period when the work being remunerated was performed

17. Payments to employees in excess of the contractor’s normal severance pay because their employment terminated due to a change in management con-trol or payments made to entice the employee to remain with the contractor after the change in control

18. The portion of company funded automobiles related to personal use by the employees

19. Employee rebates or discounts offered on products or services produced by the contractor

20. Duplicate post-retirement benefit costs due to the change from one accrual method to another

21. Post-Retirement benefit costs assigned to the current year but not funded, paid or otherwise liquidated by the tax return due date are not allowable in any subsequent year

22. Increases in post-retirement benefit costs caused by a delay in funding be-yond 30 days after each quarter of the year to which they are assigned

23. Employee compensation in excess of the compensation limits set by the Office of Federal Procurement Policy for any given fiscal year

24. ESOP contributions by a contractor that exceed the IRS deductibility limits for that fiscal year or stock purchases by the ESOP in excess of the fair market value

31.205-7 Contingencies None

31.205-8 Contributions or Donations

Contributions or donations of any kind though the costs of “participating” in community activities such as blood bank, charity or savings bonds drives are allowable per the Public Relations cost principle

31.205-11 Depreciation 1. Depreciation that would significantly reduce the book value of a tangible capital asset below its residual value

2. Depreciation, rental or use charges on property acquired from the govern-ment at no cost to the contractor

3. Depreciation or rental costs on property fully depreciated by the contractor

4. Capital leases between related parties if the costs exceeds what would have been incurred for similar leases between unrelated parties

31.205-12 Economic Planning Costs

None


FAR/DFAR CITATION


31.205-13 Employee Morale et al

Gifts and recreation unless the recreation is for employee sports teams or other employee organization designed to improve company loyalty, team work or physical fitness

31.205-14 Entertainment Costs of amusement, diversions, social activities and any directly associated costs

31.205-15 Fines, Penalties & Mischarging Costs

1. Fines or penalties resulting from violations of laws or regulations except when incurred as a result of compliance with a term of the contract or writ-ten direction from the contracting officer

2. Cost incurred in connection with mischarging costs on government con-tracts

31.205-16 Gains or Losses on depreciable property or other capital assets

None

31.205-17 Idle Facilities Costs of idle facilities unless the facility if necessary to meet workload fluctuations or were necessary when acquired but are now idle due to changes in requirements or other circumstances which could not have been reasonably foreseen

31.205-18 IR&D / B&P IR&D costs incurred in a previous accounting period unless certain specific criteria are met

31.205-19 Insurance & Indemnification

1. Costs of self-insurance in excess of the costs of comparable purchased insurance

2. Self-insurance for risk of catastrophic losses

3. Costs of a “fronting” insurance company in excess of what the “captive” insurance company would have charged

4. Actual losses, unless expressly provided for in the contract except for nominal deductibles or minor losses that are not covered by insurance

5. Insurance coverage in excess of the acquisition costs of the insured asset unless a formal written policy requires any replacement asset to be valued at the book value of the replaced asset

6. Life insurance on officers, partners, etc. unless the insurance represents additional compensation

7. Insurance to protect the contractor against the costs of correcting it own defects in workmanship or materials

8. Retroactive or backdated to cover losses that have already occurred

9. Late premium payment charges related to deferred compensation plan insurance required by ERISA

31.205-20 Interest & Other Financial Costs

Interest on borrowings (however represented) bond discounts, costs of financing / refinancing capital, legal & professional fees in connection with preparing prospectuses & preparing and issuing stock rights


FAR/DFAR CITATION


31.205-21 Labor Relations Activities undertaken to persuade employees to exercise or not exercise or the manner to exercise the right to organize and bargain collectively

31.205-22 Lobbying & Political Costs

1. Attempts to influence an election either directly or indirectly

2. Attempts to influence legislation

3. Attempts to influence Executive Branch employees to act or not act regard-ing a regulatory or contract matter

31.205-23 Losses on Other Contracts

Losses on contracts are unallowable

31.205-25 Manufacturing and Production Engineering Costs

None

31.205-26 Material None

31.205-27 Organization Costs 1. Planning or executing the organization or reorganization of the corporate structure including M&A

2. Resisting or planning to resist the reorganization of the corporate structure or a change in the ownership of a business

3. Raising capital to include incorporation fees and the costs of attorneys, accountants, brokers, promoters, consultants, etc.

31.205-28 Other Business Expenses

None

31.205-29 Plant Protection Costs

None

31.205-30 Patent Costs Patent costs not required by the contract, other than general counseling related to patent matters

31.205-31 Plant Reconversion Costs

Restoring the contractor’s plant to its pre-government contract state unless the costs are associated with the removal of government property

31.205-32 Precontract Costs None

31.205-33 Professional & Consultant Ser-vices Costs

1. Services to improperly obtain, distribute or use information protected by law

2. Services intended to improperly influence the

a. Contents of solicitations

b. Evaluation of proposals

c. Selection of sources for contract or subcontract award

3. Services that violate any law or regulation regarding improper business practices or conflict of interest

4. Services inconsistent with the services contracted for


FAR/DFAR CITATION


31.205-34 Labor Relations Activities undertaken to persuade employees to exercise or not exercise or the manner to exercise the right to organize and bargain collectively

31.205-35 Relocation Costs 1. Costs incident to acquiring a home in the new location when the employee was not a homeowner before relocating

2. Adjustments to reflect actual costs when the when the reimbursement was on a lump-sum basis

3. Loss on the sale of a home

4. Continuing mortgage principle payments on the house being sold

5. Costs associated with enabling employees to obtain below-market rate financing.

6. The following costs incident to acquiring a house in the new location;

a. Real estate broker fees or commissions

b. Litigation

c. Real and personal property insurance

d. Mortgage life insurance

e. Owner’s title policy insurance, unless such insurance was carried by the employee on their old residence

f. Property taxes & and operating or maintenance costs

31.205.36 Rental Costs None

31.205-37 Royalties & Other Costs for use of Patents

None

31.205-38 Selling Costs 1. Selling costs other than

a. Advertising

b. Corporate image enhancement

c. B&P

d. Economic planning

e. Direct Selling

2. Sales commissions paid to other than bona fide employees or established commercial selling agencies

31.205-39 Service & Warranty Costs

None

31.205-40 Special Tooling & Test Equipment

None


FAR/DFAR CITATION


31.205-41 Taxes 1. Federal income and excess profits taxes

2. Taxes associated with financing, refinancing, refunding operations or reorganizations

3. Taxes charged to Government in excess of a partial exemption attributable to the government contract activity

4. Special assessments on land that represents capital improvements

5. Taxes on real or personal property which is not used on government contracts

6. Excise taxes per the IRS Code on qualified pension plans, welfare plans, deferred compensation plans, etc.

7. Income tax accruals designed to account for the difference between taxable income and pretax income

8. Any tax imposed under 26 U.S.C. 5000C (foreign procurements)

9. Taxes for which an exemption, either directly or indirectly, was available to the contractor

31.205.42 Termination None

31.205.43 Trade, Business, Technical & Professional Activities

None

31.205-44 Training & Education

1. Overtime compensation for training or education

2. Salaries for employees attending undergraduate classes or part-time gradu-ate classes during working hours

3. Costs incident to full-time graduate school for any period that exceeds 2 years or the length of the degree program, whichever is less

4. Grants or donations to educational institutions

5. Training and education costs for other than bona fide employees (exception can be made for dependent children attending an OCONUS school)

6. Contractor contributions to employee dependent college savings plans

31.205-46 Travel The portion of company provided automobiles used for the employee’s personal use

31.205-47 Legal & Other Proceedings

1. Cost incurred in connection with any proceeding brought by the Federal Government for a violation of law or regulations (including qui tam relator FCA suits when the Government intervenes) when the result is

a. A criminal conviction

b. A civil or administrative finding of contractor liability

c. Debarment or suspension

d. Voiding or rescinding a contract

e. Termination for default due to legal or regulatory violations

f. Disposition by consent or compromise is the proceedings couldhave led to any of the outcomes above

g. Other similar results in other venues if the underlying conductcould have resulted in any of the outcomes listed in a. through e. above


FAR/DFAR CITATION


31.205-47 Legal & Other Proceedings

2. Defense or prosecution of Federal Government claims or appeals

3. Organizations / Reorganizations / M&A / or resisting M&A

4. Defense of antitrust lawsuits

5. Defense of employee lawsuits under the Major Fraud Act of 1988 where the contractor was found liable or settled

6. Defense or prosecution of lawsuits between contractors relating to agreements or contracts or to duel-sourcing or co-production agreements

7. Patent infringement litigation unless required by the contract

8. Assistance to individuals, groups or entities that the contractor is not legally bound to provide when the recipient was convicted or found to be civilly liable

9. Responding to certain Congressional inquiries

31.205-48 Research & Development

R&D costs in excess of the value of funding of a contract or grant that required that R&D

31.205-49 Goodwill Any amortization, expensing, write-off or write-down of good will

31.205-51 Alcoholic beverages

Costs of alcoholic beverages

231-205-1 Public Relations & Advertising

Payments to the Government associated with leasing of Government equipment or related support services except for Foreign Military Sales

231.205-6 Compensation for personal Services

1. Bonuses or other payments in excess of the employee’s normal compensation that are part of the restructuring costs associated with a business combination

2. Fringe benefits that are contrary to law, employer-employee agreement or an established policy of the contractor

231.205-22 Legislative Lobbying Costs

Costs or preparing any analysis etc. on the projected economic impact in a particular State or congressional district of an acquisition program for which all research, development, testing and evaluation has not been completed

231.205-70 External Restructuring

External restructuring costs unless

• The costs are otherwise allowable per the FAR and DFARS

• An audit of the projected restructuring costs and savings is performed

• The ACO negotiates an advanced agreement

• The projected savings on a present value basis exceeds the restructuring costs by at least a factor of 2 or the business combination will result in the preservation of a critical capability that otherwise might be lost

231.205-70 External Restructuring

Counterfeit parts or suspected counterfeit parts and the rework required due to the inclusion of counterfeit parts in a deliverable are unallowable unless

• The contractor has an approved system to detect and avoid counterfeit parts

• The counterfeit parts are GFP

• Becomes aware of the counterfeit parts through inspection, testing and authentication, through a GIDEP alert or by other means and provides timely notification to the Government


Meet the Authors

Nicole Mitchell, CPA, CGMA, MBAPARTNER

Nicole Mitchell, CPA, CGMA, is a partner in Aronson’s Government Contract Services Group, where she specializes in accounting and financial issues impacting government contractors.

e: [email protected]

Tom MarcinkoPRINCIPAL CONSULTANT

Tom Marcinko is a principal consultant in Aronson’s Government Contract Services Group. He is responsible for providing clients with a broad variety of both pre- and post-award support.

e: [email protected]

AUTHORAUTHOR

FOR MORE INFORMATION, CONTACT KYLE MCQUIGHAN AT 240.364.2580


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Expressly Unallowable Costs - Aronson LLC...Costs of self-insurance in excess of the costs of comparable purchased insurance 2. Self-insurance for risk of catastrophic losses 3. Costs

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