On September 28, 2016, DCAA removed Chapter Seven from the Contract Audit Manual (CAM) and released a new seventy-five chapter document entitled “Selected Areas of Cost Guidebook: FAR 31.205 Cost Principles”. It can be found on the DCAA website at http://www.dcaa.mil.
Chapter 17 deals with the Correction of Internal Control Deficiencies. It defines an internal control system as “the coordinated methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.” As its authoritative source it references FAR 31.201-3, Determining Reasonableness, relying on a “reasonable and prudent” standard to establish cost allowability.
Section 17.2 emphasizes that contractors need to have internal controls to ensure that unallowable costs are not include in billings and claims submitted to the Government (FAR 31.201-6). It goes on to state, “Some contractors may undertake large-scale reviews of unsettled overhead costs to identify unallowable costs that may have not been segregated and removed from overhead claims during the original processing of the transactions and/or the initial preparation of the billings or claims. This extraordinary (emphasis added by author) effort is often the result of the contractor’s earlier negligence in establishing, maintaining, and/or implementing an adequate system of internal control.”
“When the circumstances cited above are encountered and the contractor is incurring or is expected to incur significant costs, the auditor should notify the contractor that the costs associated with such extraordinary reviews of unsettled overhead costs are considered to be unreasonable and will be questioned under FAR 31.201-3, Determining Reasonableness. The reasons to be cited are:
- The costs are not of a type generally recognized as ordinary and necessary for the conduct of the contractor’s business or the performance of a contract. The costs are duplicative of costs incurred for the same purpose in prior periods. The Government has already reimbursed the contractor for the costs of preparing billings and claims for reimbursement. The fact that this task was not adequately accomplished does not entitle the contractor to additional reimbursement.
- The costs are the result of the contractor’s failure to follow the requirements of generally accepted sound business practices and contract terms.
- The costs result from actions taken which were not those of a prudent businessman in the circumstances, considering his responsibilities to the owners of the business, his employees, his customers, the Government, and the public at large.”
So what is this saying to you the contractor? This guidance is not addressing the unallowable cost itself or the directly associated unallowable costs but the extraordinary and duplicative “unallowable” time spent by the contractor in ensuring these costs have been properly identified and eliminated.