By Andrew Victor, Adrian Wigston

Recently, the Defense Contract Audit Agency (DCAA) updated its internal guidance to refine its approach to identifying “expressly unallowable costs,” particular items or types of cost that, under the express provisions of an applicable law, regulation, or contract, are identified as unallowable.  See FAR 31.001; 9904.405-30(a)(2) (Cost Accounting Standard 405).  This is a fundamental concept because contractors must exclude expressly unallowable costs from their proposals, invoices, and claims.  FAR 31.201-6.  If a contractor includes them, the contractor may be subject to penalties (generally the amount paid for the expressly unallowable cost), plus interest. Further, if the costs had previously been identified as unallowable (such as during an audit), then an agency can impose twice the standard penalty.

For the past four years, DCAA’s previous guidance offered what many considered to be too much flexibility for its auditors to interpret whether a selected area of contract cost was expressly unallowable.  DCAA had taken the aggressive position that “a cost can be expressly unallowable even though the cost principle does not explicitly state that the cost is unallowable or not allowable.”  DCAA Mem. for Reg’l Directors, Jan. 7, 2015, at 2.  This approach sometimes led to decisions adverse to the government before the boards and courts.  For example, the Armed Services Board of Contract Appeals in Raytheon Co., 17-1 BCA ¶ 36,724 (Apr. 17, 2017), handed the contractor a victory arising from a dispute with the government over “aircraft fractional leases,” essentially corporate aircraft leasing costs used for private corporate travel instead of commercial airfare.  According to the board, no law or regulation specifically identified aircraft fractional lease costs or stated that they are unallowable.  FAR 31.205-46, Travel Costs, referenced the costs of travel by contractor-leased aircraft and airfare costs in excess of “customary airfare,” but these categories, in the board’s view, were not equivalent to aircraft fractional leases and, therefore, not an expressly unallowable cost subject to a penalty.

Superseding its prior guidance, DCAA’s 2019 policy reins in its approach.  Now, the agency has narrowed its focus and will scrutinize only selected areas of cost that are stated as unallowable or not allowable in “express” terms.

In our view, this is a welcome course correction.  For government contractors, this new guidance should help them make better informed assessments as to whether certain costs are expressly unallowable and subject to penalties.