DCAA Commonly Questioned Costs

By: Taylor Bailey

With ever-increasing budget pressure, the Federal Government is always looking towards its contractors with concerns about allowable costs. As the environment of DCAA and government contracting changes, DCAA often shifts its focus on questioned costs. DCAA has recently been scrutinizing certain areas more than others.

One area of concern is DCAA’s focus on direct labor on Time & Material (T&M) contracts. Instead of auditing the hours charged to a contract, as they have done historically, the agency has recently been auditing the credentials of the direct labor employees charging to specific labor categories. T&M contracts have very specific technical and educational criteria for the labor categories that are agreed upon by the government and the contractor. When contractors have direct labor employees charge labor categories that they do not qualify for, they are technically in breach of the contract. Be careful to check your contract and work with your HR department to make sure the right people are charging to the right labor categories.

Another area of concern is executive compensation. Executive compensation is frequently questioned by DCAA, especially in small and mid-sized companies. Executive life insurance policies are often questioned as well. FAR 31.205-19 states that “Costs of insurance on the lives of officers, partners, proprietors, or employees are allowable only to the extent that the insurance represents additional compensation.” These costs are commonly applied incorrectly in the indirect rates. If the beneficiary of the policy is the company the policy is unallowable. If it is the shareholder the cost should be included in their compensation, otherwise they will be taxed on the death benefit.

Additionally, DCAA is often questioning the supporting documentation of consultants and legal costs. Consulting agreements and specific statements of work for legal activities are important to keep on file to back up the classification of these costs. All service agreements need to have a very clearly defined engagement letter or consulting agreement. Try to eliminate areas of concern as to lobbying and other types of unallowable activities in the agreement. All invoices should clearly state the work performed and it should match the agreement’s terms and conditions.