stephanie widzinski, sr. manager, watkins meegan...

Accounting for Unallowable Costs

Stephanie Widzinski, Sr. Manager, Watkins Meegan Kiran Pinto, Manager, Watkins Meegan GC-175

Agenda

10/2/2012 ©2012 Deltek, Inc. All Rights Reserved 2

• The Regulations • The “Unallowable” Concept • Basic Cost Principles and Unallowable Costs • How to properly account for Unallowable Cost in GCS

Premier

10/2/2012 3 ©2012 Deltek, Inc. All Rights Reserved

Key Take Aways

• Proper segregation of unallowable cost • Proper treatment in your indirect rate structure • Compliance with regulations


Basic Cost Principles – The Regulations


FAR 31.2 – Contracts with Commercial Organizations

• FAR 31.201-6, Accounting for Unallowable Costs Certain costs may be allocable, but not allowable Introduces the concept of statistical sampling for quantification of

unallowables Introduces the concept of directly associated unallowable costs



• FAR 31.202, Direct Costs Imposes the consistency requirement of CAS 402 to all FAR contracts Does not define “direct costs” The term is defined in FAR 31.201-4, Determining Allocability, as one that “is

incurred specifically for the contract”

Permits treatment of any cost of a minor amount as indirect if… Treatment is consistent, and Effect is substantially the same as charging it direct



• FAR 31.203, Indirect Costs Defers to CAS for covered contracts For all other contracts Defines indirect as everything not direct (even unallowables) Mandates pool formation in logical, homogeneous cost groupings Established requirement for causal/beneficial relationship Prohibits fragmentation of pool bases Acknowledges need for “offsite” pools for some contractors Requires pools to be allocated over contractor’s fiscal year (with some exceptions) Encourages use of “special allocations” (exception to G&A base) for GOCOs Establishes “excessive pass-through charges” as unallowable


Allowable Costs

• For a cost to be allowable, it must be: Allocable The cost is assignable or chargeable to one or more cost objectives on the basis of

benefit received

Reasonable Based on what a prudent person would incur in the ordinary course of business Think economy and efficiency Burden of proof is always on the contractor

• Pursuant to FAR 31.201 (Composition of total cost) • Pursuant to CAS, if applicable • Pursuant the terms of the contract


The Unallowable Concept

• No such concept in the commercial world Cost is cost

Government contracting is an entirely different story Cost is no longer just cost Is it allowable or unallowable? Segregation of allowable and unallowable costs is required

Costs come in many different varieties A cost can be incurred, but never charged to the Government, either directly

(visible on the invoice) or indirectly (buried in the indirects) Interest, Alcohol, Entertainment, etc.

Some costs may be charged to the Government, but only up to a ceiling Travel, executive compensation

Some costs have special restrictions - sometimes allowable, sometimes not Advertising, Legal Costs, Sales Commissions

Some costs should never be incurred (these are also illegal) Bribes (foreign or domestic)


The Legal Basis for Unallowable Cost

• Unallowable costs are a cost of doing business, you just can’t charge the government for them

• Some costs are unallowable by their nature (by law or regulation) Bribes, gifts, and donations Alcoholic beverages, entertainment Interest Federal income taxes Allowance for bad debt

• Some costs are intended to regulate or control costs Excess travel costs Excess executive compensation Business combination costs


Who Really Cares about Unallowable Cost?

• Everyone in your organization should care • There are penalties for not caring • Unallowable cost might not be on your radar, but it is on

the radar of DCAA


Top Audit Issues for 2011


Treatment of Unallowable Cost

• Some unallowable costs are unavoidable • Visibility and proper treatment is key Unallowable direct costs stay with the job, receive all appropriate allocations,

but are not billed Unallowable indirect costs (fringe or overhead) must be removed from their

respective pool, but remain in the G&A base Unallowable G&A (and all statutory unallowable costs) are removed from the

G&A pool • Important to remember…one dollar of “directly associated”

unallowable costs can become two dollars or more dollars of total unallowable costs to your company If not for cost “A,” cost “B” would not have been incurred


Treatment of Unallowable Cost

• Correctly setting up your system to account for and report on unallowable cost is a key component in the proper allocation of cost

• Document your policy on unallowable cost • Maintain separate unallowable accounts • Train your employees

GCS Premier and Unallowable Cost

Setup and Treatment


Unallowable Cost and GCS

• Unallowable cost can come in all shapes and sizes • Direct Labor, ODC’s, Overhead & G&A

• Each is treated differently in government contracting • And each requires a different setup in your system • It is important to understand how your unallowable cost

should be recorded


Unallowable Cost and GCS

• What to consider when setting up and capturing unallowable cost: A separate and distinct numbering scheme for unallowable accounts Do I have both direct and indirect unallowable cost? What types of unallowable cost will be incurred? Labor and non-labor Will you have unallowable G&A cost?

Should the unallowable cost be in the base of the G&A pool?

Direct Cost

Unallowable/Non billable


Direct Unallowable Cost

• Two basic options to consider for the recording of direct unallowable (non billable) cost

• If you only have unallowable/non billable ODC’s, a separate SFX will segregate those costs

• If you have unallowable/non billable labor (less likely), you will need to set up a separate task under your contract


Unallowable ODC

• Unallowable and non-billable mean the same thing for our discussion

• These are costs that belong to the job but cannot be billed or included in revenue

• Think excess per diem…. • Set up a separate suffix to capture the cost For example, SFX 56 Non Billable Expense


Alloc. Flag “A” means it will go the

to G&A base

SFX 56 is for Unallowable Direct

Costs


Unallowable ODC

• After setting up the SFX 56, you must “tell” the system to exclude these charges from billing and revenue

• On the Summary Budgets & Ceiling screen, bring up the project with the non-billable

• Change the code on SFX 56 to “No Fee, ceiling” at the task level


This screen is automatically set up. This is where you can

manage ceilings. Change default code


Unallowable ODC

• “No fee, ceiling” means that no fee is to be applied and a ceiling exists Our ceiling is zero because we don’t want to include any of the cost on this

SFX in billings or revenue


Unallowable Direct Labor

• If you have unallowable direct labor, you must set up a separate task to capture this cost

• Consider using a consistent numbering scheme across all projects This will allow for easy recognition of unallowable/non billable task 3100-U01, 3200-U01

• To exclude this task from billings, make sure that “Auto Compute Billing” is turned off Remember…this is a non-billable task

• The objective is to capture the cost correctly but not to bill the cost



• This would also be a non-revenue generating task Leave the Automatically compute this contract’s revenue checkbox blank

• Remember, you need to capture/segregate the cost so that is it not billed and does not generates revenue

• It is, however, a cost to the project Remember non-billable (unallowable) cost on a project dilutes your profit


In the Contract Master File, uncheck the “auto

compute” box



• If this is a T&M contract, do not set up a T&M Billing rate on the unallowable labor category Yes, you need a separate unallowable labor category

• If your revenue is at the top level of the project, you will need to set up a separate project to capture the unallowable/non-billable labor

Indirect Cost

Unallowable Set Up


Unallowable Indirect Cost

• Unallowable indirect cost can be either labor or non-labor • Unallowable expense can result from an Overhead activity

or from a G&A activity • The origin of the expense will determine how it should be

handled in the system • The goal is to properly treat your unallowable cost so that

the government is not being allocated any unallowable cost



• Recording unallowable cost to separately identified unallowable accounts will result in the most visible and accurate portrayal of the cost

• To properly set up your system for unallowable cost, you must understand the flow of the cost and all related burdens

• If you incur unallowable labor incurred, you will incur unallowable fringe

• Who incurred the unallowable expense? This will determine if the expense belongs in the G&A base Was it part of the Overhead pool? Was it a G&A type expense?



• Costs that would be normally included in overhead, but by their nature are unallowable, should be excluded from the Overhead pool(s) Excess per diem on indirect travel Alcohol at a business meeting

• The unallowable “Overhead” cost should be included in the G&A base

• The result is a lower overhead rate • Contracts cannot be burdened with unallowable overhead

cost • Unallowable G&A costs must also be removed from the

G&A pool • These costs should also be excluded from the G&A base


How to Capture Unallowable Cost in GCS

• To properly account for unallowable cost, your indirect pool structure should include a separate pool for unallowable costs

• This pool will not have a base • This pool will not allocate to projects • The purpose of the pool is accumulate unallowable cost so

that cost can be properly included in your G&A base and properly excluded from other pools


How to Capture Unallowable Cost in GCS

• The pool will contain all labor and non-labor expense related unallowable cost, including the allocation of fringe on the unallowable labor

• Unallowable labor needs to be included in the base of your fringe pool


Setting Up the Pool

• All unallowable accounts must be assigned to the unallowable pool

• The unallowable labor account must have an account type of “L” so that it will properly be included in the base of the fringe pool

• Allocation accounts must be set up • A base assigned • After the pool is set up, go to the chart of accounts file to

modify each record to assign to the pool


Chart of Accounts File-CY

Account Type is L


Indirect Pool File

Pick a base option currently not being

used

Create an Unallowable pool

Create Allocation Accounts

Set as Tier 2


Chart of Accounts


Unallowable Pool

No base!


Total Unallowable Expense per

pool

G&A allocation to unallowable cost

G&A BASE


The Consequences of Ignoring Unallowable Cost

• Knowingly including unallowable direct costs in a public voucher submitted to the Government for payment is a violation of the False Claims Act (31 USC §§ 3729 – 3733) The act states, in part,

“those who knowingly submit, or cause another person or entity to submit, false claims for payment of government funds are liable for three times the government’s damages plus civil penalties of $5,500 to $11,000 per false claim”

Each invoice is considered a separate claim • Knowingly including unallowable costs in an Incurred Cost Submission

(a “claim” for final settlement of indirect rates for a year) is also a violation of the False Claims Act

• Unallowable costs in an indirect claim are also subject to a penalty pursuant to FAR Penalty amount is equal to “two times the disallowed costs, plus interest” Penalty is in addition to False Claims Act provisions and disallowed costs Can be waived upon a showing that the inclusion was inadvertent Absent such showing, the ACO is required to assess the penalty

Each voucher or payment is considered a separate violation


The Consequences of Ignoring Unallowable Cost

• Under the new DFARS Business Systems Rule… Failure to effectively segregate allowable and unallowable costs is a

“significant deficiency” and may lead to disapproval of business systems (Accounting, in this case) and partial suspension of payments under Government contracts

Inclusion of unallowable costs in an indirect cost claim and inclusion of unallowable costs in a public voucher is considered a failure of a control element of the contractor’s internal control system and may lead to……

• Disapproval of one or more business systems • Also under the new DFARS provision, this can also result

in disqualification from competitive solicitations • Under FAR 16.301-3(a)(1), a contractor whose accounting

system has been determined to have one or more significant deficiencies may not be awarded a cost-type contract.


Burden of Proof

• Remember, it is always on you, the contractor • What should you have in place so that you are prepared to

defend your position? System Controls Policies and Procedures Adequate Documentation Knowledge of Regulation(s) Knowledgeable Employees Train your employees on the importance of unallowable segregation


In Summary

• Costs that are unallowable by law or regulation and are ALWAYS unallowable

• Costs that are unallowable by amount/ceilings require careful documentation You need to support your position

• Some costs are unallowable by circumstance or contractual provision and require careful attention and documentation

• Understanding the nature of allowability is very important • Visibility and Documentation are key to proper treatment

of unallowable costs And success with DCAA


Call to Action/Contact Us

Stephanie Widzinski, CPA Senior Manager, Government Contracting Group [email protected] (703) 342-5951 Kiran Pinto, CPA

Manager, Government Contracting Group [email protected] (703) 847-4458

mailto:[email protected]�

mailto:[email protected]�


Basic Cost Principles – The Regulations



• FAR 31.201-6, Accounting for Unallowable Costs Certain costs may be allocable, but not allowable Introduces the concept of statistical sampling for quantification of

unallowables Introduces the concept of directly associated unallowable costs



• FAR 31.202, Direct Costs Imposes the consistency requirement of CAS 402 to all FAR contracts Does not define “direct costs” The term is defined in FAR 31.201-4, Determining Allocability, as one that “is

incurred specifically for the contract”

Permits treatment of any cost of a minor amount as indirect if… Treatment is consistent, and Effect is substantially the same as charging it direct



• FAR 31.203, Indirect Costs Defers to CAS for covered contracts For all other contracts Defines indirect as everything not direct (even unallowables) Mandates pool formation in logical, homogeneous cost groupings Established requirement for causal/beneficial relationship Prohibits fragmentation of pool bases Acknowledges need for “offsite” pools for some contractors Requires pools to be allocated over contractor’s fiscal year (with some exceptions) Encourages use of “special allocations” (exception to G&A base) for GOCOs Establishes “excessive pass-through charges” as unallowable

Thank You!

Overview of Selected Cost Principles


FAR 31.205-43, Trade, Business, Technical & Professional Activity Costs

• Allowable costs are limited to: (1) Memberships in trade, business, technical and professional orgs. (subject

to limitations); (2) Subscriptions to trade, business, professional, or other technical

periodicals; (3) When the principal purpose of a meeting, conference or seminar is the

dissemination of trade, business, technical or professional information or the stimulation of production or improved productivity.

• Careful documentation of the purpose of the event is key to establishing allowability


More on Conferences and Seminars…

• General Trade, Business, Technical and Professional Activity Costs (FAR 31.205-43)

states that the cost of technical or professional meetings and conferences are allowable when the primary purpose of the meeting is the dissemination of trade, business, technical, or professional information, or the stimulation of production or improved productivity, provided the costs meet the other requirements controlling allowability (FAR 31.201-2).

The cost principle makes the following type of professional and technical activity costs expressly allowable: Organizing, setting up, and sponsoring the technical and professional meetings,

symposia, seminars, etc., including rental of meeting facilities, transportation, subsistence, and incidental costs.

Attending the meetings by contractor employees, including travel costs (see FAR 31.205-46)

Attending the meetings by individuals who are not contractor employees, provided the costs are not reimbursed to them by their own employer and their attendance is essential to achieve the purpose of the meetings.



• Conference Costs versus Entertainment Costs Determinations as to whether or not expenses associated with a particular

meeting or conference represent allowable business expense under FAR 31.205-43 provisions or unallowable social activity under FAR 31.205-14 (Entertainment Costs) should be made on a case-by-case basis, based on all pertinent facts.

Under the provision of FAR 31.205-43, costs associated with the spouse of an attendee are not allowable because the spouse’s attendance is not essential to achieve the purpose of the meeting.

• Business Meals For individuals on official travel, assure the meal expense is not included in both

the claimed travel costs and subsistence costs included as part of organizing the meeting.

For individuals not on official travel, assure that any meal expense is an integral part of the meeting as described in FAR 31.205-43, necessary for the continuation of official business during the meal period, and not a social function.



• Documentation Determination of allowability requires knowledge concerning the purpose

and nature of activity at the meeting or conference. The contractor should maintain adequate records supplying the following information on properly prepared travel vouchers or expense records supported by copies of paid invoices, receipts, charge slips, etc. Date and location of meeting, including the name of the establishment. Names of employees and guests in attendance. Purpose of meeting or Agenda. Cost of the meeting, by item.

The above guidelines closely parallel the current record-keeping requirements in Section 274 of the Internal Revenue Code for entertainment costs as a tax deductible expense. Where satisfactory support assuring the claimed costs are allowable conference expenses is not furnished, the claimed conference/meal costs and directly associated costs should be questioned.


FAR 31.205-44, Training & Education Costs

• Examples of allowable costs follow: (1) Vocational training; (2) Part-time college level education; (3) Full-time education in employee’s field of work (excluding salary) and not

to exceed 2 years; (4) Specialized programs up to 16 weeks a year.

• Examples of unallowable costs follow: (1) Grants to educational or training institutions, including the donation of

facilities or other properties; scholarships and fellowships are considered contributions;

(2) Costs of tuition, fees, textbooks, and similar benefits provided for non-employees;

(3) Costs of college plans for employee dependents.


FAR 31.205-46, Travel Costs

• These costs include costs for transportation, lodging, meals, and incidental expenses and are generally allowable subject to maximum per diem rates in effect at the time of travel as set forth in Federal Travel Regulations (CONUS), Joint Travel Regulation (OCONUS), and Standardized Regulations (foreign travel). Allowable airfare costs are limited to coach, except when this causes unreasonable travel hours, circuitous routing, or prolonged ravel. Receipts are required for all car rental, hotel, and airfare expenses, as well as expenses $75.00 or greater. Additional receipts may be required on a contract-specific basis.


31.205-46, Lowest Cost Airfare

• Substantiating documentation must be maintained if you are taking one of the exceptions in FAR 31.205-46(b).

• Substantiating documentation should take the form of quotations from competing airlines or travel service providers.

• Instances where only one flight is available may be substantiated by only one quote. Multiple instances of single quotes should be questioned by the auditor to determine if policies and procedures result in possible unreasonable airfare costs.


• Aggregate costs incurred on activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance (less income generated by these activities) are allowable, subject to limitations contained in this cost principle. Examples of allowable activity include: House publications, health clinics, wellness/fitness centers, employee counseling services, and food services for the contractor’s employees at or near the contractor’s facilities. Examples of unallowable activity include: costs of gifts (gifts do not include awards for performance made pursuant to 31.205-6(f) or awards made in recognition of employee achievements pursuant to an established contractor plan or policy). Costs of recreation are unallowable, except for the cost of employees’ participation in company sponsored orgs. designed to improve company loyalty, team work, or physical fitness. Losses from operating food services are allowable only if the contractor’s objective is to operate such services on a break-even basis.

* Refreshments, such items as coffee or tea, to employees are allowable. Flowers sent for bereavement is a gray area, but most companies do not claim the cost.

FAR 31.205-13, Employee Morale, Health, Welfare


FAR 31.205-14, Entertainment Costs

• Costs of amusement, diversions, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.

• Costs of membership in social, dining, or country clubs or other organizations having the same purposes are also unallowable, regardless of whether the cost is reported as taxable income to the employees.

• Attendees at an event should be careful to document the business purpose of the seminar or conference to avoid having the costs later determined to be in the nature of entertainment.


• Costs of alcoholic beverages are unallowable

FAR 31.205-51, Costs of Alcoholic Beverages


FAR 31.205-27, Organization Costs

• Expenditures in connection with: (1) Planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions; (2) Resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business; and (3) Raising capital (net worth plus long-term liabilities) are unallowable.

*Note: The cost of activities primarily intended to provide

compensation will not be considered organizational costs subject to this subsection, but will be governed by 31.205-6. These activities include acquiring stock for (i) Executive bonuses (ii) Employee savings plans, and (iii) Employee stock ownership plans.


FAR 31.205-28, Other Business Expenses

• The following types of recurring costs are allowable: (a) Registry and transfer charges resulting from changes in ownership of

securities issued by the contractor; (b) Cost of shareholders’ meetings; (c) Normal proxy solicitations; (d) Preparing and publishing reports to shareholders; (e) Preparing and submitting required reports and forms to taxing and other

regulatory bodies; (f) Incidental costs of directors’ and committee meetings; and (g) Other similar costs.


FAR 31.205-15, Fines, Penalties & Mischarging Costs

• Costs of fines and penalties resulting from violations of, or failure of the contractor to comply with federal, state, local, or foreign laws and regulations, are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer.

• Costs incurred in connection with, or related to, the mischarging of costs on Gov’t. contracts are unallowable when the costs are caused by, or result from, alteration or destruction of records, or other false or improper charging or recording of costs.


FAR 31.205-8, Contributions or Donations

• Contributions or donations, including cash, property, and services, regardless of recipient, are unallowable, except as previously discussed in the community services portion of cost principle 31.205-1.


FAR 31.205-1, P.R. and Advertising Costs

• Public Relations (P.R.) includes activities associated with advertising and customer relations

• Allowable P.R. costs include the following: (1) Costs specifically required by contract (Direct) (2) Costs of: (i) Responding to inquiries on company policies and activities;

(ii) Communicating with the public, press, stockholders, creditors and customers; (iii) Conducting general liaison with news media and Gov’t P.R. officers, to the extent that such activities are limited to communication necessary to keep the public informed on matters of public concern such as contract awards, plant closings and openings, employee layoffs, financial information, etc.

(3) Costs of participating in community service activities (e.g., blood bank drives, charity drives, savings bond drives, disaster assistance, etc.)

(4) Costs of plant tours and open houses


FAR 31.205-1, P.R. and Advertising Costs – (cont’d.)

• Advertising means the use of media to promote the sale of products/services

• The only allowable advertising costs are those that are: Specifically required by contract or that arise from requirements of gov’t

contracts, and that are exclusively for: (i) acquiring scarce items for contract performance; or (ii) disposing of scrap or surplus materials acquired for contract performance.

Costs of activities to promote sales of products normally sold to the U.S. Government, including trade shows, which contain a significant effort to promote exports from the U.S. Note: Such costs do not include the costs of memorabilia (e.g., models, gifts, and

souvenirs), alcoholic beverages, entertainment, and facilities used primarily for entertainment rather than product promotion – unallowable.

And, those costs allowable in accordance with 31.205.34 (Recruitment costs).


FAR 31.205-1, P.R. and Advertising Costs – (CONT’D.)

• Unallowable P.R. and advertising costs include the following: (1) All P.R. and advertising whose primary purpose is to promote the sale of products or

services by stimulating interest in a product line (except allowable directly selling costs later discussed in 31.205-38) or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company’s product or services.

(2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Gov’t (can be allowable or unallowable).

(3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production.

(4) Costs of ceremonies such as: (i) Corporate celebrations; (ii) New product announcements.

(5) Costs of promotional material, motion pictures, videos, brochures, handouts, and other media that are designed to call favorable attention to the contractor.

(6) Costs of souvenirs and other mementos provided to the public or customers. (7) Costs of memberships in civic and community organizations (certain types of

membership fees are allowable, e.g., American Payroll Association).


FAR 31.205-22, Lobbying and Political Activity Costs

• In most cases, these cost are unallowable. An example of an allowable cost in this area would be providing technical or factual presentations of information on matters related to contract performance.

• Attendees at seminars and conferences should be cautioned to be certain the event is not considered “lobbying.”

stephanie widzinski, sr. manager, watkins meegan...

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