Pricing Matters – Unallowable Costs

The ears of PTAC clients seem to perk up when they hear the term unallowable costs.

In this article we will try to answer the following questions: What are unallowable costs? Why are they unallowable? What are the consequences of their being classified as unallowable?

Per FAR Subpart 31.2, for a cost to be allowable, it must meet the following requirements:

  1. Reasonableness: The measure for reasonableness is the prudent person rule: The cost should not exceed that which a prudent person would incur in the conduct of competitive business.
  2. Allocability: A cost is allocable or chargeable to a contract if (a) it is incurred specifically for the contract, (b) the benefits of the cost can be allocated in reasonable proportion to the benefits received, and (c) the cost is necessary for the overall operation of the business.
  3. Generally Accepted Accounting Practices (GAAP) and Cost Accounting Standards (CAS), if applicable.
  4. Terms of contract.
  5. Cost limitations in FAR 31.2.

Costs that do not meet the preceding requirements are deemed unallowable.

Per FAR 31.201-6, unallowable costs cannot be included in any billing, claim, or proposal applicable to a Government contract.

What costs are unallowable? 

The following costs are generally unallowable:

  • Bad debts (FAR 31.205-3)
  • Contributions or donations (FAR 31.205-8)
  • Entertainment (FAR 31.205-14)
  • Fines, penalties, and mischarging costs (FAR 31.205-15)
  • Interest and other financial costs (FAR 31.205-20)
  • Lobbying and political activity costs (FAR 31.205-22)
  • Losses on other contracts (FAR 31.205-23)
  • Organization costs (FAR 31.205-27)
  • Patent costs (but with exceptions) (FAR 31.205-30)
  • Costs of alcoholic beverages (FAR 31.205-51)

Some costs are usually unallowable, but may have exceptions. For example, public relations and advertising costs (FAR 31.205-1) are generally unallowable. However, if they are specifically required by the contract, they would be allowable.

When trying to determine if a cost is allowable or unallowable, it is best to look to the particular circumstances of that cost.  Per GSA Form 1408, unallowable costs are to be excluded from costs charged to government contracts. In terms of the accounting system, unallowable costs should be separately identified. This can be accomplished by assigning a separate numerical sequence in the chart of accounts to the unallowable costs.

What are the consequences of including unallowable costs in billings, claims, and/or proposals under government contracts?

The unallowable costs under discussion are usually placed in indirect cost pools. This means that, if the unallowable costs are not separately identified, they might be included inadvertently in a company’s calculation of its indirect rates. The result may be inaccuracies in the company’s indirect rates.

Also, there are penalties associated with unallowable costs. Per FAR 42.709-1, the penalty is the amount of the unallowable cost plus interest.

As we can see, the proper treatment of unallowable costs is critical for a company’s billings, claims, and/or proposals under government contracts, as well as for the company’s accounting system. Lack of compliance with the relevant FAR principles and procedures may result in serious difficulties for a company that seeks to do government contract work.

 

Pricing Matters is a regular feature by Ronald Marta.  Watch for future posts on a wide range of pricing issues.


More about Procurement Technical Assistance Centers (PTACs)

Ninety-eight PTACs – with over 300 local offices – form a nationwide network of procurement professionals dedicated procurement professionals working to help local businesses compete successfully in the government marketplace. Funded under the Defense Logistics Agency’s Procurement Technical Assistance Program through cooperative agreements with state and local governments and non-profit organizations, PTACs are the bridge between buyer and supplier, bringing to bear their knowledge of both government contracting and the capabilities of contractors to maximize fast, reliable service to our government with better quality and at lower costs.


Simple Steps for Achieving your VA Veteran Owned Business Verification

Preparation can be key to Successful Verification

If you are a veteran owned business pursuing federal contracts, it’s likely that you’ve heard complaints and horror stories about the VA Center for Verification and Evaluation (CVE) verification process, which must be completed to leverage your veteran (VOSB) or service disabled veteran owned small businesses (SDVOSB) status with the US Department of Veterans Affairs (VA) and Federal Aviation Administration (FAA). As a VA Certified Verification Assistance Program Counselor with the Washington Procurement Technical Assistance Center (PTAC), I’ve found that investing time on the front end to both understand how the VA will evaluate your business and to prepare all the documentation you will need prior to applying will simplify all phases of the process and significantly decrease the likelihood of receiving a denial. Avoiding a denial is always my goal, because firms denied CVE Verification must wait 6 months to reapply, which can be a lifetime in the world of federal contracting. When weighed against the prospect of being shut out of set aside and subcontracting opportunities for 6+ months, taking the time to adequately prepare to succeed seems a worthwhile trade-off.

I encourage my clients to follow these 7 steps to simplify the application process and decrease the risk of denial. You can also find additional information and tips in my four part webinar series on VA CVE Verification.

  1. Read the VA’s Initial Verification Application Guide
    The Initial Verification Application Guide should be your dog-eared desktop Bible throughout the certification process. The guide contains an overview of the application process, an explanation of the core requirements for verification, and discussion of common reasons for denial.
  2. Review the regulations that govern Verification.
    Regulations pertinent to VOSB and SDVOSB verification can be found in an easy to understand Q&A format in 38 CFR 74. Careful review of these provisions will help you understand how the VA will evaluate your business for ownership and control.
  3. Once you’ve reviewed 38 CFR 74, complete the Verification Assessment Tool.
    The Verification Assessment Tool is a helpful resource that will walk you through a series of questions concerning control and ownership of your business. Based on your responses, it will generate a list of issues that could result in your application being denied, thus allowing you to determine if your firm meets the eligibility requirements and address problematic areas prior to applying.
  4. Based on any red flags raised by the Verification Assessment Tool (above), review the applicable Verification Assistance Briefs. These documents spell out how the regulations governing the Verification process are applied, covering a range of issues that can result in denial, including (among others):
    • community property
    • highest compensation
    • working full-time in the business
    • 51% direct, unconditional ownership, and transfer of ownership and control within two years of application.
  5. Review your System for Award Management (SAM) registration and SBA Dynamic Small Business Search (DSBS) profile and make sure that both are active and accurate. The following sections merit particularly close attention:o SAM:
    – Assertions: You must have self-certified the business as a VOSB or SDVOSB.
    – Representations and Certifications: The Veteran owner must be one of the individuals listed to negotiate pricing.
    – Points of Contact: The Veteran owner must be listed as a point of contact.

    o DSBS:
    – The Veteran owner(s) must be listed as a principal.

  6. Gather all of the documents required for your type of business.
    It can be helpful to scan and save the required documents in a file with sub-folders that mirror the VA’s document numbers (i.e. a folder labeled1.1 License, 1.2 Resume, 2.1 Tax 1040, etc.). This will simplify the process when uploading each specific document type as required with your application. This file will also come in handy when you renew your verification at the two year mark and completely reapply at the four year mark.NOTE: The required document list is much more than a check list. In reviewing your application, CVE performs a detailed evaluation of the documents, which must clearly show that the VOSB or VOSB meets the requirements set out in 38 CFR 74.
  7. Contact a VA Certified Verification Assistance Program (VAP) Counselor for help.
    This is perhaps one of your most important steps– your VAP counselor can review your application package, including supporting documentation, and help identify issues that may conflict with eligibility requirements outlined in 38 CFR 74. Your counselor can also explain the application process, including the relatively new pre-determination and pre-decision phases that provide the opportunity to make corrections or withdraw your application to avoid denial.

What is the VA CVE Certified Verification Assistance Program?
Procurement Technical Assistance Center (PTAC) counselors nationwide have received training and certification by the VA to guide businesses through the CVE’s verification process. What’s more, PTACs provide no-cost technical assistance to help businesses compete for federal, state, and local government contracts, so a PTAC counselor can help you leverage your VOSB or SDVOSB status once it has been verified, working with you to identify suitable contracting opportunities for your firm as well as the right strategies for you to pursue them.

 

For help with the CVE’s VOSB/SDVOSB Verification process, contact your local PTAC.