On August 13, 2002, the Defense Contract Audit Agency (DCAA) issued supplementary audit guidance to DCAA's Regional Directors and auditors concerning the application of the recently modified employee relocation cost principle, FAR 31.205-35. The guidance notes that FAR 31.205-35 was recently expanded to include costs that were previously expressly unallowable and that the effective date for the new, expanded cost principle is July 29, 2002. The guidance also reminds auditors that the date the contractor incurs the relocation costs does not determine which version of the cost principle is applicable, rather it is the contract award date that determines the version that should be applied. For contracts awarded prior to July 29, 2002, the new, expanded "allowable costs" would not be applicable and the guidance warned auditors to watch carefully for any violation of the prior version of the cost principle.
The new FAR 31.205-35 modifies the previous version in four substantial ways: 1) the amount of time that an employee can be reimbursed for payments associated with house-hunting trips and temporary lodging is changed, by allowing reimbursement of "reasonable costs" (without a specific time limit) instead of all reasonable costs incurred within a 60-day period; 2) the lump-sum reimbursement of miscellaneous expenses is increased from $1,000.00 to $5,000.00; 3) payments for increased employee income or Federal Insurance Contributions Act (FICA) taxes (commonly called "tax grossups"), which were previously expressly unallowable, are made expressly allowable; and 4) payments for spousal employment assistance, which were previously expressly unallowable, are made expressly allowable.
Based on this new audit guidance, contractors will need to be careful to avoid future violations of the cost principle. Absent an advance agreement with the Administrative Contracting Officer (ACO) addressing changes in relocation cost recovery when contracts are in place both pre- and post-effective date, DCAA may claim penalties for expressly unallowable costs if the new, expanded "allowable costs" are claimed on older contracts. Additionally, since contractors are required under the cost principle to have an "established policy or practice that is consistently followed by the employer" relating to reimbursement of relocation costs, any modification of existing policies to conform with the new, expanded cost principle which may result in unallowable costs being charged to contracts awarded prior to July 29, 2002 must be avoided. Contractors should to carefully examine the effective date of the contract that is being charged to ensure that no unallowable relocation costs are charged to the contract.
Additionally, on August 28, 2002, the DCAA issued supplementary audit guidance to its Regional Directors and auditors concerning unilateral adjustment of indirect cost rates when a contractor does not timely submit a certified incurred costs proposal. The guidance issued by DCAA on August 28, 2002 elaborates on previous audit guidance published on June 17, 2002. In the June 17, 2002 guidance, auditors are advised that indirect cost rates on physically complete and active contracts could be unilaterally modified and those rates unilaterally applied if a contractor fails to submit incurred costs proposals to justify the indirect rates. The August 28, 2002 guidance clarified that the auditor is responsible for calculating the new indirect rate and proposing the rate to the ACO, who is responsible for making the unilateral change to the contract. Once the ACO has unilaterally adjusted the rates, the auditor should adjust previously billed costs to reflect the change, as well as take the newly established rate into account when establishing billing rates for future fiscal years.
The new guidance also states that if historical data exists for the contractor for the given fiscal year (FY) being audited, then the auditor should determine the appropriate rate to reduce the contractor's indirect rates consistent with the rate by which, historically, the contractor has charged unallowable costs to the government. If no historical data exists for the FY being audited, the auditor is directed to recommend a unilateral reduction of 20 percent to the contractor's indirect rates. The audit guidance notes that the 20 percent reduction is considered conservative, based on historical overcharge rates of "high risk contractors," which includes contractors that do not submit certified incurred costs proposals. Given the rather draconian nature of the new guidance, contractors would be well advised to promptly comply with an auditor's request for incurred cost data to avoid unilateral action being taken by the ACO.