Government
Cost Principles and
Accounting Standards
Robert M. Craig
Director, The Claro Group
Jeffery M. Chiow
Associate, Rogers Joseph O’Donnell
Three Questions…
What is Cost?
Direct
Indirect
What is Cost Allocation?
Pools
Allocation Base
What is Cost Allowability?
Reasonable
Allowable
Allocable
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
2
What is Cost?
Total expenses incurred by a company in
the normal course of business
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
3
Composition of Total Cost — FAR 31.201-1
► Costs incurred or estimated using any generally
acceptable method that is applied consistently
Direct Costs
Cost s directly associated with production of a product or service
(aka “Variable Costs”)
+
Indirect Costs
Costs required to support production and/or normal business operations
(aka “Fixed Costs”)
+
_
Cost of Money
The imputed cost of investment in the business
Applicable Credits
= Total Cost
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
Typical Direct Costs
Direct
Labor
Material
Subcontracts
Direct Costs
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
Typical Indirect Costs
Utilities
Indirect
Labor
Rent
Indirect Costs
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
What is Cost
Allocation?
A method to distribute total costs to contracts
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
7
Cost Accounting Allocation Standards
CAS
403
CAS
410
CAS
418
• Allocation of home office expenses to segments
• Direct allocation to maximum extent practical
• Residual expenses – 3-factor formula
• Allocation of business unit G&A to final cost
objectives
• Allocation of direct and indirect costs
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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Major Concepts – Indirect Cost Pooling
Homogeneous
Pools
Beneficial or
Causal
Relationships
• Homogeneous Indirect pools must contain costs with common links
• Base used to allocate those pooled cost must benefit from or
demonstrate to have caused the indirect costs to be incurred
• Allocability — FAR 31.201-4
• Normally expressed as a percentage (i.e., “Pool Expenses” is the
numerator and “Allocation Base” is the denominator)
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Typical Indirect Pools and Allocation Bases
Fringe
Pool
Health
Insurance
Overhead
Pool
Indirect
Labor
G&A
Vacation
Retirement
Direct Labor
Utilities
Rent
Direct Labor
Human
Resources
Finance
Total Cost Input or
CEO
Value Added
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Full Absorption Costing
Material /
Subcontracts
Direct Labor
General
Overhead
Selling
Administrative
Period
Cost
Product
Cost
Total
Project
Costs
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
What is Cost
Allowability?
Costs the Government is willing to pay for!
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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Allowable Cost Criteria — FAR 31.201-2
“A cost is allowable only when the cost complies with
all of the following requirements”
Reasonable
CAS/GAAP
Compliant
FAR 31.2
criteria and
limitations
Allocable
Complies
with terms of
the contract
Risks of double and treble damages, plus interest for failure to comply!
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
Reasonableness — FAR 31.201-3
► Factors for determining reasonableness:
●
●
●
●
●
Nature and amount incurred by prudent person in the
conduct of competitive business
Recognized as ordinary and necessary
Accepted sound business practices, arm’s length bargaining,
and Federal and state laws and regulations
Contractor’s responsibilities to customers, owners and
employees
Significant deviations from contractor’s established practices
If challenged by the Government, the burden
of proof is on the Contractor to prove a cost
is reasonable
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
FAR 31.205 - Unallowable Costs
Costs Government does not want to pay for!
► Expressly Unallowable
●
●
Not considered necessary for Government work

Advertising

Bad debts
Matter of public policy

Charitable contributions

Alcohol
► Allowable with limitations
●
●
Travel
Legal fees
Must be identified and excluded from all
invoices and claims by contractor
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
7 Expressly Unallowable Costs
FAR
Name
Description
31.205-3
Bad Debts
Uncollectible accounts
receivables
31.205-8
Contributions or donations
Cash or property
31.205-14
Entertainment costs
Amusements, diversions &
social activities
31.205-15
Fines and penalties
Violations of Government
laws or regulations
31.205-20
Interest & other financial costs
Interest on “borrowings”
31.205-49
Goodwill
Price in excess of fair
value of assets
31.205-51
Alcoholic beverages
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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10 Cost Allowable with limitations
FAR
Name
Items of note
31.205-1
Public Relations
and Advertising
•
Compensation for
Personal Services
•
•
31.205-6
31.205-13
Employee Morale,
Health and Welfare
Allowable costs:
•
•
•
•
•
Recruiting
Acquiring scarce items
Disposing of scrap
Communication with public, press
Promote international sales
Executive compensation limitation
Must be reasonable based on:
•
•
•
Size
Industry
Geographic area
•
Bonuses must be based on an established plan
•
Designed to:
•
•
•
•
Improve working conditions
employer-employee relations
employee morale and performance
Allowable costs can include:
•
•
•
Company-sponsored sports teams
Award dinners
Recognition awards
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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10 Cost Allowable with limitations
FAR
Name
Items of note
31.205-27
Organization Costs
•
Unallowable costs:
•
•
Planning and executing organization or reorganization
Cost incurred in raising capital including
• Attorney fees
• Accountants
• Brokers
•
Allowable costs if incurred based on
Government contract requirements are:
31.205-30
Patent Costs
•
•
•
•
Costs unallowable if not required by a Contract
•
31.205-33
Professional and
Consultant Costs
•
Preparing disclosures and reports
Searches related to invention disclosures
Filing a U.S. patent application
Except general counseling services
Generally allowable except for services to:
•
•
•
•
•
Improperly obtain information or data
Improperly influence contract awards
Defend violation of any statute or regulation
Defense or prosecution of claims against the
Government
Services connected with patent infringement
litigation (unless provided for in contract)
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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10 Cost Allowable with limitations
FAR
Name
Items of note
31.205-34
Recruitment Costs
•
Allowable costs:
•
•
•
•
•
Unallowable Costs:
•
•
DCAAM 7-2104-1a(2)
31.205-35
Relocation Costs
•
•
•
•
Help-wanted advertising
Educational testing programs
Travel costs for employees to recruit personnel
Employment agency fees - not in excess of
standard commercial rates
Advertising which does not describe specific
positions or is not relevant to recruitment
See DCAA Guidance
• Avoid to build backlog of resumes rather
than recruiting for actual openings
Cost of Acquiring new residence limited to 5%
Must be for benefit of Employer
Must not exceed employee’s actual expenses
Unallowable costs:
•
•
•
•
•
Loss on sale of old residence
Real estate fees and property insurance
Mortgage insurance
Property taxes
Continuing mortgage payments on old residence
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
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10 Cost Allowable with limitations
FAR
Name
Items of note
31.205-46
Travel Costs
•
•
31.205-47
Costs Related to
Legal and Other
Proceedings
•
Lodging and meals limited to daily maximum
per diem rates
Airfare limited to lowest coach fare available,
including company-owned aircraft
Costs incurred in connection with any
proceeding brought by Federal, state, local or
foreign Government for failure to comply with
laws or regulations are unallowable if:
•
•
•
•
•
•
The proceeding results in a criminal conviction
The contractor if found liable
The contractor is debarred or suspended
A contract is voided, rescinded, or terminated for
default
Disposition by consent or compromise if the
proceeding could have resulted in any of the
above.
Suits between contractors, employees and their
employers and companies and their
shareholders will require close attention for
allowability determination
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Keys to Helping our Clients comply…
Enforce
Policies
and
Procedures
Implement
or revise
key
Business
Systems
Emphasize
strong
Internal
Controls
Maintain
detailed
records
Ensure
robust
Contract
Review
Proprietary to Claro, LLC. Not for distribution. For internal Client purposes only.
21
Thank you for the opportunity
to speak with you today!
Robert M. Craig
Jeffery M. Chiow
Director
Associate
The Claro Group
Rogers Joseph O’Donnell
4922 Fairmont Ave., Suite 200
750 Ninth Street, N.W., Suite 710
Bethesda, MD 20814
Washington, D.C. 20001
[email protected]
[email protected]
(202) 800-7534
(202) 777-8952