By Vern Edwards on Thursday, November 07, 2002 - 12:43 pm:

Assuming that the expenses in question are allowable costs of your company's government contracts (see FAR § 31.201-2), then there is no law against your company agreeing to share the expenses with the government, i.e., to invoice for only part of the expenses. That is a business decision. The contention that either all the expenses or none of the expenses must be paid by the government is wrong.

By formerfed on Thursday, November 07, 2002 - 01:05 pm:

I'm glad you came up with that answer, Vern. I started to say I did something like that while I was in the government. The contractor and I saw mutual benefit in their employees attending seminars and conferences, so we came up with a similar plan to split costs. Then I read this question again and wondered if I did something wrong. I was close to computing whether the statue of limitations ran out for me.

By Vern Edwards on Thursday, November 07, 2002 - 01:38 pm:

JackBlue and formerfed:

The proper way to share allowable costs is to enter into a written advance agreement (see FAR § 31.109) that identifies which costs the government will reimburse and which will be absorbed by the contractor. The agreement should be appended to the contract and made a part thereof and distributed to any administrative contracting officer and auditor.

The effect of the advance agreement will be to make the excluded costs expressly unallowable by agreement. (See FAR § 31.001 for the definition of expressly unallowable cost.) Such costs, and any directly associated costs (see FAR § 31.001 for the definition), must thereafter be handled in accordance with FAR § 31.201-6, Accounting for Unallowable Costs. They cannot be included in any of the contractor's indirect cost pools.

By Vern Edwards on Thursday, November 07, 2002 - 01:40 pm:

JackBlue and formerfed:

Ignore the last sentence of my previous post. Just read FAR § 31.201-6, which explains.

By Ron Vogt on Thursday, November 07, 2002 - 07:53 pm:

Vern,
Why do the contractor's shares have to become expressly unallowable? There are lots of costs that a contractor incurs that are not direct costs under a contract, but that are not unallowable either. They simply are not chargeable to that contract. Some easy examples that come to mind are IR&D, some employee morale costs, memberships in professional organizations, etc. In fact, aren't these particular costs allowable under 31.205-43, "Trade, business, technical and professional activity costs"?

I'm not a costs expert, but my guess would be that the contractor could account for its share the same way it would if the government did not pick up any part of the tab. If they are otherwise allowable but not allocable to a particular contract, wouldn't they just be indirect costs?

I don't see this as much an 'allowable vs unallowable' issue as it is a 'reimburseable vs not reimburseable' issue under that contract. Can the advance agreement simply say that X expenses are reimburseable costs under the contract?

By Vern Edwards on Thursday, November 07, 2002 - 09:10 pm:

Ron:

I don't buy the distinction you make between allowable and "reimburseable." A cost is reimburseable only if it is allowable. See, e.g., FAR 52.216-7, paragraphs (a) and (b)(1). If the parties to a government contract agree that the contractor won't charge certain allowable costs to that contract, then that cost is unallowable under that contract. See FAR § 31.201-2(a)(4). If the cost is a direct cost, then it is not allocable to any other contract and is, therefore, unallowable under any other contract, as well as under the contract in question. If the cost is an indirect cost, then the amount that is allocable to the contract in question is not allocable to any other contract and is, therefore, unallowable under any other contract.

You said: "There are lots of costs that a contractor incurs that are not direct costs under a contract, but that are not unallowable either. They simply are not chargeable to that contract." That statement doesn't make sense; any cost that is not chargeable to a contract is unallowable under that contract. That is because in order to be allowable under a contract a cost must be allocable to that contract, and in order to be allocable to that contract it must be assignable or chargeable to that contract.

You seem to be confusing different ways of categorizing costs. Costs are either direct or indirect and either allowable or unallowable. A direct or an indirect cost may be allowable or unallowable, depending on the FAR cost principles and the terms of the contract.

You also said: "If they are otherwise allowable but not allocable to a particular contract, wouldn't they just be indirect costs?"

You appear to be confused about the concepts of allowable and allocable and direct and indirect. Allocability is an element of allowability. See FAR § 31.201-2(a) and § 31.201-4. See FAR § 31.202 for a discussion of direct costs and § 31.203 for a discussion of indirect costs.

Vern

By Ron Vogt on Friday, November 08, 2002 - 01:07 pm:

Vern,
OK, as I stated in my message, I'm not an expert on costs, and maybe I'm not using the terms precisely. I can certainly learn more in this area, and I will be more precise in using direct vs indirect instead of reimburseable.

Nevertheless, you haven't answered my question: Why must the contractor's share be expressly unallowable? IR&D, employee morale costs, professional memberships, certain training, etc., are all allowable, but are usually indirect costs because they do not benefit a single cost objective. Here, attendance at technical conferences seem to be expressly allowable under 31.205-43. Why does the contractor's share become unallowable, and excluded even from indirect cost pools, simply because the government has agreed to pick up some of the tab? After all, if the government paid for none of it directly, wouldn't these be proper, allowable indirect costs?

If I am confused about the definitions of allowable and allocable, I may not be the only one. I believe that the courts and boards have admitted on many occasions that the definitions are circular (costs are allocable if they are allowable, and allowable if they are allocable).

I think that part of the original question has been answered: the splitting of costs is OK. Now, how do you treat the contractor's share?

By Anon on Friday, November 08, 2002 - 01:21 pm:

Costs can be allocable but not allowable. For instance, a contractor borrows x amount to finance an effort for a single contract. The interest on that loan can be said to be allocable to that contract but FAR 31.205 states that interest is an unallowable cost and therefore while the interest can be attributed to that particular contract, the government is not billed, nor does it recognize and pay, for the interest costs.

The interest comes out of the contractor's profit/fee.

By Anonymous on Friday, November 08, 2002 - 02:55 pm:

I think the original "all or none" idea reflects the concept of allocability. Either the trip is reasonable and necessary for performance of the contract and allocable to it or it isn't. If it is allocable, then all of its allowable costs can be charged to the contract.

I suspect the real issue here is that the conference attendance is not really essential for performance of the contract, but is mostly for the the benefit of the attendees (as training to acquire or maintain expertise in the field). The current compromise arrangement suggests that the Government agency is not willing to pay the full tab for something of questionable benefit to them.

They also may be looking at the statutory prohibition in 31 USC 1345. That language prohibits payment of travel, transportation, or subsistence expenses of private parties at meetings without specific statutory authority. While GAO has held this prohibition does not extend to grantees (55 Comp Gen 750), they have held that it does apply to contractors (62 Comp Gen 531).

Personally, I have always thought the FAR cost principle needed to do more to address this and to explain when the expenses may be charged to the government and when they are precluded by the above statute, and when they can be considered allocable to an individual contract and when they need to go into an indirect cost pool. At present, I suspect agencies are fairly inconsistent in what kinds of training or conferences they are willing to pay for as direct charges, which has to force contractors into a position of accounting for these costs inconsistently.

By Vern Edwards on Friday, November 08, 2002 - 05:21 pm:

Ron:

You said: "Here, attendance at technical conferences seem to be expressly allowable under 31.205-43. Why does the contractor's share become unallowable, and excluded even from indirect cost pools, simply because the government has agreed to pick up some of the tab? After all, if the government paid for none of it directly, wouldn't these be proper, allowable indirect costs?"

First off, the conference attendance costs (labor and travel) are either direct or indirect; that issue is entirely distinct from the issue of whether they are allowable or unallowable. Do you understand that? If the costs are direct, then they are allocable to the contract in their entirety; if they are indirect, then only a portion of them are allocable to the contract, the rest being allocable to other contracts. Understand?

Assuming that the costs, direct or indirect, are allowable, then the contractor is entitled to reimbursement of those costs. If the contractor agrees to "share" the costs, that means it has agreed not to seek some of the reimbursement to which it would otherwise have been entitled. It means that the contractor has promised not to seek reimbursement for those costs, to forgo making what would otherwise be a legitimate demand. That promise is contractually enforceable.

Let's assume that the cost-sharing agreement stipulates that the government will reimburse the contractor for the labor costs of employees attending a conference, but that the contractor will not seek reimbursement of the travel costs. That agreement makes the travel costs unallowable by contractual agreement. "Unallowable" simply means that the contractor cannot get reimbursed for them. Now look at the definition of "expressly unallowable cost" in FAR 31.001, which is as follows: "a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable."

Declaring the travel costs to be unallowable does not mean that they are illegitimate; it simply means that the contractor will not be entitled to reimubursement of those costs under the terms of the contract, in this case by mutual agreement.

You asked: "Why does the contractor's share become unallowable, and excluded even from indirect cost pools, simply because the government has agreed to pick up some of the tab?" You don't understand. The government has not agreed to pick up some of the tab; the contractor has agreed not to seek reimbursement to which it would otherwise have been entitled. Having made that agreement, it would not make sense for the government to let the contractor get the money some other way, by adding the portion of the costs that were properly allocable to the contract in question to an indirect cost pool and recovering it from other government contracts.

Get it?

There is no need to bring the courts and boards into this. This is not a matter of case law; this is a matter of understanding the fundamentals of the government contract cost principles.

By Vern Edwards on Friday, November 08, 2002 - 06:06 pm:

Anonymous of Nov. 8 at 02:55p.m.:

You wrote: "I suspect the real issue here is that the conference attendance is not really essential for performance of the contract, but is mostly for the the benefit of the attendees (as training to acquire or maintain expertise in the field). The current compromise arrangement suggests that the Government agency is not willing to pay the full tab for something of questionable benefit to them."

The costs of conference attendance are either allowable or not. If the costs are allowable, then the agency has no choice but to reimburse the contractor for those costs, whether it likes it or not. To refuse to reimburse the contractor for an allowable cost would be a breach of contract. If the costs are unallowable, then the agency cannot agree to pay any part of those costs unless it obtains approval for a FAR deviation. See FAR § 31.101.

When a contractor "shares" a cost, it has agreed not to seek reimbursement to which it would otherwise be entitled. This is not a matter of the government agreeing to reimburse part of some cost that it otherwise would not reimburse. The only costs that the government can refuse to reimburse are unallowable costs; the only costs that the government can agree to reimburse are allowable costs.

We don't know why JackBlue's company is sharing the costs of conference attendance with the government. Maybe it doesn't know what it is entitled to (that's what it sounds like to me); on the other hand, maybe it isn't entitled to anything, but the government doesn't know that and is making reimbursement anyway.

Ignorance is rife in our business.

By Vern Edwards on Friday, November 08, 2002 - 07:03 pm:

Anonymous:

There is another possible scenario, and maybe this is what you were talking about. I'll explain it through the following example:

Let's suppose that a company has a cost-reimbursement contract for security services at a government facility. The contractor's owner gets a flyer in the mail for an anti-terrorist seminar and thinks that she and some of her shift managers could learn something that would improve the company's contract performance and make the facility safer. She'd like to attend and take her shift managers.

There is nothing in the contract statement of work about attending seminars and she's afraid to go and include the costs in an invoice out of fear that the contracting officer would say that seminar attendance was not required by the contract and that the cost was, therefore, unreasonable and unallowable.

Alternatively, the contracting officer might say that the cost was not directly allocable to the contract and had to be included in the contractor's indirect costs. See FAR §§ 31.201-2(a)(1), 31.201-3(b), and 31.201-4. Admittedly, the owner could include the cost in her overhead and allocate only part of it to the contract, but her other contracts are fixed-price, which means that the allocation to them would reduce her profits. Moreover, she doesn't think that terrorism is a significant threat to her other customers, which are small, and so she feels that the government customer should pay the cost, since that's the customer that would benefit.

When the owner approaches the government's COTR, he says that he'd be willing to pay part of the cost, so he writes a letter to the contracting officer saying that he thinks seminar attendance would be beneficial to the government. The contracting officer tells the contractor and the COTR that she doesn't think attendance is required by the statement of work, but agrees to give the contractor a letter authorizing specific contractor employees to attend as part of contract performance, conditioned upon an advance agreement to the effect that the contractor would seek reimbursement for only the price of seminar attendance, but not for travel costs. The contractor agrees to that arrangement.

Essentially, what the parties have done is agreed to an interpretation of the contract and an advance agreement that makes the seminar costs allowable, but only in part. This does not entail a deviation from the FAR.

By John Ford on Thursday, November 14, 2002 - 11:09 am:

Instead of focusing on advance agreements, another way of approaching this is through a cost sharing contract. Such an arrangement only involves one contract and does not need to get into the procedures for an advance agreement as described in FAR 31.109.
On another point, unallowable costs are allocable to contracts as well as allowable costs. Only by allocating all costs that benefit a contract to that contract can the government determine the true cost of its activities.