Updated DCAA Guidance on Expressly Unallowable Costs

In recent months, expressly unallowable costs have emerged as a focal point for the Defense Contract Audit Agency (DCAA). DCAA has issued two Memorandums for Regional Directors (MRDs) providing auditors with new guidance on identifying expressly unallowable costs, much to the dismay of contractors who believe that the guidance does not align with the intent of the applicable cost principles. These MRDs likely mean that contractors will receive more penalty recommendations than in years past, in addition to potential assertions of CAS 405 non-compliances.

On December 18, 2014, DCAA issued MRD 14-PAC-021(R), which distributed a long list of cost principles in FAR Part 31 and DFARS Part 231 that meet the definition of expressly unallowable costs, in DCAA’s opinion. The guidance directs auditors to recommend penalties for costs questioned under cost principles that appear on the list. In addition, it clarifies that the list is not all inclusive and that costs questioned under other cost principles could still be considered expressly unallowable if warranted by facts and circumstances.

On January 7, 2015, DCAA issued MRD 14-PAC-022(R), providing auditors with additional guidance on identifying expressly unallowable costs. The guidance clarifies that, in order for a cost to be expressly unallowable, the Government must show that it was “unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable.” In order for a specific cost principle to make a cost expressly unallowable, it must:

  1. State in direct terms that the costs are unallowable or leave little room for difference of opinion as to whether the particular cost meets the allowability criteria
  2. Identify the specific cost or type of cost in a way that leaves little room for interpretation

While the first criterion is relatively straightforward, the second is more subjective. In an attachment to the MRD, DCAA provides examples of cost principles that do not directly state that a cost is unallowable, but may still be considered expressly unallowable. These examples may be more indicative of costs that may be unallowable, depending on the circumstances, but may not meet the present definition of expressly unallowable.

As audit results are determined, contractors should pay close attention to the basis used for determining that questioned costs are expressly unallowable and subject to penalties.

Read more about the Government Contracts practice.