The Defense Contract Audit Agency recently issued guidance clarifying the agency's view on the types of evidence necessary to substantiate consultant costs. See Memorandum to Regional Directors No. 13-PAC-026(R), “Audit Alert on Professional and Consultant Service Costs (FAR 31.205-33) and Purchased Labor.” The guidance explains DCAA's position that Federal Acquisition Regulation 31.205-33, which addresses the allowability of consultant costs, does not require the existence of specific types of documents in order for consultant costs to be allowable. This guidance is important because of the recent trend of auditors insisting that FAR 31.205-33 requires contractors to provide specific types of documents, such as invoices, contracts, and work product, as a precondition of consultant cost allowability.
Under FAR 31.205-33(f), “[f]ees for services rendered are allowable only when supported by evidence of the nature and scope of the service furnished.” FAR 31.205-33 goes on to state that evidence “necessary to determine that work performed is proper” includes:
- Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;
- Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and
- Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.
While DCAA Contract Audit Manual guidance has always indicated that the above evidentiary requirements included an element of subjectivity (DCAM 7-2105.2), auditor insistence on access to consultant work product, detailed written agreements, and itemized invoices has resulted in the disallowance of consultant costs, even when such costs are clearly incurred for appropriate purposes.
The recent DCAA guidance will assist contractors facing such auditor demands. The guidance begins by noting that, while FAR 31.205-33 contains certain evidentiary requirements, "[t]he type of evidence satisfying [FAR 31.205-33's] documentation requirements will vary significantly based on the type of consulting effort and from contractor to contractor." As a general matter, however, the guidance summarizes the evidentiary requirements of FAR 31.205-33 as follows:
- An agreement that explains what the consultant will be doing for the contractor;
- A copy of the bill for the actual services rendered, including sufficient evidence as to the time expended and nature of the services provided to determine what was done in exchange for the payment requested, and that the terms of the agreement were met. This documentation does not need to be included on the actual invoice and can be supported by other evidence provided by the contractor;
- Explanation of what the consultant accomplished for the fees paid [which] could be information on the invoice, a drawing, a power point presentation, or some other evidence of the service provided.
(Emphasis added). Finally, and most directly, the guidance ends its discussion of FAR 31.205-33's evidentiary requirements by stating that "[i]t is important to clarify that the audit team is looking for evidence to satisfy these three areas and not a specific set of documents. Therefore, auditor judgment will be the determining factor on the type and sufficiency of evidence required to satisfy these requirements." (Emphasis added).
We expect the above guidance to be helpful to contractors facing auditor insistence that the FAR 31.205-33 documentation requirements must be met by specific and contemporaneous documents. Rather than the rigid position frequently adopted by government auditors, the DCAA guidance confirms that FAR 31.205-33 sets forth three categories of evidence that auditors must assess based on various sources of information, and not a specific type of documentation.
Other positive aspects of the DCAA guidance include: (1) the explicit acknowledgment that contractors can meet the evidentiary requirements of FAR 31.205-33 by providing noncontemporaneous documentation; (2) the recognition that arrangements providing for flat monthly fees that do not require consultants to record the quantity and/or nature of the support provided to the contractor may, under certain circumstances, be acceptable under FAR 31.205-33; and (3) the clarification that FAR 31.205-33 is not intended to apply to "purchased labor" such as janitorial, clerical, and security services.
This recent DCAA guidance is only one more piece in the complex set of rules and regulations governing cost allowability generally and consultant costs in particular.