B-224782.4, Jul 31, 1987, Office of General Counsel

B-224782.4, Jul 31, 1987, Office of General Counsel

PROCUREMENT - Contract Management - Cost accounting - Federal procurement regulations/laws - Revision DIGEST: General Accounting Office is not in favor of proposed revision of Federal Acquisition Regulation Sec. 31.204(c), which concerns application of the contract cost principles, because the proposed revision would not be sufficient to preclude the reimbursement of costs specifically made unallowable.

Ms. Margaret A. Willis:

This responds to your letter of May 19, 1987, requesting our comments on a proposal to amend Federal Acquisition Regulation (FAR) Sec. 31.204(c), which concerns application of the contract cost principles. This is FAR case No. 85-63.

The Federal Register notice announcing the proposed revision, 52 Fed.Reg. 15884 (1987), indicates that the change is intended, at least in part, to implement a recommendation contained in a letter from this Office to the Secretary of Defense dated May 7, 1985. In that letter, we noted that while various subsections of FAR Sec. 31.205 list specific costs as unallowable, other provisions of FAR Subpart 31.2 arguably provide a basis for concluding that the same costs may be allowable. As a result, contractors, contracting officers, and Defense Contract Audit Agency personnel frequently come to different conclusions regarding the allowability of the same costs, and in some cases reimbursement may be made, either in full or in part, for costs that the regulations expressly list as unallowable. We therefore recommended that steps be taken to amend the FAR to provide that costs specifically made unallowable under any subsection of FAR Sec. 31.205 are not allowable under other provisions of FAR Subpart 31.2. Public comments on such an amendment were solicited in December 1985. 50 Fed.Reg. 51776 (1985).

The latest proposed amendment does not incorporate the provision we recommended in our 1985 letter. Rather, in essence the amendment merely suggests that the allowability of a cost be determined under the most relevant cost principle. While we do not quarrel with the proposition that the most relevant cost principle should be used in making an allowability determination, we think the proposed revision will not be sufficient to preclude the reimbursement of costs specifically made unallowable. In our view when a cost principle expressly makes a particular cost unallowable, that principle should be considered the only one relevant to the question of the allowability of that cost. The suggestion that another cost principle also may be relevant is contrary, we believe, to the policy that certain specified costs not be reimbursed under a government contract. In this connection, we point out that at least with respect to certain defense contracts, Congress had specified a number of costs that may be allowed. See 10 U.S.C. Sec. 2324(e)(1) (Supp. III 1985).

In addition, the proposed amendment provides that when more than one cost principle may have "reasonable applicability," the rules and standards of each principle shall be considered in determining the respective amount of allowable and unallowable costs. This provision suggests that where the allowable costs. This provision suggests that where the allowability of a particular item is open to question, the issue may be resolved by allowing part of the item and disallowing the remainder. In our view, such compromises ought not to be encouraged, particularly with respect to an item that is specifically or expressly unallowable under one of the cost principles. In this connection, Cost Accounting Standard (CAS) 405, "Accounting for Unallowable Costs" requires that such costs be identified and excluded from any billing, claim, or proposal applicable to a government contract. We think that CAS 405 contemplates that contracting officers will make determinations that particular costs are either allowable or unallowable rather than make the kind of compromise allocations seemingly permitted by the proposed amendment.

For the reasons stated, we are not in favor of the proposed change. suggest that the words "more relevant" be deleted from the penultimate sentence of the proposed revision and that the last sentence be deleted entirely.