B-224782.2, MAR 27, 1987

B-224782.2, MAR 27, 1987

PROCUREMENT - PAYMENT/DISCHARGE - FEDERAL PROCUREMENT REGULATIONS/LAWS - REVISION - COST REIMBURSEMENT DIGEST: GENERAL ACCOUNTING OFFICE'S OFFICE OF GENERAL COUNSEL CONCLUDES THAT THE PROVISIONS OF DEPARTMENT OF DEFENSE FEDERAL ACQUISITION REGULATION SUPPLEMENT (DFARS) SUBPART 231.70 AND TWO CONTRACT CLAUSES TO BE SET OUT AT DFARS SECS. 252.231-7001 AND 252.231-7002 ARE CONSISTENT WITH THE PROVISIONS OF 10 U.S.C. SEC. 2324 (SUPP. III 1985), WHICH PERTAINS TO PENALTIES FOR THE INCLUSION OF UNALLOWABLE COSTS IN SETTLEMENT PROPOSALS, AND ALSO APPEAR TO BE CONSISTENT WITH THE INTENT OF THE CONGRESS TO ELIMINATE THE CHARGING OF UNALLOWABLE COSTS TO DEFENSE CONTRACTS.

PENALTIES FOR UNALLOWABLE COSTS (B-224782.2):

THIS RESPONDS TO YOUR REQUEST FOR OUR COMMENTS ON A RECENT CHANGE TO THE DEPARTMENT OF DEFENSE FEDERAL ACQUISITION REGULATION SUPPLEMENT (DFARS) IMPLEMENTING PORTIONS OF 10 U.S.C. SEC. 2324 (SUPP. III 1985), WHICH CONCERNS UNALLOWABLE COSTS UNDER COVERED DEFENSE CONTRACTS. UNDER 10 U.S.C. SEC. 2324(J), THIS OFFICE IS REQUIRED TO EVALUATE DEPARTMENT OF DEFENSE (DOD) IMPLEMENTATION OF SECTION 2324 AND TO REPORT ON OUR EVALUATION TO SPECIFIED COMMITTEES OF THE CONGRESS WITHIN 90 DAYS OF PUBLICATION IN THE FEDERAL REGISTER OF CHANGES IN DOD'S REGULATIONS PERTAINING TO UNALLOWABLE COSTS. THE CHANGES DISCUSSED BELOW WERE PUBLISHED IN THE FEDERAL REGISTER AS AN INTERIM REGULATION ON FEBRUARY 26, 1987.

BY WAY OF BACKGROUND, SECTION 2324 OF TITLE 10 WAS ENACTED AS PART OF THE DEPARTMENT OF DEFENSE AUTHORIZATION ACT, 1986, PUB.L. NO. 99 145. THE SECTION LISTED SPECIFIED COSTS AS UNALLOWABLE AND REQUIRED DOD TO DEFINE IN DETAIL BY REGULATION THE ALLOWABILITY OF OTHER COSTS. WE ISSUED A REPORT ON OCTOBER 10, 1986, DISCUSSING OUR EVALUATION OF CHANGES MADE TO THE COST PRINCIPLES UNDER SECTION 2324. SEE UNALLOWABLE COSTS: IMPROVED COST PRINCIPLES SHOULD REDUCE INCONSISTENT TREATMENT OF THESE COSTS, GAO/NSIAD-87-11 (OCT. 1986).

SECTION 2324 ALSO PROVIDES FOR DOD TO ASSESS PENALTIES AGAINST CONTRACTORS WHOSE PROPOSALS FOR SETTLEMENT OF INDIRECT COSTS CONTAIN UNALLOWABLE COSTS. THERE ARE THREE CATEGORIES OF PENALTIES:

(1) IF IT IS DETERMINED BY CLEAR AND CONVINCING EVIDENCE THAT A COST INCLUDED IN A SETTLEMENT PROPOSAL IS UNALLOWABLE, A PENALTY SHALL BE ASSESSED EQUAL TO THE AMOUNT OF THE DISALLOWED COST PLUS INTEREST.

(2) IF A CONTRACTOR INCLUDES IN A SETTLEMENT PROPOSAL A COST THAT HAD BEEN DETERMINED TO BE UNALLOWABLE IN THE CASE OF THAT CONTRACTOR PRIOR TO THE SUBMISSION OF THE PROPOSAL, THE PENALTY IS TO BE TWICE THE AMOUNT OF THE UNALLOWABLE COST. THIS IS IN ADDITION TO THE PENALTY ASSESSED UNDER (1).

(3) IF A PENALTY IS ASSESSED UNDER EITHER (1) OR (2), DOD MAY ASSESS AN ADDITIONAL PENALTY OF NOT MORE THAN $10,000.

THE INTERIM REGULATION ADDS TO DFARS PART 231 A NEW SUBPART 231.70, CONSISTING OF SECTION 231.7001, AND TWO CONTRACT CLAUSES, TO BE SET OUT AT DFARS SECS. 252.231-7001 AND 252.231-7002, TO IMPLEMENT THE PENALTY PROVISIONS OF 10 U.S.C. SEC. 2324(A) THROUGH (D). THE REGULATION PROVIDES FOR THE ADMINISTRATIVE CONTRACTING OFFICER (ACO) TO DETERMINE WHETHER THE PENALTIES DESCRIBED IN (1) AND (2) ABOVE SHOULD BE ASSESSED AND TO INITIATE RECOMMENDATIONS TO DESIGNATED OFFICIALS WITH RESPECT TO THE PENALTY DESCRIBED IN (3). THE CONTRACT AUDITOR IS TO MAKE RECOMMENDATIONS TO THE ACO REGARDING ALL PENALTIES. THE INTERIM REGULATION ALSO PROVIDES EXAMPLES OF INSTANCES WHERE THE ACO MAY FIND THAT A COST HAD BEEN DETERMINED TO BE UNALLOWABLE WITH RESPECT TO A PARTICULAR CONTRACTOR PRIOR TO THE SUBMISSION OF A SETTLEMENT PROPOSAL. FINALLY, THE REGULATION DESCRIBES HOW PENALTIES ARE TO BE COMPUTED AND PROVIDES FOR A RATE OF INTEREST EQUAL TO THAT DETERMINED PERIODICALLY BY THE SECRETARY OF THE TREASURY UNDER PUB.L. NO. 92-41.

FROM OUR REVIEW OF THE INTERIM REGULATION, WE CONCLUDE THAT IT IS CONSISTENT WITH THE PROVISIONS OF THE STATUTE. IN ADDITION, THE REGULATION APPEARS TO BE CONSISTENT WITH THE INTENT OF THE CONGRESS TO ELIMINATE INSTANCES OF UNALLOWABLE COSTS BEING CHARGED TO DEFENSE CONTRACTS.