Navigating FAR 31.205: Selected Costs: Penalties on Unallowable Costs

At a glance:

• The main takeaway: Including unallowable costs in certain submissions can lead to fines and even criminal penalties. Understanding the consequences and how to avoid them is crucial for government contractors.
• The impact on your business: The potential penalties associated with submitting unallowable costs can cause severe financial and reputational damage. It’s important for businesses to understand what not to do.
• Next steps: Take the insights in this piece back to your company, then schedule a consultation with Aprio to make sure you have adequate controls and procedures in place.

Schedule a consultation with Aprio’s Government Contracting team today.

The full story:

In previous discussions, we’ve covered various aspects of unallowable costs, including how to account for them and the importance of not claiming them. Now let’s delve into another crucial part of the subject: the potential penalties associated with including unallowable costs in certain submissions.

When are penalties assessed?

Penalties are assessed against contractors who include expressly unallowable indirect costs in:

1. Final indirect cost rate proposals; or
2. The final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract.

This applies to all contracts in excess of $800,000, except fixed-price contracts without cost incentives or any firm-fixed-price contracts for the purchase of commercial products or commercial services (See FAR 42.709-1).

What is the penalty for claiming expressly unallowable cost?

Penalties are equal to the amount of disallowed costs allocated to contracts, plus interest on the paid portion, if any, of the disallowance. It’s important to note that penalties can be assessed even if the unallowable costs were not paid to the contractor. If the indirect cost was determined to be unallowable by the contractor before the proposal submission, the penalty is double the amount. These penalties are in addition to other administrative, civil and criminal penalties provided by law.

The interest rates used to compute the assessed penalties are specified by the Secretary of the Treasury pursuant to Pub. L. 92-41 (85 Stat.97), and the amount owed is calculated from the date of overpayment to the date of the demand letter for payment of the penalty.

What is the process regarding penalties?

• The contract auditor identifies to the contracting officer which costs are expressly unallowable and may incur penalties (referencing FAR 42.709-2(a)). They substantiate their recommendations with reasoning and supporting documentation. If there is indication that the contractor intentionally submitted expressly unallowable costs, the auditor is responsible for referring the matter to the relevant criminal investigative body for review and for coordinating appropriate remedies.
• The responsible contracting officer assesses whether penalties outlined in 42.709-2(a) should be imposed, considers potential waivers as per 42.709-6 and, if there is evidence of deliberate submission of expressly unallowable costs by the contractor, refers the matter to the relevant criminal investigative organization for review and coordinates appropriate remedies.
• If the penalty is accepted by the contractor, the contractor remits payment to the Department of Treasury per the contracting officer’s instructions. The penalty payment is also an unallowable cost.

Can these penalties be waived?

Yes, the penalties can be waived under the following circumstances:

• When the contractor withdraws and resubmits the proposal before the Government formally initiates an audit of the proposal. Formal initiation of an audit includes when the Government provides written notice or holds an entrance conference, indicating that the audit work has begun.
• The amount of the unallowable cost is $10,000 or less.
• The contractor demonstrates, to the cognizant contracting officer’s satisfaction, that policies have been established, personnel has been trained and an internal control and review system precludes the inclusion of unallowable costs, AND that the unallowable costs subject to the penalty were inadvertently incorporated into the proposal.
• A positive and open relationship with the Government assists in assuring excessive penalties can be mitigated before any trips to the courts occur.

Schedule a consultation with Aprio’s Government Contracting team today for help identifying and excluding unallowable costs.

Related Resources:

Navigating FAR 31.205: Selected Costs: Directly Associated Unallowable Costs

FAR 31.205: Selected Costs: Costs That ARE Allowable

Navigating FAR 31.205: Selected Costs: Allowable vs Unallowable