(Editor’s Note. The following guidance that addresses the documentation requirements for allowing consultant and professional costs is most welcome. Consultant costs have become one of the top two areas of audit scrutiny. In recent times questioned costs in this area has skyrocketed, where the basis of such findings are often very subjective and quite inconsistent from one auditor to the next. Though audit conclusions are still to be based on “auditor judgment” we find the following audit guidance does provide some reasonable and objective considerations for determining whether such claimed costs are allowable and should lessen the practice of automatically disallowing costs when a document is missing or deemed insufficient.)
The Defense Contract Audit Agency has issued Dec 19, 2013 new guidance in the form of a Memorandum for Regional Directors entitled “Audit Alert on Professional and Consultant Services Costs (FAR 31.205-33) and Purchased Labor.” Though the guidance does often distinguish between consultant and professional service costs and purchased labor costs it does not address the latter so we invite the reader to review our prior articles on purchased labor (conduct a Word Search at our website at govcontractassoc.com). The guidance separately addresses several issues related to these costs and adds a Question and Answer section that covers numerous other highly pertinent issues.
Why is the guidance being issued?
The guidance states there is a need to clarify documentation requirements for consultant and professional services (we will simply refer to these services as “consultant” costs) following “input from field audit offices, internal quality assessments and inquiries from DCMA.” We believe the genesis of this new guidance is at least partly a result of complaints from federal contractors about inconsistent and unfair treatment of proposed consulting costs from DCAA and other auditors and increasing appeals of ACO decisions on DCAA determined questioned costs.
What are the documentation requirements of FAR 31.205-33(f)?
FAR 31.205-33(f) contains three documentation requirements that are needed to ensure consulting costs are allowable:
The claimed costs are unallowable without evidence of an agreement, invoice and what work the consultant actually performed. The guidance stresses that auditors are looking for evidence to satisfy these three areas but they are not to look for “a specific set of documents” where “auditor judgment” will be the determining factor on the type and sufficiency of evidence required. The auditor is to explain to the contractor they are looking for evidence “that a prudent person would already possess” such as an understanding of what they are buying, how much they will be paying and ensuring they get what they paid for.
The contractor may provide evidence created when it incurred the costs as well as evidence from a later period. Though evidence from a later period is acceptable, auditors are told to assess the qualify of the evidence, such evidence prepared after the fact is “less persuasive” and additional corroborative evidence may be needed. Examples of later period evidence may include oral or written documentation from the consultant on what effort was performed.
Special concerns related to work product documentation
The purpose of the work product requirement is for the contractor to be able to show what work the consultant actually performed (as opposed to what was planned). A work product should satisfy this requirement but the guidance states other evidence may also be sufficient. An example of adequate work product even though it is not provided is an attorney’s advice to the contractor. Auditors are told not to insist on work product if other evidence provided is sufficient to determine the nature and scope of actual work performed.
When are documentation requirements applied
FAR 31.205-33(a) defines professional and consulting services costs as services rendered by persons who are members of a particular profession or who possess a special skill and who are not officers or employees of the contractor. The guidance states examples of these services are those to enhance “their legal, economic, financial or technical positions.” The guidance distinguishes between these types of services and other expenses such as janitorial, clerical and security which the guidance states is “purchased labor.” The guidance makes the distinction between these two types of services where if purchased labor is recorded in “Consultant” or “Professional” accounts that nonetheless does not make these costs subject to FAR 31.205-33.
wFAR documentation requirements for purchased labor
The guidance states that there are no FAR cost principles covering purchased labor but does allude to the Defense Contract Audit Manual (DCAM) at Section 72102. Nonetheless, contractors must have adequate documentation to support the reasonableness of amounts paid (covered by FAR 31.201-3, determining reasonableness), demonstrate the person who provided the services and evidence the effort represented allowable activities (covered by FAR 31.201-2d)
Should FAR 31.205-33(f) always be cited?
The guidance refers to circumstances when there is only partial evidence but that partial evidence indicates the costs are unallowable in accordance with other FAR cost principles. For example, if the partial evidence indicates the consulting costs were for advertising or public relations then the FAR cost principle covering those activities (i.e. FAR 31.205-1) should be cited and not 31.205-33. However, if the auditor cannot gather sufficient documentation to support the evidence requirements of the consulting cost principle but the consulting activity is nonetheless allowable then the costs should be questioned and FAR 31.205-33(f) should be cited.
Other considerations
The guidance rejects the common argument put forth by contractors that the attorney-client privilege protects documentation. It cites the DCAM section 1-504.4g for resolving assertions of attorney-client privilege.
Questions and Answers
The Q&A section of the guidance is quite comprehensive addressing such issues as what are “consultant” versus purchase labor costs, allocation of direct versus indirect costs, what is the meaning of “reasonable” costs, examples of what constitutes adequate evidence for work product, third party testimonials, flat fee consulting arrangements and when are consulting costs considered unallowable public relations.
Are temporary accounting services to perform bookkeeping activities considered professional and consulting activities? No. Though accounting is considered to be a profession under the FAR 31.205-33(a) definition, the type and nature of work described are really clerical and hence should not be evaluated by 31.20533 criteria.
Contractor enters into an agreement with an individual to provide program management activities for one of its contracts where the individual works directly with contractor employees to monitor work so is this covered by FAR 31.205-33? No. This individual is equivalent to a contractor employee where he is integrated as part of the operations and hence would be considered as purchased labor not a consultant.
The contractor hires a thermal engineer to work on program specific technical activities of a contract and charges these activities as direct consulting costs. Yes. It is appropriate because the service enhances the technical capability of the contractor which is one of the definitions of professional and consulting services in FAR 31.205-33(a). Whether the costs are charged direct or indirect does not affect whether the costs meet the definition found in 33(a), documentation requirements of 33(f) or 33(d) considerations of allowability.
Contractor engages an efficiency engineer to evaluate the design of its manufacturing process where the only document for work product is a single agenda item from an executive meeting stating the engineer verbally presented its recommendations (which the agenda says were adopted). Is this sufficient evidence for work product? No but the auditor should seek additional corroborative evidence such as actions taken to improve the manufacturing process tied directly to the consultant’s recommendations after taking a physical inspection of the process, interviewing relevant employees and coordinating with DCMA technical specialist or program office technical staff.
The contractor provides an agreement and invoice for claimed consultant costs but the contractor does not have evidence of work product but offers to obtain a letter from the consultant describing her activities as well as setting up a meeting with Air Force personnel to confirm the consultant’s activities. Should the auditor consider these? Yes. The consultant’s testimonial is similar to a third party confirmation where if the Air Force officials corroborate the testimonial an independent confirmation has been achieved.
Contractor hires an international marketing consultant to identify business opportunities who is to be paid a flat fee of $12,000 per month. The invoices reference the agreement and detail actual services provided but do not identify hours worked so should the costs be disallowed under FAR 31.205-33 (f)(2)? No, the auditor should not automatically disallow the costs but should first review the invoice in combination with the terms of the agreement and then meet with the contractor to determine whether payment is consistent with the services agreed to and provided. Further tests are needed to determine the nature and scope of the services planned and actually performed to ensure the costs are allowable and finally the auditor is to determine whether the amount paid is reasonable for services performed and sufficient evidence exists to ensure the services were performed.
A consultant provided a training course on pricing proposals where the contractor provided a copy of the agreement and the paid invoice as well as a list of attendees but it does not have a copy of the training material so should the auditor question the costs. Not necessarily. The guidance states the agreement, paid invoice and some evidence the training was provided is sufficient to satisfy 31.205-33(f). The auditor “could further” support the training by interviewing names on the attendee list.
Contractor claimed costs paid to a public relations firm where it booked the costs as consultant costs and provided extensive evidence in support of the costs paid where if it met all the documentation requirements would the costs be allowable. No because the underlying costs are unallowable in accordance with FAR 31.205-1, public relations and advertising. In evaluating the costs for allowability auditors are told to consider whether the costs are unallowable in accordance with other FAR cost principles such as lobbying and political activities (31.205-22), organization costs (31.205-27), legal and other proceedings (31.205-47) or selling costs (31.205-38).
9. The contractor uses outside writers to augment their in-house staff in preparing technical publications where the outside readers proofread drafts and make recommendations for improvement. These efforts are not covered by 31.205-33 because they do not meet the definition of professional and consulting services because they do not enhance the contractor’s “legal, economic, financial or technical position.” Rather they are considered to be purchased labor.
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