This article was excerpted with permission from the Beason & Nalley Government Contracts Consulting Newsletter September 2010 issue.

Beason & Nalley provides clients with financial accounting and consulting goals using specialized knowledge and expertise, along with niche focus on government contractors.

FAR Rule Clarifies Cost or Pricing Data Definitions

The Civilian Agency Acquisition Council and Defense Acquisition Regulations Council issued a final FAR rule clarifying the distinctions among “cost and pricing data”, “certified cost and pricing data”, and “data other than cost or pricing data”. In addition, amended verbiage clarifies contracting officers’ responsibilities for requesting the appropriate level and type of data necessary to establish a fair and reasonable price and reinforces the order in which certain types of data can be requested. The rule is effective October 1, 2010.

The catalyst for this change began with overlapping and inconsistent definitions of cost and pricing data within FAR Part 15 and Truth-in-Negotiations Act (TINA), and confusion as to what “information other than cost or pricing data” represents and circumstances in which such data can be requested.

FAR Part 15 often refers to “certified cost and pricing data” (data that can be requested by the contracting offices for supporting certain pricing actions); yet TINA does not include “certification” as part of the “cost or pricing data” definition. The term “certified” as intended by FAR Part 15 is a written affirmation required of government contractors attesting to the currency, accuracy and completeness of a contractor’s cost or pricing data. The use of the term “certified” within FAR Part 15 had created a misperception among some contracting officers that those officials could not request “cost or pricing data” unless it was “submitted in certified form”.

The FAR Part 15 term “information other than cost or pricing data”, and the FAR 15.403 conditions in which such data could be requested, were worded in a manner making it difficult for contracting officers to understand when such data could be utilized (in lieu of cost or pricing) to make a determination of a fair and reasonable price.

The revised FAR verbiage amended or added definitions within FAR 2.101 for three key terms to separate the distinctions among types of data:

Cost or pricing data—prior definition amended to remove reference to certification
Certified cost or pricing data—expressly states data is “cost or pricing data” which is required to be certified under FAR Part 15 provisions
Data other than certified cost or pricing data—replaces former term, “information other than cost or pricing data”, and specifically states such data may include pricing or cost data which may be identical to “cost or pricing data” (but for the TINA requirement)

Sections of FAR Part 15.4 were also amended for clarity and specificity of contracting officer choices as to the types and the sequential preference of data requests to support pricing actions. A few of those more notable changes include:

FAR 15.402—states that contracting officers shall determine if certified cost or pricing data is required, and if not, request data other than certified cost or pricing data as necessary (a) by first avoiding requesting any data if prices are based on adequate price competition, (b) and if data is required, requesting pricing and/or cost data; this policy statement also affirms that the government should not request any more data than necessary to establish a reasonable price
FAR 15.403-3—succinctly states that when “certified cost or pricing data” is not required, the government may request “data other than cost or pricing data”; verbiage establishes sources of such data that can be requested to include data that can be obtained from government or the offeror’s location, and whether cost information is required if pricing data is not sufficient
FAR 15.403-4—amends paragraph (b)(1) to specifically state that contracting officers may require “data other than certified cost or pricing data” even if “certified cost or pricing data” is required
FAR 15.403-5—clarifies format requirements for submission of “certified cost or pricing data”, “data other than certified cost or pricing data”, and data supporting forward pricing rate agreements.

Consulting Costs and Documentation Requirements: What Does FAR 31.205-33 Mean?

Provisions of FAR 31.205-33(f) stipulate documentation requirements that demonstrate the nature and purpose of costs incurred in connection with consulting and professional arrangements, in order for such costs to be allowable. The cost principle states that fees for services are allowable only when supported by evidence of the nature and scope of services furnished. Translation to the preceding sentence: if those documentation requirements are not met, the associated professional fees are expressly unallowable.

More precisely, the documented evidence required for such costs to be allowable includes:

Consulting arrangement details such as work requirements, compensation, and nature of other expenses;
Invoices/billings that identify “sufficient” detail as to time expended and actual services provided, and;
Consultants’ work product and related documents (trip reports, etc.)

In reading the documentation criteria, the good and bad news for government contractors is that those parameters are vague and leave open to interpretation the specific details required identifying the “nature of expenses”, “time expended”, “work product”, and so forth. Depending on the government contracting office or audit group evaluating a given contractor’s evidential data supporting claimed professional costs, application of the FAR verbiage can be extremely rigid, whereby auditors, for example, expect a work product for every professional hour charged, to a more lenient point of view where a written outcome from the consultant for a specific consulting task would not be practical or necessary.

Audit guidance contained in the DCAA Contract Audit Manual (section 7-2105) recognizes that auditors must be reasonable in assessing adequacy of documentation that meets the FAR criteria. Verbiage in this section states, for example, “auditors may not substitute their judgment for the explicit documentation requirements”, but at the end of the day, it remains the contractor’s responsibility to demonstrate adherence to the documentation standards. Audit guidance also states “although a work product usually satisfies this requirement (work performed), other evidence may also suffice”. The guidance clearly notes that the auditors “should not insist on a work product” meaning that if a work product was not provided, auditors may rely on other information demonstrating services provided.

DCAA’s guidance is premised upon the underlying rationale with respect to FAR 31.205-33; specifically that the multiple requirements for documentation should be sufficient to establish that the nature of the professional service was for an otherwise allowable activity as opposed to an unallowable activity such as lobbying, organizational costs, advertising, as well as those listed in 31.205-33(c).

The first FAR documentation stipulation, a consulting arrangement, must at a minimum contain sufficient information regarding agreed-to services and consulting compensation terms. The cost principle however does not prescribe in-depth rhetoric outlining the arrangement terms and content; absence of such useless details in codified form is intentional, and thus the preparation of an acceptable consulting agreement is left to the contractor to use good business logic, one tailored to the specific contractor needs, and identifying responsibilities of both buyer and seller in a commercial market environment.

The government (e.g. a DCAA auditor) should therefore avoid interjecting personal preferences in what they believe the contractor/consulting agreement should entail, and stick to the requirements of FAR 31.205-33. For example, a consulting agreement for legal services may be open-ended in the services to be provided, which would allow a contractor the flexibility to seek brief guidance from counsel when needed; such an arrangement may stipulate general services that will be provided, but would not, because of its purpose, attempt to outline every possible legal service the law firm could deliver. Should a specific service be provided that falls within the general services menu listed in the arrangement (for example, a phone call regarding a patent issue), government auditors should avoid taking the erroneous and foolish position that patent counseling (as shown within an invoice) is not explicitly listed in the consulting agreement, thus precipitating a supportable challenge of consultant costs for that patent guidance.

The second documentation requirement, which states invoices must show time expended, does not necessarily translate into invoices having to display consultant hours actually incurred, by consultant name, on a daily basis; nor does “actual services provided” mean that invoices must identify all details of a consultant’s daily work. Time expended may be numbers of work days, weeks, or other groupings of time, and may be identified by groups or categories of professionals; consulting labor costs however should be segregated from other expenses such as travel. The key in identification of “time expended” is allowing auditors the visibility as to actual effort performed and billed, whereby the value and the reasonableness of amounts billed for those services can be ascertained. As to “actual services performed”, invoices may refer to a more detailed outline of a consultant’s activity for the billing period within another document (time line report by task, etc.); the FAR provisions did not envision a blow by blow daily account of every activity that consultants performed in a given day, especially when daily activities may have been diverse and extensive.

Work products and related documents reflecting the outcome of the arrangement are not always necessary per se (see discussion above); however, if a defined work product is promised in the engagement agreement, contractors should ensure that those deliverables are provided and meet the specific details required. Some consulting activities will not necessarily result in a needed or required work product; for example a series of telephone calls or several meetings wherein contractors seek casual guidance of professionals (as needed services) would not necessarily generate a hard deliverable, nor would it be reasonable to expect a work product for such activities. As stated before in this article, DCAA audit guidance understands these situations, and should accept descriptions contained in consultant invoices, or contractor meeting notes, as evidence that work was performed.

One final note on retainer agreements and documentation required. DCAA audit guidance in the contract audit manual recognizes that retainer agreements may not necessarily have detailed statements of work, nor are such agreements required to provide that level of detail. Nevertheless, all FAR 31.205-33(f) documentation requirements apply to these agreements, but our experience in working with clients often disclose poorly documented invoices, and virtually no evidential data supporting services performed or time expended (other than a flat amount identified for a month and no description of services for that billing period).

Contractors beware: the cost principle expects sufficient documentation for the government to identify in some manner the consumption of a retainer value via work output and a description of time dedicated by consultants for tasks under such agreements. An invoice for $15,000 with a statement, “per retainer agreement”, with no peripheral information from your consultants (list of meetings, daily activities, trip reports, log of time worked, etc), will quickly land that amount into the auditor’s questioned cost column during audits of any proposal or billing claim that includes this value. And remember, inadequately supported costs under FAR 31.205-33 are unique to the extent such costs will almost always include a recommendation that these are expressly unallowable costs subject to FAR 42.709 penalties (generally speaking unsupported costs are not expressly unallowable).