FAR 31.205-33 governs costs of professional and consultant services rendered by persons of a particular profession or have special skills but are not officers or employees. It operates in tandem with FAR 31.205-47 and other cost principles that limit allowability of costs associated with certain activities such as FAR 31.205-3, Bad debts; FAR 31.205-27, Organization costs; FAR 31.205-28, Other business expenses; FAR 31.205-30, Patent costs and; FAR 31.205-38, Selling costs.

The general rule is that reasonable costs of professional and consultant services are allowable except when (1) incurred in any of the circumstances listed in paragraph (c) of the cost principle (i.e. making unallowable costs arising from illegal or improper business practices) (2) limited by other applicable cost principles (e.g. bad debts, organization, certain patent or selling costs) or (3) are contingent upon recovery of costs from the government. So, in RRP Construction where a consultant prepared the contractor’s termination settlement proposal and was paid an initial fee of $100 plus 10% of the settlement amount, the court ruled only the initial fee was allowable.

Paragraph (d) of FAR 31.205-33 lists eight factors the contracting officer is required to consider in determining allowability of professional and consulting costs which include such things as the necessity of contracting for the service, whether it can be performed more economically by employees, qualifications of the consultant, customary fees charged for the services and adequacy of the contractual agreement. The government has generally not succeeded in challenging the reasonableness of the contractor’s decision to retain professional services. For example, in Cramp Shipbuilding, the Court ruled it was reasonable for the contractor to retain outside legal and accounting services rather than use in-house services. In addition, FAR 31-205-33(e) imposes additional conditions to support allowability of retainer fees (i.e. fees paid to provide professional services for a specific period of time on as-requested basis).

In response to the "Operation Ill Wind" criminal investigation in the mid-80’s where illegal payments were disguised as consultant expenses, FAR 31.205(f) was issued that provides for fees to be allowable they must be "supported by evidence of the nature and scope of the service furnished." In addition the costs must be supported by evidence in each of the following three categories: (1) details of the agreement and actual services performed (2) invoices or billings, including detail as to time expensed and nature of services provided and (3) consultants’ work products and related documents such as trip reports, minutes of meetings, reports, etc.

Ms. Manos believes that DCAA guidance issued in May 2002 addressing documentation requirements under section (f) may prove "problematic." The guidance said that earlier impressions that only one of the three categories was required and that work performed by attorneys and CPAs was exempt under attorney-client privilege rules were incorrect. The guidance also stated that if consulting costs are claimed as indirect expenses and the contractor does not have the required evidence then a penalty under FAR 42.709 can be imposed. Ms. Manos says it is long established that a cost principle may not override court-recognized privileges such as the attorney-client privilege and to disclose such information violates court sanctions. As for penalties, she stresses that it is inappropriate to impose them if evidence is insufficient or a contractor fails to provide it under attorney-client privilege rules. Penalties are appropriate only for "expressly unallowable costs" which are defined as costs specifically named by express provisions of law, regulation or contract. The ASBCA has held that to impose penalties "the government must show that it was unreasonable under all the circumstances for a person in the contractor’s position to conclude the costs were allowable" and the professional costs are not made expressly unallowable because DCAA is dissatisfied with the contractor’s supplied evidence.

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