(Editor’s Note. Both DCAA and local contracting officers we are in touch with often tell us of the increased pressure they are receiving to speed up resolution of incurred cost audits, forward pricing rates and complete final overhead rate settlements. The pressure is coming from the headquarters of the Defense Contract Management Command (DCMC) which administers most contracts awarded by the military and when they take an interest in a cost issue it is usually their position that determines how a questioned cost will be resolved. The following article discusses the topics being addressed by DCMC which is based on an article by Robert A. Burton, Associate General Council for the Defense Logistics Agency, in the Fall 1998 issue of The Procurement Lawyer. Though the publication informs its readers that Mr. Burton’s views are his own and not those of DCMC – we think this is a pretty good indication of what DCMC thinks are important cost issues.)

DCMC

DCMC administers over 383,000 contracts valued at $927 billion and it plays a key role in the resolution of contract cost issues. In recent years it is taking an increased interest in making sure that proper accounting treatment of costs incurred under negotiated DOD contracts occurs. In 1994 DCMC created a unit at its headquarters to bring national focus on "high profile" cost issues arising primarily out of business combinations to ensure there was consistent treatment of cost allowability and allocability issues across DMCM. In August 1997, the DCMC commander issued a policy memorandum to require coordination of the Overhead Center and DCMC on certain actions related to resolving "high profile" cost issues. The memo, in effect, made the positions of the Overhead Center on the "high profile" issues dominant in most administrative matters including final ACO decisions , advanced agreements, administrative or court settlements and inititation of litigation against contractors. The memo made it clear the Overhead Center will address only these high profile issues, leaving local ACO actions involving routine costs alone.

Selected "High Profile" Issues

Those costs tending to cause significant indirect costs and hence the target of most concern include:

Environmental Costs

The allowability of environmental costs will continue to be a high profile issues due to the high dollar amounts involved. For a long time, DOD considered adopting a specific FAR cost principle but determined that the costs should be considered on a case-by-case basis because the nature and extent of the costs vary so much. Without such a cost principle, DCMC must apply reasonableness standards.

Environmental costs consists of costs to prevent contamination and costs to clean up prior contamination. They are generally considered to be normal costs of doing business and hence allowable if they are reasonable and allocable to government contracts. Several factors complicate this general concept such as: (1) the simple fact of very high costs of environmental remediation (2) inadequate environmental standards in earlier years that resulted in extensive remediation efforts makes assignment of blame difficult (3) numerous parties contributing to the contamination of a site over a long period of time (4) does the government or contractor own the site (5) potential contractor insurance recoveries and the government’s right to these recoveries and (6) contractor recoveries from potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act.

The author cites DCAA guidance to its auditors as sound, especially when environmental costs should be questioned. For example, the costs should be questioned if they resulted from contamination caused by the contractor’s wrongdoing and increased costs caused by a contractor’s delay in responding to contamination. ACOs should ensure the government does not pay more that its "fair share" particularly when there are numerous parties responsible for the contamination over many years. Also ACOs must take care that the government receives its proportionate share of any recoveries a contractor obtains from any insurance policies that provide coverage for remediation.

(For an analysis of environmental costs see the GCA DIGEST Vol. 1, No. 1)

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