In its draft audit report and subsequent discussions DCAA did not assert the legal costs are unallowable Because they obviously do not meet any of theprohibitions of FAR 31.205-47, Legal and other proceeding. Rather their position is these legal costs are not allocable to government contracts because (1) the expenses are related to specific contracts and hence they should be charged directly to those contracts that caused the lawsuit or (2) in any case, they should not be charged to the government. In defending their position, DCAA cited the following laws, regulations and court case:

1. FAR 31.203(a). Indirect costs. This section definesan indirect cost as a cost not directly identified with a single final cost objective (e.g. contract) but rather with two or more cost objectives. Since the costs in question should be charged to the commercial contracts related to the lawsuits, they cannot be charged indirect.

2. FAR 31.201-4, Determining allocability. This section identifies three conditions for a cost to be allocable to a government contract: (a) incurred specifically for the contract (b) benefits both the contract and other work and can be allocated on a reasonable proportion basis and (c) necessary for the overall operation of the business. DCAA asserts neither the second or third condition applies, andhence the cost should be a direct cost of the commercial contract that gave rise to the lawsuit.

 3. CAS 418.30. These are definitions of direct and indirect costs. Since the contractor is covered by CAS the auditor chose to cite definitions of direct versus indirect and state the legal expenses were direct costs.

4. FMC Corp Northern Ordnance Division (FMC Corp), ASBCA No. 30130. This FMC case is put forth as support for DCAA’s position since it rules that costs of litigation in a specific contract were attributable solely to that contract and not to the contractor’s G&A pool.

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