Interestingly, DCAA recognizes legitimate grounds for having excess compensation. For example, compliance with federal and state laws, employee relations concerns or labor shortages may be legitimate grounds for paying excessive amounts. The contractor needs to provide "sufficient documentation" to establish the basis for the exceptions. When a contractor wants to justify costs determined to be unreasonable the guidance states the conditions in FAR 31.201-3 should be considered, namely:

1. The costs do not exceed what a prudent person in conduct of competitive business would incur.

2. The cost is generally recognized as ordinary and necessary for the conduct of a contractor’s business or contract performance.

3. What are generally accepted sound business practices, arm’s length bargaining and federal and state regulations.

4. Considerations should be given to the contractor’s responsibilities to the government, other customers, owners of the business, employees and public at large

5. Significant deviations from the contractor’s established practices should be considered.

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