The guidance says that outside and inside legal services are considered to be a specific kind of professional service covered by FAR 31.205-33. Significant guidelines above reiterating the requirements of FAR 31.205-47 include:

(1) In-house costs includes not only salaries and fringe benefits but secretarial and other support costs such as other services, space, utilities and library services.

(2) Recognizing that all activities of legal expenses are lumped together, it states the auditor should not undertake nor request the contractor to conduct an analysis to classify costs by activity or type of effort unless an overall review indicates an obviously excessive or significant amount of legal effort on unallowable activities.

(3) States that a penalty does not include a payment to make a unit of government whole for damages or interest accrued on the damages. A penalty is in the nature of a punitive award or fine.

(4) Clarifies that the maximum amount limited is not to exceed 80 percent (it can be less) of the otherwise allowable cost where the unallowable portion (amount above the 80%) is considered to be a co-payment to encourage contractors to incur costs responsibly even when winning a case. The cost ceiling does not apply to (a) defense suits brought by employees or ex-employees under Section 2 of the Major Fraud Act of 1988 or (b) assistance to entities found to have violated the law or regulation where the contractor is not "legally bound."

(5) The contractor is not required to anticipate whether a routine inquiry or action will result in a potentially unallowable cost proceeding so cost segregation and identification need not begin until the contractor has notice of the proceeding.

(6) Based upon the history of the regulation, the following guiding principles should be followed: (a) the government should not pay for wrongdoing, defense of wrongdoing or the results or consequences of wrongdoing (as discussed below, this principle is the source of much controversy) (b) the government should not encourage litigation by contractors (c) government contractors should not be put in a better position than contractors in the commercial arena (d) the government should not discourage contractors from enforcing the government’s rights and protecting its interests.

(7) Auditors should evaluate the internal controls of the contractor over approval and payments of bills submitted by outside legal services where they should include: (a) written policies/procedures of allowability of legal costs (b) policy regarding types of information and provisions to be included in agreements with outside legal firms (c) a designated reviewer(s) of bills and (d) procedure to be followed when reviewer believes the legal firm has duplicated or billed excessively.

(8) Contractors’ responses or support of DCAA audits should not be considered proceedings subject to disallowance of the cost principle.

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