Q. Though we chose not to fight several questioned costs, we were quite surprised to see that DCAA is also attempting to impose penalties on many of these. Since some penalties are triple the amount of the cost, can you suggest some ways to challenge them?
A. First its not DCAA’s role to impose penalties – their role is only to recommend when they believe the conditions are appropriate. It is the contracting officers decision to do so – they used to only rarely impose them but recent Inspector General reports criticizing the lack of penalties are resulting in more frequent attempts to collect penalties. The rules for waiving the penalties are found in DFARS 231.7002-5, FAR 42.709, CAS 405 and even Chapter 6-608 of the DCAA Contract Audit Manual.
At the least controversial level, you can avoid the penalty by demonstrating the allocation of the penalized costs represent less than $10,000 of costs that are allocable to covered contracts. If the contracts are really subcontracts, then the penalty statutes do not flow down to them even though the prime contract was covered. Next, you can claim the inclusion of the cost was an “inadvertent error” – the inadvertence error is a valid defense when the contractor can establish it has “appropriate policies, personnel training and an internal control and review system” in place to screen unallowable costs. Most difficult to prove is to challenge DCAA’s assertion that the penalized costs are “expressly unallowable” - DCAA’s interpretation of “expressly unallowable” is if the cost questioned is clearly covered by one of the FAR and DFARS cost principles. As we discuss in an article in the Fourth Quarter 1999 in the GCA DIGEST, court cases have ruled that “expressly unallowable” does not apply if there was either a “reasonable dispute” or it is not entirely a cost principle applies (“clear beyond cavil”). These challenges to what is “expressly unallowable” have not yet been incorporated into DCAA guidance so you are likely not to prevail with them. If you are challenging some of the costs, we frequently see the CO attempt to reach a compromise by waiving the penalties if the questioned costs are accepted so you may want to challenge more “gray area” disallowances in the future.
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To discuss your needs, contact Bill Lennett, Principal, at 1-925-362-0712 or email him at
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