Adding to a previously published rule in 2003, the FAR Council is proposing to provide specific criteria for acceptable use of statistical sampling as a method to screen unallowable costs.  Under the proposed rule, which would amend FAR 31.201-6, statistical sampling of accounts would be “an acceptable practice” for accounting for and presenting unallowable costs when (1) the statistical sampling results in an unbiased sample that is a reasonable representation of the sampling universe (2) all large dollar and high risk transactions are separately reviewed and excluded from the sampling process and (3) the statistical sampling permits audit verification.  The proposed rule would also require the government and contractor to make an advance agreement specifying the basic characteristics of the sampling process being used.  

Whether for incurred cost or forward pricing proposals, contractors would be required to exclude amounts projected to the sampling universe for any expressly unallowable costs in the sample.  For penalty provisions under FAR 42.709, any amounts that are not excluded are subject to the penalties. However, these penalties would not apply if they are (1) contracts or $500,000 or less (2) fixed price contracts without cost incentives or (3) firm fixed price contracts for the purchase of commercial items.

If a directly associated costs (i.e. a cost that would not have been incurred without the primary cost being incurred – e.g. travel costs to an unallowable entertainment event) is included in a cost pool that is allocated over a base including the unallowable cost with which it is associated then the directly associated cost must remain in the pool.  When a selected cost item under the FAR cost principles provides that directly associated costs be unallowable then such directly associated costs would be unallowable only if they are “material in amount” in accordance with materiality criteria in FAR 31.201-6 except where allowance of any of the directly associated cost would be considered “contrary to public policy” (Fed. Reg. 58013).  

(Editor’s Note.  The provisions related to statutory penalties on unallowable costs and the requirement for an advance agreement are amendments to the original proposal following receipt of extensive comments from industry and government representatives.  Though DCAA provides for use of statistical sampling techniques under limited circumstances, the FAR proposal will clarify conditions and hopefully expand opportunities for its use.)

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