DOE IG Finds Problems with Contractor Legal Cost Reimbursement Practices

(Editor’s Note. Though the following report addresses legal costs where there is considered to be high risk for unallowable costs, many of the findings are relevant for other contractors incurring high legal costs.)

The Department of Energy reimburses its facilities contractors for legal research, litigation, consulting and settlement fees paid to outside law firms but certain costs are unallowable such as penalties, fines, punitive damages and where contractor management has engaged in “willful misconduct” or has failed to exercise “prudent business judgment.” In the past, there were allegations of excessive legal costs where DOE adopted legal-management plans to outline requirements to hire outside counsel and engagement letters to specify which costs are permitted and excluded.

The IG stated that contractors and DOE officials failed in several areas: (1) directly associated outside legal costs where DOE reimbursed contractors for questionable costs because they were directly associated with unallowable costs such as fines or penalties (2) outside legal costs where costs were incurred that were inconsistent with engagement letters such as travel-related costs or first class travel where the IG cited insufficient reviews of invoices as the cause of such problems and (3) settlement costs where multiple contractors were reimbursed for settlement costs without a proper review of the appropriateness of the those costs.

The DOE recommended that COs (1) review high-value outside law firm invoices for the last five years to determine whether they comply with engagement letters (2) require contractors to either terminate or impose available remedies where law firms continue to bill the same unallowable fees (3) review and document reasons for fines for certain legal cases such as management failure to exercise prudent business judgment and (4) ensure that procedures are in place that require the contractor to obtain DOE approval of certain settlements.

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