Consultant and professional service costs have long been considered a major risk area by government auditors and a source of frustration among contractors. Over the years, the Defense Contract Audit Agency (DCAA) has aggressively questioned or disallowed consultant and professional service costs for various documentation reasons. Prior DCAA audit guidance was interpreted by auditors to require the contractor to support all consultant costs with acceptable evidence from each of the three categories listed in Federal Acquisition Regulation (FAR) 31.205-33(f) and that the absence of any or all will operate as a presumption of inadequate support. Auditors were told not to substitute their auditor judgment for the explicit requirements of the cost principle and may not use evidence from one category to satisfy as evidence for the other categories.
FAR 31.205-33(a) defines professional and consulting services costs as services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. These can be services to enhance the contractor’s legal, economic, financial, or technical position, but contractors should place special emphasis on the phrase "special skill" in that definition to properly categorize the services as consulting or purchased labor. To support consultant and professional service costs, FAR 31.205-33(f) contains three requirements for evidence to ensure the allowability of professional and consultant service costs: (1) details of all agreements; (2) invoices or billings and (3) consultant work product and related documents. While the regulations do not require written documentation, DCAA has had a history of requiring written documentation, particularly in the area of work product. Contractors have had difficulty maintaining this level of support because some consultant agreements may be verbal or the work performed by the consultant did not result in a physical work product.
Many contractors have expressed frustration with DCAA’s techniques in auditing this area with stories of applying the documentation requirements no matter the type of service performed or the "work product" associated with the consultants’ efforts. These concerns were raised in joint meetings between the National Defense Industry Association (NDIA) and the DCAA. Encouragingly, DCAA agreed that this was an area that needed to be addressed and would issue guidance and provide training in this area.
On December 19, 2013, DCAA provided updated guidance that placed an emphasis on testing transactions for allowability based on the nature of the claimed cost versus the general ledger account in which the transaction was recorded and on the evidence necessary to satisfy the FAR 31.205-33(f) documentation requirements. DCAA auditors should assess whether or not the costs listed under a "consultant" or "professional services" account are, in fact, a consultant or professional services costs as defined in FAR 31.205-33(a) before performing audit steps and applying the documentation requirements in FAR 31.205-33(f) to these transactions. The guidance gives an example of hiring outside help to handle bookkeeping or contract administration would be viewed as purchased labor because the services provided do not enhance the contractor’s financial or technical position, and were to handle a function in the ordinary course of business and would not be considered consultant or professional services under FAR 31.205-33. Therefore, the requirements of FAR 31.205-33 would not apply.
The updated guidance went on to clarify that the audit team should use their auditor judgment to find evidence to satisfy these three areas and not look for a specific set of documents. These pieces of evidence should include items that a prudent person would have already possessed when contracting, receiving and paying for services from a consultant. DCAA reiterated that although a physical work product usually satisfies the requirement, other evidence that demonstrates the nature and scope of the consultant work was actually performed would be sufficient. The audit team should not insist on a physical work product if other evidence would be sufficient to determine the nature and scope of the actual work performed by the consultant. Other evidence may include, email, PowerPoint presentations, contractor sign in sheets identifying the consultant as a visitor at a particular time and after-the-fact testimony confirmation.
Best practices regarding consultant and professional services costs include ensuring that a description of work to be performed, pricing and the product to be delivered, if applicable, are included in the written consultant agreement. The work product should be included in the consulting agreement file along with copies of the applicable invoices. Contractors should retain a copy of DCAA’s most recent guidance and confirm that their specific auditor is aware of it, as these alternative methods may be necessary to determine allowability.
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