Penalties on Unallowable Costs - FAR 31.205 - Selected Cost Series #5

We’ve previously discussed types of unallowable costs (see prior deClermont Compliance Clips), how to account for those costs and the fact that we must not claim them.  In the event that all that information is unknown… or perhaps disregarded….

When are penalties assessed?

Penalties are assessed against contractors who include expressly unallowable (there are 10 identified in FAR 31.205) indirect costs in:

1. Final indirect cost rate proposals; or

2. The final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract.

This applies to all contracts in excess of $800,000, except fixed-price contracts without cost incentives, or firm-fixed-price contracts for the purchase of commercial products or commercial services.

What are the Penalties?

Penalties are equal to the amount of the disallowed costs allocated to contracts plus interest on the paid portion, if any, of the disallowance. However, it is not necessary for unallowable costs to have been paid to the contractor in order to assess a penalty.  If the indirect cost was determined to be unallowable for that contractor before proposal submission, the penalty is two times the amount!  By the way, these penalties are in addition to other administrative, civil, and criminal penalties provided by law.

Penalties are assessed using the interest rate specified by the Secretary of the Treasury pursuant to Pub. L. 92-41 (85 Stat.97) and are computed from the date of overpayment to the date of the demand letter for payment of the penalty.

What is the process regarding penalties?

• The contract auditor recommends to the Contracting Officer, which costs are expressly unallowable and subject to the penalties (ref FAR 42.709-2(a)). They provide rationale and supporting documentation for any recommendation and, if there is evidence that the contractor knowingly submitted expressly unallowable costs, they are responsible for referring the matter to the appropriate criminal investigative organization for review and for appropriate coordination of remedies. 

• The cognizant Contracting Officer is responsible for determining whether the penalties in 42.709-2(a) should be assessed or whether such penalties should be waived pursuant to 42.709-6, for referring the matter to the appropriate criminal investigative organization for review, and for appropriate coordination of remedies, if there is evidence that the contractor knowingly submitted expressly unallowable costs.

Can these penalties be waived?

Yes, under the following circumstances, the penalties may be waived:

• When the contractor withdraws and resubmits the proposal before the Government formally initiates an audit of the proposal.  Formal initiation of an audit includes when the Government provides written notice or holds an entrance conference, indicating that the audit work has begun.

• The amount of the unallowable cost is $10,000 or less; or

• The contractor demonstrates, to the cognizant contracting officer’s satisfaction, that policies have been established, personnel have been trained and an internal control and review system precludes the inclusion of unallowable costs, AND the unallowable costs subject to the penalty were inadvertently incorporated into the proposal.

Past Compliance Clips in this series:  

• What does it mean to be selected?

• Selected costs that ARE allowable

• More on Unallowable Costs-Directly Associated

• Can a Company Reimburse Unallowable Costs?

deClermont Consulting can help identify and segregate costs which must not be claimed under Federal Contracts.