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Severance


barricaden

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Can someone provide some insight on the following scenario?

Assumptions

1. A federal cost-reimbursement contract or grant is coming to an end.

2. Severance is allowable on this contract or grant.

3. The contractor does not have a severance reserve, but rather treats severance as a current period expense.

Scenario:

Contractor severs an employee on the last day of the contract. The contractor has an agreement with the employee stating that severance will be owed to employee upon termination. The severance is disbursed on the next scheduled pay period which falls in the subsequent month. Contractor is on the accrual basis. For simplicity's sake, let's also assume that the employee has only worked on that one contract/grant.

Question:

Is severance obligated as of the last day of the contract/grant regardless of the fact that payment is actually disbursed in the subsequent month? My assumption is that severance is obligated as of the termination date and the contractor is merely liquidating that existing obligation. Accordingly, severance could be charged to that contract/grant given that it is otherwise allowable.

Alternate Scenario:

Contractor allows the employee to ride the bench for a couple weeks while trying to place him on another contract. Unable to do so, the contractor severs employment.

Question:

Given that the employee was severed subsequent to the contract ending date, could the severance payment still be charged to the contract/grant or would the contractor have missed its window?

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I agree with your assumption on your first question. It's no different from the employee's salary for the last pay period of the contract that is disbursed in the subsequent month. Regarding the second question, I expect that the contractor missed the window to charge the severance payment to the contract, but without knowing the terms of the contract, can't say for sure.

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1st Question -- Yes, the contract is charged when the accrual is made. The cash payment is irrelevant to the charging (unless we are talking about crossing fiscal years).

2nd Question -- Yes, the contractor missed the window. The severance should be charged to the appropriate indirect cost pool.

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Contractor allows the employee to ride the bench for a couple weeks while trying to place him on another contract. Unable to do so, the contractor severs employment.

Unlike the first scenario, in this scenario the contractor did not accrue a severance payment and charge it to the contract within the specified Period of Performance. Quite to the contrary, the contractor did not intend to incur any severance expense; instead, it intended to reassign the employee to another contract. The employee "rode the bench" (I.e., charged an indirect cost objective such as "awaiting assignment" or "idle time") for "a couple [of] weeks" and thus the employee's salary and benefit costs were spread across all active contracts/grants. The employee, in essence, was treated as an indirect function for that period of time.

At the end of that period of time, the contractor determined that it could not reassign the employee and termined him/her. By this point, the contract to which the employee had been charging time was completed and over with. There was no "bucket" to receive the severance charges so they should be charged to the appropriate indirect account, just as if an indirect employee had been terminated.

In fact, the only rationale for charging the original contract/grant with the employee's serverance expense was that the employee had been assigned only that one contract/grant. In all other cases, I would expect that severance would be an indirect expense.

Does this help clarify?

H2H

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Guest Vern Edwards

It does help. What I'm wondering is whether the period of performance is always and necessarily the cut-off date for the incurrence of costs directly allocable to a contract. The answer seems obvious, which is why I distrust myself on it.

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Vern,

Well, no. It's not always a good rule to follow, as I too frequently tell my DCAA oversight "friends".

You can have lagging costs. In fact, you are almost certain to have lagging costs. For example, you will have a subcontractor that has a subcontractor that has a subcontractor. The lowest tier will incur a cost and then wait until the books close at month end before invoicing the next higher tier, who will wait 15 or 30 (or 60) days before paying, and then record the cost and wait until the books close at month end before invoicing the next higher tier, and so on. Depending on how many tiers there are, costs could take six months or more to hit the prime's books. Easily. Meanwhile the offical PoP is over and we still have costs hitting the books, costs that were literally incurred months before (on another entity's books).

So yeah. It can't be a hard and fast rule.

But in this case (and based on limited information), the contractor seemed to have moved the employee off the contract before terminating him/her. To me, that changed the answer. It decoupled the cost of employee termination from the contract.

Let's analogize. (Another bad habit that should be distrusted.) An employee travels to Alaska to work on a contract; a long-term assignment. The cost of travel to and from the Alaskan site was bid into the contract and negotiated and included in the contract's estimated cost. But instead of flying the employee home after the long-term assignment had been completed, the contractor promoted her to Office Manager and she ran an office supporting multiple contracts for some time. Eventually, the contractor decided she wasn't right for that job and recalled her back to her original office.

Would you expect the contract to pay for her return airfare as well as any ancillary costs (such as breaking a lease, final utility payments, etc.) as direct contract costs? I would say, "no". While the parties originally anticipated paying for the return from the long-term assignment, the contractor changed the deal during performance when it reassigned the employee instead of sending her home.

Same thing here, it seems to me.

H2H

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